As we are beginning to experience inflation, and as our price expectations are changing, it’s good to take the time to understand a few simple, yet very important, facts about the dollar.
First, what is a dollar? It’s simply a piece of paper. It doesn’t really mean anything, other than the meaning that you attach to it. Your opinion of the dollar is largely based on what other people’s opinion of the dollar is because you don’t have money just to have money—you own it so you can buy things in the future.
What affects the opinion people have of the dollar? There are several factors.
One is its usefulness. Who accepts dollars, and who doesn’t? Keep in mind that no one is forcing you to use dollars to buy and sell things here in America. A long time ago, we happily used foreign currencies, even Spanish coins, and we thought nothing of it at the time.
The dollar has maintained its usefulness because it has been a relatively stable currency. That means that over time, its value doesn’t change very much, or its value tends to go up. Because there are plenty of dollars in the world, it’s easy for people to acquire dollars when they need them. Because there is a lot of usefulness for the dollar, people can “sell” the dollar when they no longer want it, exchanging it for some other currency or for goods and services they need.
Let me help you understand what I mean. When I lived in South Korea from ’95-’97, I could’ve walked into almost any store and bought things with American dollars. Now, the store owners weren’t too pleased to get dollars instead of Korean Won, but as long as I was willing to take the exchange hit, they didn’t mind. It’s just a simple matter of going to the nearest bank and converting the dollar to won, and they can stuff their pockets full of won. Dollars were very useful in Korea, because Korea engaged in a lot of foreign trade with America, and there were a lot of Americans living in Korea.
A country like North Korea, on the other hand, which was shut off from America, probably didn’t find the dollar as useful, because there aren’t many Americans in North Korea and because the can’t trade directly with the United States.
Another factor in the dollar’s value is how many dollars there are floating around. If there are too many dollars and not enough uses for the dollar, then the dollar’s value drops. It’s easy to acquire dollars but hard to get rid of them. On the other hand, if everyone wants to use dollars but there aren’t enough dollars around, then the value goes up.
Where do dollars come from? The Federal Exchange Bank (Fed) is the only bank in the world authorized to print dollars. They can print as many dollars as they like, whenever they feel like it. They can give those dollars to whomever they choose. Granted, of course, they don’t sprinkle dollars around like it is candy, or at least they didn’t use to. They only give dollars to people who promise to repay those dollars in the future—with interest.
Nowadays, we’ve reached a point where the dollar is declining in value. Why is this? Not enough usefulness, and too many of them floating around.
Why has the usefulness declined? Because they expectation of future usefulness has declined. This is a vicious feedback loop, where negative results leads to more negative results. It’s important to understand, however, that temporary shifts in value due only to the changing, temporary expected value and not on substantive facts are generally temporary, although they might be severe from time to time. As long as the underlying reality remains the same, opinion can only shift so far.
There is another part—the quantity of dollars—that has shifted, and shows signs of continually shifting. The debt battle we just witnessed in the Federal Government sent a message to the world that the quantity of dollars will continue to increase, and eventually increase at a very rapid rate.
I think this is where I will lose the liberal readers of my blog, for a very important reason: they cannot understand where the government gets its money from. If they understood where government gets its money from and wanted to have ever increasing sums of it to spend on the poor, sick and elderly, they would agree with my proposals below.
Basically, government can only acquire cash in one of three ways: (1) Taxes, (2) printing, and (3) borrowing. We have, with the Fed Act of 1913, declared that we will not use printing to acquire money. Instead, we created a bank that we borrow from and pay interest to. That bank is allowed to print our money, instead of our government. Now, this is only a law, and could potentially change at any day in the future, but I doubt it will because the people whom this law benefits are making billions and billions every year. Every dime we pay in interest on the debt is a dime that goes directly into their pockets. They have every reason in the world to keep the electorate confused about this important topic.
Granted that we can’t print our money, the way the Founding Fathers intended, the government can only acquire cash through taxes and borrowing.
We have, a very long time ago, decided as a country that we’re fine with carrying a national debt that our children’s children for the perpetual future will have to pay interest on. I don’t know why we as a country tolerated this, but we did. We are, basically, slaves to our national debt. On the one hand, we have promised with the strongest of oaths that we will always pay our debts and interest on the debt. On the other hand, we have promised ourselves that we will never spend within our means, nor pay down on the principal of our debt. This is not necessarily a bad thing, considering the growth of the economy.
- If the economy grows at at least the rate by which our debt grows, then everything is roughly OK. The proportion of our grandchildren’s income that they will have to spend on the debt is about the same what we pay today. This is the same as taking on twice as much debt as your income doubles.
- If the economy grows faster, then the debt shrinks in proportional pain, and one day could potentially be seen as hardly an obstacle worth thinking much about. A hundred trillion dollars is nothing for an economy that measures its size in quadrillions. This is like taking on twice as much debt but seeing your income triple.
- If the economy grows more slowly than the debt, then we have big problems. We will find the debt is more and more difficult to pay, until we reach a breaking point where we simply cannot pay it. This is like taking on triple the debt with only double the income, or worse, doubling your debt while halving your income.
Now, some people propose taxes as a way to remedy the problem, but they do not understand that every penny taxed is a thousand penny’s worth of damages to the economy. This is the same group that believes you can simply change the world by changing laws and regulations, and that either they don’t believe there is an economic impact to these rules and regulations, or that the American people are smart enough slaves to figure a good way around the conflicting laws. As I outlined above, the way to beat the debt is to increase the income—the American economy–while increasing or stabilizing the debt, not harm our income.
We are in a state today where the economy is growing at about 1%-2%, with occasional dips. Our debt, however, is ballooning at an enormous rate. In the first few years of Obama’s presidency, the entire national debt in terms of cash has doubled. This is partially due to decreased tax revenue due to the economy lagging, but also due to massive new spending programs. The programs of Social Security and Medicare are also debt but not in the cash sense. These are debts that are coming due today, debts that must be paid and total well over a hundred trillion dollars.
I think you will see that we are in the least ideal position. I hope you also understand that the tax rate should not be changed, or if possible, lowered so that we can get into a better position.
What does this all mean? Well, it means at some point the US government will either figure out that they can print their own money without taking on debt, or that they will just keep borrowing from the Fed and spending ever more vast sums of money. The result of both of these policies is that the world will be flooded with dollars, without a corresponding increase in demand.
The Tea Party is right about what needs to be done. If we can show the world that we can not only stop increasing the debt, but actually reverse course and start paying down the principal, and at the same time, reorganize our entitlement programs so that we won’t be scrambling to find hundreds of trillions of dollars, then we will send a signal to the world that we won’t flood the world with dollars. At the same time, we need to cut taxes to get our economy growing again, hopefully at the 5% range and perhaps, God willing, at the 10% range that truly free economies experience. If we, as a country, show the political will to do these things, then the entire world will once again regard us as the most stable and most secure economy in the world. The dollar will rise in value, making exports hard but making Americans the wealthiest people on planet earth.