What is the ‘REAL’ problem with our Economy?
Why will Digital Money not create a better global economic system!
Economist’s are all over the board on what is our core economic problem. Robert Reich, former Secretary of Labor, says the problem is jobs, jobs, jobs. Congressman Hensarling, of Texas, says the problem is debt, debt, debt. House speaker Boehner, of Ohio, says the problem is no plan or proposal from President Obama. Speakers on the Kudlow show say it’s no consumer confidence. And President Obama says he has no plan to propose a plan. So what is happening with our economy and why do most pundits and experts lack an understanding of the REAL problem? Let’s talk about the REAL problem!
To date, I have heard few experts mention the core problem which is our MONEY! What is our ‘money’ today and why is digital money (95 + % of our money in circulation) leading to chaos, value destruction, volatility, and a global loss in confidence of our ‘dollar’? Why does no-one seem to understand the issue of ‘money’ and ‘value’? Am I the only expert who understands the role of ‘money’ and ‘value’ within our Capitalistic economic system? Who is talking about this core issue which underlies ALL economic decisions?
First of all, what is the ROLE of money within a Capitalistic economic system? What functions must ‘money’ serve in our economy to satisfy the demands of the marketplace? Why must ‘money’ be some THING (from nature) which exists in space and time to serve as a viable unit for measuring VALUE? Why must money be viewed as an objective creation which contains some ‘intrinsic value’? Let’s review these questions and see if we can discern why our current DIGITAL Money can not work for the longer term or even for the next few years. Let’s think about the functions which MONEY must serve to retain the people’s confidence!
First of all, Digital Money can not serve as a stable unit for measuring VALUE. The real purpose for money, within a Capitalistic system, is to serve as a unit for measuring VALUE. All assets and exchanges of goods must be priced or valued in some monetary unit. In the United States of America we use a unit called the ‘dollar’ for deriving VALUE. But what is a ‘dollar’ today? Where does our ‘dollar’ derive from? How can a Digital unit which is subjectively created by our banking system (‘out of nothing’) serve as a STABLE measuring unit or valuation unit? Who can rely on a unit which can not be possessed or stored within space and time…and which has no relationship to physical WEALTH or a physical commodity? How can a digit or digits in the computer screen fulfill the basic and necessary FUNCTIONS of money? Think about this situation!
Money needs to serve three basic functions to be viable as ‘money’. The primary function is: STANDARD of value. The secondary function is: STORE of value. And the third and least important function is: MEDIUM of exchange. What do we experience today given that we now have mostly Digital Money (within the computer screen or via transactions that occur via electronic cards and/or transfers)? How can Digital Money serve as a STANDARD of value? What is the ‘value’ of a digit in the computer screen? A digit is nothing more than a virtual image or number (such as $1, $2, $5, etc.) which we transfer from person to person via the computer. This digit has no substance or material nature and can not be ‘valued’ independently. This eliminates the most important role which MONEY must play to be a viable unit for measuring VALUE. Any monetary unit must be (itself) perceived as a unit of ‘value’! Digits can not fulfill this function! The history of money demonstrates that MONEY must (itself) be a unit perceived as containing VALUE.
To measure VALUE we need a unit which itself has ‘value’ or which is perceived as containing ‘value’. Digits in the computer are created, circulated, and exchanged with no focus or relationship to any objective ‘value’. Digit money serves ONLY the function of medium of exchange…not the other two functions! Originally, our ‘dollar’ was defined as a unit of silver and/or gold. This made our ‘dollar’ a THING which could be possessed, transferred, and stored within space and time. We could use the definition of our monetary unit (the dollar) to fulfill the function of a STANDARD of value. Silver and gold does EXIST in space and time…whereas, digits (our current ‘dollars’) do not EXIST as units which we can possess or store. This difference is KEY and important to investors, lenders, traders, and countries…which must STORE value over long time periods!
Also, with digits within the computer screen as our ‘money’, we are totally dependent on those who create these digits (now by the trillions). How can anyone who desires to save or store ‘value’ over longer time periods have any confidence in policymakers (mostly Mr. Bernanke in the USA) as he creates these units with no understanding as to maintaining a STABLE value over time? Who would want to SAVE or STORE value over longer time periods via a digital monetary unit that is volatile, subjective, virtual, and valueless? Most investors and lenders will reject a monetary unit that has no substance, intrinsic value, or objective existence. The history of money demonstrates this reality and our history shows clearly that money must fulfill all three functions to be viable over time!
