Conservative Thought, Fiscal Insanity, Higher Indoctrination, Politics, Random Posts, War on America

Are We Burning Through Our Wealth?

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Paying Off The Debt?
Paying Off The Debt?

Something has bothered me since I was very young.  I have this mental picture, derived from a story that I was told regarding the circumstances surrounding the Great Depression.  I’m sure you’ve heard the story, too.  It’s the one about the two tycoons, dressed like the character from the game Monopoly.  They’re laughing and joking, bragging about how rich they are, and one of them lights a cigar using a burning $100 bill.  Stuff like this is probably why I ended up majoring in Economics…

What bothered me about the above story is the utter waste of it.  The destruction of value.  The excess of the upper crust.  Ok, I admit it, what bothers me about it is thinking about what I could have done with that $100!  Why didn’t he just let me have it?  Why didn’t he share it with me???  Nobody “deserves” to have that much!!!!  (Sound familiar?)

 

What if I told you that he was voluntarily making a payment toward the national debt?

 

Yep, something that Warren Buffett won’t do, even after someone reminded him that he can, following his speech about “income inequality.”  Let me explain.  It has to do with the nature of money.

Man is, by his nature, a trader.  My rice for your corn.  Your violin for my car.  My labor for your goat. Your Manhattan Island for these shiny beads… whatever.  The problem arises when I need something from you, but I don’t have anything you want.  The next step is a three-way trade, with a third person and a third commodity involved.  After a point, though, for maximum flexibility and convenience, and to maximize the value of trade, it becomes useful to introduce an intermediate good- something that is recognized far and wide as having value.  It helps if it is durable and compact.  How about gold?  It facilitates transactions between disparate parties.  Gold has been used as a store of value throughout the history of mankind.  Seriously, the Egyptian pharoes weren’t buried with stacks of cash.

Even gold, though, has its limitations. Beyond a certain point, it becomes hard to carry.  The need to physically secure and transport gold gave rise to our modern banking system.  Instead of carrying gold, I now carry a “note”.  Note, as in “deed” or “IOU.”  “This $20 bill denotes a deposit of one ounce of gold” (that ratio of $20/oz was fixed by Congress) if you want to think of it in those terms.  The Treasury held the gold, but didn’t own it- currency was issued when people put gold on deposit.  The currency simply reflected the value of physical deposits of gold.  You could go to the bank and swap your dollars for gold at the established rate (literally so- this didn’t end until Nixon, and the official ratio then was $35/oz).

So what that tycoon was doing was giving up his claim on his gold!  With the destruction of that $100 bank note, he no longer had any claim to what would have been, at the time, 4 ounces of gold.  The gold itself, though, still existed. Since the prima facia evidence of ownership is possession, this just means that the government now claims the asset- the wealth- the underlying value.  The tycoon simply relinquished ownership as surely as writing a check to the IRS.

What is a dollar?  Your answer is probably going to be “a unit of value.”  My answer, now that we are 40+ years from the gold standard, is “a used piece of paper.” Seriously, they have no nutrition.  With about $3 trillion of them in print, each one represents a tiny share of “the full faith and credit of the United States of America.”  Thanks to fractional reserve banking and credit money, even that is diluted by a factor of several tens by dollars that exist only on balance sheets or electronic accounts.

I am no longer distraught about the actions of that tycoon.  Granted, it wasn’t my money to begin with, but now I realize that nothing was lost- the wealth- the underlying asset- the gold is still there. That is an important concept that I will cover from a different angle in my next article.

 

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12 Comments

  1. Many moons ago in an economics class the teacher stated that many of us in engineering might wonder why we had to take Economics. —” There is one compelling reason for everyone to understand economics—so you will know when the bastards are lying to you.”
    Dr. Woods- if you are still around-you wuz’ right . Thank you.

  2. Spurwing Plover

    Liberal demacrats answer to everything is more taxes and more spending

  3. My concern is: Does the Federal Government still have our gold in its possession?

    • Inagada Davida

      Not just ours, but the US is also the trustee for all the Bretton Woods deposits, too- the whole Western world’s gold. Ask the Brits or the Krauts what happens when one asks for the repatriation of just a portion of their deposits! 😉

  4. Good article. A refreshing change from the usual fare that seems to dominate this page.

  5. Angry White Dudette

    You’re pretty smart… Enjoyed your article!

  6. Inagada…

    Most excellent write-up. Gives one a lot to ponder as well. – Looking forward to your next article, no doubt about it.

    Btw…very glad you finally got this posted, sorry I couldn’t be much hope last night.

  7. Excellent read, Inga. I’d definitely recommend Murry Rothbard’s “A Case Against the Fed” for further reading on this topic. (http://www.amazon.com/The-Case-Against-Murray-Rothbard/dp/1467934895/ref=sr_1_1?ie=UTF8&qid=1390757877&sr=8-1&keywords=rothbard+a+case+against+the+fed)

  8. Inagada Davida

    Thanks for the positive feedback, y’all!

  9. What a cliffhanger Inagada, waiting with anticipation and looking forward to where you are headed with this.

    I just finished reading When America met China, a book about tall fast wooden ships, and the early tea trade with china. The author kept referring to Specie (silver) and the huge trade imbalance China had with the rest of us barbaric empires.

    Seems the world had nothing China wanted or needed for trade so the Emperor did us a favor and allowed us to trade specie for tea. Over $62 million worth of specie was traded to China between 1805 and 1825.

    What I found extremely interesting was China was fine with having our money, but western traders where not allowed to have their women or families with them inside China proper, and white men were segregated in Cantonese districts for their own protection, seems the Mandarins liked our silver but wanted to avoid tainting their culture.

  10. Obongo and the democrats want it all…..all of it….none for you even though you worked for it….it belongs to them because the government built the roads…..and now they get to take all of the money generated on the internet because Al Gore invented the internet…..

    you get nothing….and that is what you deserve……who the hell do you think you are to think that you can earn a living….you owe your very existence to the government….why do you owe your very existence to the government……it’s simple…they didn’t have you abort…therefore they can take anything they want from you…….

    bow…..bow …..bow to the state…..and thank them for not coming after you……

    you owe everything you have to the state……they know how to redistribute what-ever it was you had….

    smile when you turn over your assets to the state…..

    smile god damn you……..we are watching you……..

    http://i.dailymail.co.uk/i/pix/2013/10/11/article-0-18AA7DFA00000578-38_634x436.jpg

  11. Hey that was pretty good

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