The Dollar, The Euro, and the 800lb. Gorilla

Over the last couple of months our good friends in U.S. economic central planning Ben Bernanke, Timothy Geithner and even our fearless leader Barack Obama have been trying to blame Europe for the economic issues in the United States. Barry O. has even gone out and wagged his finger at Europe to say that it needs to get it's economic house in order.

This idea is so insane that you must be without a clue to believe it. There is a fundamental problem with this concept, and that is the way these economies are based. To understand the problem with this theory you have to understand the relationship of the dollar to the Euro, and the older European currencies that the Euro is based on. To do this we have to go all the way back to before World War II.

Before WW2, most European currencies were based on a Gold Standard. The major economies like England, Germany, France, etc.. had many tons of gold and silver in their reserve vaults. Their printed money, much like our dollar back then was just a paper certificate that represented the debt in gold or silver to the bearer in that metal.

Just look at the dollar bill above. "Silver Certificate" "This certifies that there is on deposit in the treasury of The United States of America One Dollar IN SILVER PAYABLE TO THE BEARER ON DEMAND"   This is a common sense solution to running a stable economy. 

Then WW2 happened and threw a major wrench into this concept. In 1944 44 allied nations met in Bretton Woods, New Hampshire to decide how the post war recovery was going to take place. For more information on the Bretton Woods System Click Here. Basically it decided on a fixed exchange rate between the U.S. dollar and the currencies of the other nations. 

Once rebuilding started in Europe, the United States loaned dollars to the nations in western Europe. They in exchange for loans in dollars had to give their gold and silver reserves to the Americans as collateral. In the 50s and 60s the United States being the only major industrialized nation to not be devastated by the war had a booming economy. The U.S. was supplying the world because everyone else's industry was not yet back online.

By the 70s countries like West Germany had fully recovered from the war an were ready to pay back all their loans to the Americans and get their gold and silver back. Their were so many dollars in circulation at that time, (mostly the loaned out dollars in Europe) that eliminating the European gold and silver from the America's reserve would devalue the dollar. What needed to be done is take the dollars back, return the gold and silver, and destroy all the extra dollar currency that was printed. This would have maintained the value of the dollar but the influence of the United States as a world economic power would go back to where it was before the war.

Our President Nixon came up with a "better" plan. He closed the "gold window" which is now referred to as the Nixon shock. It basically by executive order made the United States dollar into a fiat currency. (See my previous article) All the gold and silver stayed in Ft. Knox and the Europeans were basically told they are SOL.

In previous times in history this kind of violation of a treaty this large would have resulted in the outbreak of a large war. The Europeans came to the realization that without any gold or silver in their reserves to pay for a war effort, they had no choice to to accept the new fiat dollar as something of value.

So now this fiat dollar, controlled entirely by the U.S. Federal Reserve has become the reserve asset of the world. Something that has value only because of its acceptance is the major entity backing most of the worlds currency, even the Euro after its creation. This is the 800lb. gorilla in the room that nobody wants to talk about.

Debt, The American Resource

Debt: something owed

That is the second definition of debt according to Merriam-Webster. I'll get to the first later. How can debt be considered an asset or export. I don't have an answer for that but it has. America's greatest export is now debt. Economists will tell you that debt is a very good thing. Especially cheap debt. I will discuss how it is not. Debt although sometimes essential should never be considered a good thing. This is something our greatest generation who lived through the depression will gladly tell you.

The fundamentals of banking are very simple. You have many people who put money into the bank in exchange for a certain interest rate, let's say 5%. The bank then loans the money to somebody else who it sees fit to repay the loan at a higher debt, say 8%. The decent rate for the savings gives individuals reason to loan their money to the bank. The reasonable loan rate gives an opportunity for somebody truly in need to barrow money. It is a very good system and allows for good circulation of the money supply. The banks in exchange make a fair profit.

