Why do we have this credit-based money? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 1 August 2013
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Why do we have this credit-based money? A  A  A

Poitou, France

Another day of piddly trading, with piddly losses for both stocks and golds.

So, let's turn back to our thoughts. At last, we are getting somewhere...!

First, we looked at money. We saw that the US now operates on a type of money better suited to the Paleolithic Age. A credit-backed money system has never worked in the modern world...and none has ever survived a full credit cycle. The credits expand until the debt is far too heavy. Then, when interest rates rise, the cost of carrying the debt goes up, until the system falls apart.

Second, we considered the plight of the average person. In 1950, the typical working man was able to support a family. Today, he can barely support himself. Because his main expenses have gone way up. We looked at the cost of a new car and a new house yesterday. He has to work about twice as long to get them. Health care is worse. The cost per person per year in 1950 was about $100. According to the government's numbers, prices today are about 10 times higher. So, health care should cost about $1,000. Not even close. It's $9,000.

In 1950, your typical father or grandfather earned about $60 a week. For a family of four, he had to work fewer than 7 weeks to cover health care expenses. Today, how much does he earn? We've used the figure $30,000. But it is more complicated than that. A man with a full time job actually earns, on average, $47,000. But fewer men have full time jobs. Many are self-employed. Many are on disability or have simply dropped out of the labor pool. Simply taking the median hourly wage -- $18 - and multiplying by the average number of hours worked - 33 - brings us to $30,000.

And yet, a family of four consumes about $36,000 worth of healthcare spending alone. You do the math later!

But now let us connect the dots. How did the feds' funny money system affect the average family's wealth?

We can begin by wondering what would have happened if the US had kept its pre-1971 money system. Then, the amount of credit was limited. National accounts were settled in gold. Whatever the feds may tell you, when push comes to shove, it is gold we trust. In 1971, France had accumulated more dollars than it wanted. Its clever chief economist, Jacques Rueff, urged the French to take their dollars forthwith to the US Treasury and demand gold. But after August 15th, it was too late. The gold window slammed shut. France had to keep its dollars and hope for the best.

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Since US dollars were now the cornerstone of the international monetary system, US dollars were in demand. Americans had them. They were able to spend their fool heads off. The US dollar itself became America's number one export, with the highest margins of any export item ever produced.

Say's Law, however, tells us that 'products are paid for with products.' He meant, you had to produce things in order to be able to buy things. Which is normally true. But not when you're printing up the world's reserve currency. Then, you have the exorbitant privilege of only needing to produce 'money.'

In the event, the factories that would normally have fabricated the products needed to buy other products from other people in other places decamped to other places themselves. Between 1978 and 2010, the Bureau of Labor Statistics tells us the that the US lost 78% of its workers in the garment industry, 69% of those in 'primary metals,' 67% of those in the textile industry, and 26% of those in 'transportation equipment.' Or, to look at it another way, the accumulated trade deficit since '71 is roughly $8 trillion. That's how out-of-balance the 'products for products' exchange has been. The foreigners produce the products; Americans produce only money. Imagine that the labor component of the products is 50%. That means, US workers have lost out on $4 trillion worth of income. Share that out among the entire male workforce and each one would be $80,000 richer. More importantly, had it not been for the wholesale loss of American manufacturing, Americans would now have more jobs and higher wages.

Credit-based money is easy money. And easy money easily becomes more debt. Debt impoverishes. It doesn't make people richer.

Then why do we have this credit-based money? Because governments are essentially a way for the insiders (who control the police power of the state) to take power and money from the outsiders. Cicero once described the two groups as the "Optimates" on one side and the "Populares" on the other. You might also think of them as the elite and the hoi polloi...or the privileged classes and the riff-raff.

The critical difference between the two is that the elites...the optimates...the insiders...have the government in their pocket. The others do not.

Bullion-based money is a natural limitation on the ability of the elite to rob the rest of the population. It's relatively harder to fiddle with gold and silver coins than it is with paper money or paper money backed some other form of credit. There is only so much gold and silver. You either have it or you don't. And when the French come to the Treasury, dollars in hand, you have to turn it over, or you are in default.

From the get-go, governments took control of the currency. Episodically, they usedit as another way of diverting wealth from the outsiders to the insiders. You can see the results by looking again at what it did to a working man's salary. Food, fuel, automobile, heath-care, housing - by our calculations the typical working man today would need about twice as much income as he now earns to be even with the 1950 standard.

Where did this extra income go? Some of it went to China and other competitors. Some went to the zombies. And some just vanished...

..into the thin air from which the feds' new money cometh.

More to come...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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