Why are lenders today reluctant to lend via long-term mortgages (say 30 to 40 years) when they witness the ‘value’ of their unit (the dollar) losing an unknown percentage of purchasing power over longer time periods? Our ‘dollar’ has lost purchasing power to the tune of 20% just in the last 10 years and 97% since the creation of the Federal Reserve Act in 1913. Some days our ‘dollar’ loses as much as 1 to 5% against a commodity like gold or silver…and that’s just in one day. How can any prudent lender or saver have CONFIDENCE in this type of monetary unit? Who wants to SAVE their wealth or STORE their value via a unit that is subjectively created ‘out of nothing’ and with no focus on long-term stability? My guess is that most participants in our market economy will seek much better alternatives!
Why is there now a growing trend towards saving and storing VALUE via physical commodities? Many investment advisors (Don McAlvany, Doug Casey, David Morgan, Al Korelin, et al) are now recommending that all investors (with dollar units) now STORE their wealth in physical coins and bullion. Why? Both gold and silver (coins and bullion bars) are now being purchased by most astute investors as their REAL store of wealth and value…going forward. Why? And all these investment advisors are recommending that these metals be held in physical form…not in paper or digital form. Why? Think about this issue called our monetary unit!
The REAL problem with our economy is our MONEY. Few, however, seem to be aware of this issue and few understand why investors and even the public are rejecting our digital monetary units. Why do so few seem to understand this problem and this core issue? Will the public begin to WAKE UP and seek an understanding of this issue? Money is the ‘life blood’ of Capitalism and Free Market Economics…yet few seem to understand the history or current events surrounding this issue. My personal view is that our non-material money which is now created subjectively by just a few select policymakers on this planet (the Central Banks) is the REAL issue behind all our economic problems. If you want to understand our economic problems (debt, deficits, digital units, unsustainable debt, flash crashes, and the coming deflationary depression) it may be wise to seek an understanding of MONEY…and the purpose and role of MONEY in our global economic system. Enjoy and let’s keep growing and learning! Http://kingdomecon.wordpress.com.
P.S. China is now the #1 producer of gold. India is the #1 consumer of gold. Only 1% of Americans own gold at this time. The USA had 700 million ounces of gold in 1944. Today we, supposedly, have 264 million ounces. The USA stockpile of silver is nil. Currency units today are traded via high frequency computers at near the speed of light. Electronic trading has now replaced floor trading on mostly all stock exchanges on this planet. Algorithms now control most trading (human decisions have been replaced with math and formulae). QE policies (really digitization of money) has replaced the printing of paper notes. Coins and paper notes now make up less than 3% of all money in circulation. Keynesian policies have produced debt (locally, nationally, and globally) which can not be repaid. The entire ‘house of cards’ called Capitalism is now similar to a CASINO operation in Las Vegas. Does any of this sound like a viable and sound system for our future? Wisdom and understanding is sorely needed in the thinking of our leaders…going forward! www.usdebtclock.org tells the USA story rather clearly.
Kingdom Economics 
Digital currency is not a problem because it is digital. It’s a problem because it has no formal supply dicipline as per the market. The supply issues go back to the structure of centralisation, a necessary evil when dealing with IOU’s that serve as currency.
Real-time digital gold currency, where the currency is the actual ownership title of reserved gold, solves the inflation problem , while also providing instant liquidity on a global basis, something that the FIXED & PEGGED gold-money of Bretton Woods could not provide. The problem with BW was not the gold ….. it was the FIXED PEG. Real-time is a necessary attribute to a truly reflective money system. The challenge was to bring gold (and silver) into a real-time trading paradigm where debt-free store of value could be married with instant global liquidity ….. in the twinkling of an eye.
By using real-time, gold backed digital currency, you can now buy a stick of gum with exact payment, settle the transation with no debt creation or lingering debt, and do so with a mouse click…..internationally. Weight is weight.
The advent of real-time gold payments was not possible without a real-time measure that could bridge the fiat price paradigm with the weighted gold payment paradigm. That real-time measure is what the evolution of the free-floating dollar was all about. It set gold free to “find its monetary trade value” as per the market.
The two currency paradigms co-exist and the dollar is a currency, only within the fiat currency paradigm. Within the real-time gold-as-money paradigm, the dollar still has a valuable role , but NOT as a currency …… as a real-time measure for weighted gold payments. Something has to bridge the fiat pricing of goods & serices with weighted gold payment. The dollar has a new role.
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I would agree that backing a digital currency (say the dollar) with the option of convertibility into a specific weight of gold (say x number of grains) is much better than no convertibility (as now). The issue of stability and volatility, however, may not be solved with a digital currency unit. Also, the price of gold would need to be regulated by Congress of some international body. The concept of ‘value’ is always subjective, however, so gold would not work unless people bought into the view that gold has intrinsic value over time. Does gold have intrinsic value in the minds of all people? Let’s remember that the role of all money is to serve as a proxy for ‘value’. Any commodity or thing chosen as a unit of value must have a stable value over time. Does gold fulfill this role?