This is how it used to work. Then we through a federal reserve bank into the mix. Now the FED lends money to the banks at an interest rate much lower then what you would expect to get for your hard earned money. Since the FED is able to create as much as it's fearless leader Uncle Ben Bernanke sees fit. Because of this competition to your savings, banks drop the interest they are willing to pay you to below the FED's rate. This also results in the loans rates that banks give out being cheaper. This is also a bad thing.

You ask how this could be? Why would lower rates on loans be a bad thing? The answer is simple. (The whole point of this blog is to prove that these ideas are simple to understand.)  The public now has access to loans at a very unusually low rate. This gives the people an incentive to barrow more. You now have people with larger budgets for things like their homes. This caused the prices of houses rise. The more aggressive the FED got with its cheap credit, the higher housing prices went. Then in the 2000s when the FED just started dumping dollars on the banks, housing prices sky-rocketed. 200 thousand dollar houses were now 300 and so forth. Of course until it collapsed. Housing prices fell apart and many people lost more hundreds of thousands of dollars of money that wasn't even theirs.

People are now left being having debts more than they could ever afford, with the collateral being worthless. This leads to the first definition of debt according to Webster:

Debt: sin, tresspass

Monopoly Economics

Fiat currency has become excepted as the norm in today's "global economy". What is a fiat currency? Simply  it is a type of currency in which it only has value because a government says so. Simply put, it's the same concept as a game of monopoly. When you play monopoly, every player is distributed a certain amount of money by the banker. The value of this money  is there only because all the players except the fact. It has no scarcity because the box is full of it and it is nothing more than sheets of paper. There is always more in the "bank".

This is how a fiat currency works. I will use the US economy as the example, but it works the same way with all the other fiat currencies like the euro. We start with the "bank". In the case of the US it's the Federal Reserve. The Federal Reserve is a private bank independent from the government that has been chartered by the congress to print money.  This is why they have no oversight. They have a "banker". He is  Federal Reserve Chairman Ben Bernanke.  He hands out the money to who he decides. He can just create money from thin air. He even lends money to the government.  This is where we split off from monopoly. In the game their are rules. In the real world there are not, and Uncle Ben hands out money to whoever he see's fit.

Bernanke hands out money to his friends in the banking sector. It gives an unfair advantage against banks who conduct an honest business. His friends get money for free, and the others have to borrow that at an interest rate. This gives the big banks an advantage since they get their money for free.

With a fiat currency there is no limit on the amount of money in use. For this reason if you keep your money in a bank account you actually loose money. They give virtually no interest, and as the fed keeps inflating the money supply you keep loosing. In this way Uncle Ben actually is taking your capitol because you loose the purchasing power of your savings. He will tell you this is good for the economy because it drives growth. Yes it is good, for this parties that get the free loans. For everyone else you loose. It is basically a reverse of Robin Hood. They are taking from the poor and giving to the rich.

With a gold standard, and I use that term loosely, you have a limited amount of gold, (or other commodities) and you can't just print money. Money is a finite resource. It has scarcity, and therefore value. You put a dollar in the bank today, and it will still be worth the same tomorrow, next week, month, year, etc...

Welcome to Economics is Common Sense. This blog is designed to explain why economics isn't some complicated science. You do not have study economics for many years. I am here to show how many of these excepted facts of economics are flawed, and most people are being scammed.

Economics has become considered a "science". Even Merriam Webster excepts this as definition 1a:

                     " a social science concerned chiefly with description and analysis of the production,                                   

                 distribution, and consumption of goods and services"

I except definition 1b:

                     "economic theory, principles, or practices"

Economics is simply the term that defines the exchange of capitol. For some reason most people have come to except that fact that they don't understand economics and that they have to except the insights of some so-called expert. The problem has become that these experts either don't have a clue themselves or they have a hidden agenda. I will give specific examples in future posts.

Think of economics simply as the practice of trading goods or services. It's nothing more than that.