Sunday, November 20, 2011

SOLVING THE CRISIS

The national debt has now passed the 15 trillion mark. There are lots of web sites which attempt to help us understand how big that obligation is. Pictures of a football field covered with hundred dollar bills stacked to sky scraper height, for example.

You get the idea. It’s mind boggling.

I’ve never been a big fan of fiat money. Seems to me that money ought to have some real value that people can count on when doing business with each other.

Still, the free market dictates otherwise.

Money, it turns out, is just another commodity. Its value goes up and down according to demand and supply. Sort of like speed and distance and mass and all those other things that Albert Einstein figured out. It’s all relative.

So money is just a chit. A marker. An I.O.U. Its value depends on the muscle of the guy who issued it.

The United States of America, ever since the middle of the last century, has maintained a nuclear arsenal. It has also maintained a very high tech, very sophisticated military establishment. We are often called the most powerful nation on earth. We think we are, and so does most of the rest of the world.

Because we, as a nation, have the most muscle, our markers, our IOUs, if you will, are regarded as the most valuable. U.S. currency is recognized and used all around the world. Our money is what the bankers call the reserve currency.

How much money have we issued? Here’s what Wikipedia says:

As of November 17, 2011 the Federal Reserve reported that the U.S. dollar monetary base is $2,150,000,000,000. This is an increase of 28% in 2 years. The monetary base is only one component of money supply, however. M2, the broadest measure of money supply, has increased from approximately $8.48 trillion to $9.61 trillion from November 2009 to October 2011, the latest month-data available. This is a 2-year increase in U.S. M2 of approximately 12.9%.

That’s a lot of dough, and it seems to be increasing very rapidly.

It’s pretty obvious that the increase in money supply is fueled by government borrowing and deficit spending.

Which brings me to propose this simple solution. A constitutional amendment which would say something like this:

The treasury of the United States shall issue currency which shall be legal tender for all debts, public and private, in sufficient amount to discharge all obligations of the United States incurred prior to the ratification of this amendment, and, annually thereafter to fund all appropriations of the Congress.

The Congress shall not otherwise have the power to borrow on the credit of the United States.

At the same time, the treasury should be charged with the obligation of devising forms of currency which are incapable of being counterfeited. Fiat money can have value only if it is real fiat money. Electronic technology should be employed to assure that when the Treasury issues currency it is the real thing.

No doubt this proposal will have the immediate, visceral opposition of many conservatives. The obvious argument against it will be that Congress will spend without limit to satisfy every political demand that comes from the left, while reducing taxes to placate the right.

So what’s new? Isn’t that what they are doing now?

At least with fiat money, the United States would not have to pay interest on a 15 trillion dollar debt. That would save us about half a trillion every year.

In any case, the Congress can’t repeal the law of supply and demand. If it cannot maintain a rational balance between spending and taxation, the good old yankee dollar will melt.

Inflation is the most regressive form of taxation. It shrinks savings, impairs investments, reduces wages. It affects everybody. The 99 percent. The one percent.

And camping out in front of city hall isn’t going to change that.

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