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There’s no reason to have any body, other than the marketplace, regulate the trade value of gold. Do we regulate the price of most free market products ? Regulation is a necessary evil in the supply of IOU’s in a fiat paradigm, definitely, simply because we cannot all run around writing them. Real assets are a different story because the debt is paid before the weight can be used as a form of money. In this manner, the creation of real economy actually precedes the circulation of the money. With debt based currency, the currency is created before the hope of the real economy following, thus they are mere promises. This can amount to pushing on a string.
Gold doesn’t need intrinsic value in the minds of all people. That’s the beauty when you consider rate of change. You have to know how to introduce it. That’s what the whole issue has been about since 1913. It cannot be too quick for fear of a dollar collapse. When migrating from a legacy system to a new system, rate of change is absolutely critical because you cannot afford for either system to crash. Both systems are destined to continue and compete. The idea of a free market economy with a single currency makes little sense. Let the market figure it out. It will and in time people it will migrate more and more toward debt-free store of value, one person at a time. That’s the whole point. Think bottom-up. The top down contribuition has been made. That top-down contribution was the creation of the real-time measure for gold.(the dollar) That part of the evolution is a fait accompli. It’s now up to the market to marry the weight to the real-time measure, bottom-up. As more and more gold or gold backed digital currency enters circulation, it will add liquidity without adding new debt. In this manner, it fills a potential liquidity void. This allows for the withdrawing of debt based fiat for the repayment of existing debt. I dare say that Gresham’s law will be reversed because Greshams law is primarily predicated on gold with a fixed trade value. People hoarded it because they felt they couldn’t get a fair trade for it. The idea of monetising gold in an efficient manner was simply a matter of letting the trade value rise (post 71) and then figuring out a way of splitting the gold (by weight) for the sake of enhancing liquidity, so you could buy a yacht or a stick of gum with exact instant payment. That’s all about real-time. That was accomplished in the mid-nineties wiith the advent of digitising gold weight on the basis of transferring actual title of allocated reserved gold. The system is already working and has for years. It’s gaining ground each and every month. It has to be gradual which is exactly why it has to be bottom-up and has to be a market function . It cannot be top-down. Their job (the elite) , now, is to simply ” carry the stick” ….. inflation. The donkey will move sooner or later, no question.
You cannot pour new wine into old wineskins.
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The history of our dollar and of money demonstrates that fiat (imaginary units) will not create a stable price level for goods and services…unless the unit (say dollar) can be converted (exchanged) into a fixed weight of gold (the underlying real money). Think about the policymakers (Central Banks) who create and then distribute the currency units into the marketplace. What creates the discipline in the system if there is no convertibility of each unit (say a dollar) at a fixed weight of silver or gold? The history of money demonstrates that silver and gold were chosen as money because of there uniqueness, etc. and then paper units or digital units are issued as a proxy. The proxy units work if people have the real time option of converting each and every unit into the real money (silver or gold) at their discretion. Without discipline in the system, the central authorities will just create excess units and inflation and value distortion will happen. Remember, money does not exist in nature as a separate item. Money is created or invented by people to serve a purpose. What is that purpose? I would maintain that the purpose is as a standard of value (first), then a store of value (second), and finally as a medium of exchange for value (third). Without people choosing money and desiring money as their unit of value, nothing will work. We are better off with NO MONEY. Money is just a ‘tool’ to assist with the creation of wealth.
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I agree with what you are saying about fiat currency. It needs competition. That competition is already here and available in the marketplace as a choice. That choice is gold, but this time around , the gold system is a real-time gold system where the fundamentals of the marketplace allow people to trade in gold where the trade value is not fixed but governed by the same market. This is very different from a gold backed dollar. The gold backed currency is not found in any dollar-gold relationship that has a fixed peg. The gold currency is either the actual bullion or a fully backed derivative of bullion where the derivative is denominated in weight. In the case of gold backed digital currency, the currency is gold, not dollars. The gold takes on the “translation” of a fully backed ownership derivative that amounts to ownership title of the gold …. again, denominated in weight. The functional value of the dollar in this real-time gold paradigm is that the dollar is necessary to bridge the gap between fiat pricing and weighted gold payment. You need to be practical in the sense that almost all that we buy in the real economy is priced in a fiat currency. There has to be a real-time mechanism that translates the $0.02 gumball into an appropriate weight of gold , based on the current price of bullion so that the gumball can be fully paid for in bullion weight. The currency is bullion based. The amount of bullion to be surrendered for payment is reliant on determining how much the pricing of $0.02 translated to when you calculate the weight by using the real-time gold price that been developed as a result of the floating relationship between dollars and gold. You can now pay for goods and services with fully backed bullion, thus creating liquidity (trade) without introducing any new debt …. but unlike yesteryear, you can do so with the ease of instant global liquidity.
