Friday, June 13, 2014

MONEY: How the Destruction of the Dollar threatens the Global Economy — and what we can do about it

Originally written by By Steve Forbes and Elizabeth Ames

Book Reviews Dyman Associates Publishing Inc - In “The Wealth of Nations,” Adam Smith wrote, “The sole use of money is to circulate consumable goods.” Truer words have rarely been written, but the remarkable thing about Smith’s passage was that it was a throwaway line in what remains to this day one of the most important books on economics ever written.

Smith’s line about money was throwaway simply because it was a tautology. The world is round, the sun sets in the west, and yes, money’s sole purpose is to facilitate exchange. Money is not wealth, it’s merely what we use to measure our production so that we can exchange it for that which we don’t have, not to mention place a value on investments representing the production of future wealth.

Precisely because money is a measure, much like a foot and minute are, it’s essential that its value be as stable as possible. Gold has historically been used to define money not because it’s nice to look at, but simply because its stability renders it “money, par excellence,” in the words of Karl Marx.

In modern times, the economics profession has perverted money, and turned it into wealth itself. We’ve seen this most notably through the monetary machinations (quantitative easing — QE) foisted on the economy by then-Federal Reserve Chairman Ben S. Bernanke. Money is no longer seen by economists as a low-entropy measure; now, its simple creation is viewed as the path to actual production. In light of this, it’s no surprise that the economy took a dive under our former Fed chairman.

Enter Forbes editor-in-chief Steve Forbes and Elizabeth Ames. They’ve co-authored an essential new book, “Money: How the Destruction of the Dollar Threatens the Global Economy — and What We Can Do About It,” which seeks a return of money to its proper place. Channeling Smith, the authors write that the money in our pockets is “fundamentally simple,” and that it’s singular purpose is “as an instrument of measurement.”

The problem, described by the authors expertly, is that ever since 1971 when President Nixon delinked it from gold, the dollar has floated in value. Just as houses would be asymmetrical and souffles burned if the foot and minute were to constantly change in terms of length and time, so has economic growth been sadly restrained thanks to a dollar that is no longer a stable measure of value. As the authors explain it, “This ever-fluctuating system of ‘fiat money,’ with its gradual weakening of the dollar, has produced four decades of slow-motion wealth destruction.”

Why is this? The answer is as simple as the correct conception of money is. The authors write that “when money is weakened, people seek to preserve their wealth by investing in commodities and hard assets” least vulnerable to the decline of the dollar itself. Looked at in historical terms, we didn’t have “oil shocks” in the 1970s; rather, we experienced commodity shocks across the board as the dollar in which they were measured declined in value. Just the same, oil isn’t currently expensive; instead, the dollar in which it is once again measured has declined substantially since 2001.

Looked at from an investment perspective, economic growth is derived from information, good and bad, entering the economy. In short, it’s about experimentation with always-limited investment. However, when money is losing value, investment flows into hard assets representing wealth that already exists (think land, art, rare stamps, oil, gold) and away from the stock and bond income streams representing wealth that doesn’t yet exist. Floating, cheap money signals a descent into darkness that robs the economy of the information necessary to power it forward.

Some readers will understandably point out that the U.S. economy performed well in the 1980s and ‘90s despite a floating dollar, but the authors know why this is. As they note, the dollar back then, “despite ups and downs, averaged around $350 an ounce,” as measured in gold. With the dollar largely stable during the Reagan and Clinton presidencies, investment was reallocated from the prosaic wealth of yesterday, and back into stocks and bonds representing future wealth. The technology explosion in the ‘80s and ‘90s was no accident.

That’s why the authors so confidently and correctly assert that quantitative easing “did not just fail as stimulus. It prevented recovery by causing a destructive misallocation of credit.”

In their clear-eyed way of looking at the economy, the authors make plain that QE’s imposition explicitly deprived the dollar of its essential role as a measure, and with the value of money once again uncertain a la the 1970s, the investment that powers growth has once again gone into hiding. The authors’ solution to our economic malaise rooted in devalued money is simple: We must give the dollar a gold definition once again. As they explain, “getting the economy right requires getting money right.” It’s no accident that gold was used to define money for the hundreds of years leading up to 1971, and it will be no accident when the economy takes off again, assuming a return to gold.

Mr. Forbes and Ms. Ames have laid out a simple plan for returning to good money. Unknown is whether either political party is aware. What’s certain is that the party that discovers the basics of money yet again will oversee an economic boom that will make the Reagan and Clinton eras seem tame by comparison.

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