Gold never enjoyed with distribution benefit in the past because there was no way to “split up” the enhanced weighted trade value. Now you can pay for your gum by transferring less than half a milligram of your own personal gold reserve, electronically. The currency is the gold title to the calculated weight ….. it’s not dollars or any fiat currency. The point is that the new system allows for gold payment, so that liquidity can be utilised without the creation of any new debt. In the transitional sense, this frees up the existing fiat currency supply to flow into the hands that need it most , in order to service existing fiat based debt and have those IOU’s removed from circulation.
It appears to me that you have your gold-money paradigm stuck back in the fixed peg mode, as it was in Bretton Woods. BW was inefficient because gold is a finite resource, so pegging the trade value distorts the market. If gold weight from the ground cannot satisfy the demand for gold-as-money, the market laws’s solution is to shift stratgeies , but without distorting the law of supply-demand, because you cannot get enough of the commodity out of the ground, cut the fixed peg and let the trade value (price) rise to meet the demand. Once your have allowed the price to rise sufficiently, the only challenge left is to find a way of splitting up that gold of enhanced trade value and use it as money. All of the above, within this paragraph, is reliant on a trade value that has flexibility, as per the market, in order to reflect true market fundamentals. This is why the severing of the fixed gold-dollar peg had to come about. Gold had to be set free. The process of doing that was for the fiat dollar to become a completely free floating dollar in order for the dollar to “arrive” in its latter (and current) role as a real-time measure for gold-money …… in real-time (not a fixed trade value). In this new gold-money paradigm (in real-time), the dollar is NOT acting as a currency. It’s simply acting as a component for measuring gold to determine weighted payment. The dollar is only a currency within the fiat paradigm, not the gold-money paradigm.
You cannot pour new wine into old wineskins.
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What you are describing is our current system with a recognition of gold as another option or currency. I am now storing my savings with an ETF called GLD (a type of derivitive). The problem, however, is that the price or value of gold changes on a moment by moment basis in the marketplace. This means that there is no stability in the price structure. Your model would not eliminate any of this instability or volatility…creating an impossible situation for long term lenders.
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Don …. I believe that it will smoothen out on the basis of more and more participation. The volitility that you speak of is likely “dollars for gold”. The gold payment system I refer to (which isn’t my model and has been running very successfully for over 15 years) is about gold for economic widgets. That’s not nearly as volitile as the gold-dollar relationship. The market will work it out. It must because “the stick” is just going to pour more and more inflation at us, including QE3, until we wake up. When we wake up and have a very large influx of gold purchasers and users, the vastness of the participation will remove the volitility. It’s a process. The current volitility you see is based on so few being in the gold market. The small market cap is what makes it volitile, not the fact that it’s gold or even a precious metal or even a commodity.
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My sense, rooster, is that as more investors and Americans flee the instability and volatility of all the fiat currencies, silver and gold will become even more volatile. Keep in mind that most (99%) of all goods and services on this planet are currently traded via these digital fiat (imaginary) units…which are created by just a few key central bankers…with little understanding of what they are doing. Does Bernanke understand anything other than ‘saving’ the TBTF institutions? Did his QE policies promote jobs and growth or real wealth? My sense is that we either need new money as outlined in our Constition or no money. Let’s see how events play out in the coming months. My next missive will cover the history of our dollar.
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The keystokes you’re defining are based on the fiat currency creation. Your reference is to fiat currency as a currency. My reference is to gold as a currency. The only role that national currency would play in the 21st century gold-money paradigm is in the measurement of how much gold to “slice off” your personal reserve and send that title (actual currency) from A to B. That gold weight is not created with keystrokes or pen and ink, but by the sweat of the brow. The digital currency is not created by gov’t or central banks either, but by competitive gold based payment processors such as goldmoney.com, just to name one.
Getting into a real-time gold payment environment took some aspect of design and leadership. The system had to be able to bridge fiat pricing with gold payment which is a process that went right through the fiat dollar as part of the process and the severence of gold from the fixed peg. The dollar is only a currency within the fiat paradigm, however. It’s not a currency in the real-time gold-money paradigm, simply a measure for gold where the gold is traded for real economic goods and services. In this step, new liquidity is expanded but no debt is added to the system. The point is that if we can add liquidity, without debt, then debt becomes managable. It moves us in the right direction. No currency system has ever combined debt-free store of value with instant global liquidity. It wasn’t possible before the age of information.
You cannot pour new wine into old winekins.
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