Threadbare Economics

The mysterious resilience of the dollar

Since 2008, the Federal Reserve has added a rough average of a trillion dollars per year to the money supply. Every year, detractors of this practice have predicted a collapse of the dollar’s credibility. But the collapse has not come. To get a sense of the mystery here, imagine what would happen to the value of gold if it became as easy to manufacture as dollars. But again, the collapse has not come.

Since the international accords made at Bretton Woods in 1944, the global economy has organized itself around the trusted US dollar. Over the years, US money managers have abused the dollar’s privileged position, using currency as a means of siphoning real financial energy away from other countries in exchange for our synthetic financial energy (that is, currency conjured from thin air; value derived not from producing goods but from exploiting our position of trust).

Other countries have mostly just gone along with it, however, since our currency, despite its questionable origin, has remained an acceptable medium of exchange. Sure, we enjoyed the preposterous advantage of being able to trade mere buying power for hard labor and hard goods, but complaining wasn’t going to change anything, and buying power has exchange value if anything does.

Over time, in addition to facilitating the exchange of goods, dollars have also become a store of value. Today that means that every person or country storing financial energy in dollars has an interest in upholding the value of the dollar — because if the dollar collapses, the financial energy stored in dollars will go up like a dust cloud into the air from which it came.

Our Fascinating Moment

We therefore live at a fascinating moment in global economic history. It is a moment in which there is widespread interest in preserving unsustainable monetary policy. It is an arena in which we will answer the question of whether we, by dint of the collective will, can force something false to be true. It is a moment that calls to mind the words of God in the book of Genesis: “… nothing will be impossible for them.”

The recent spike in US money-printing is revealing the grisly inner workings of our system. Our economy is built around the American consumer, a creature carefully bred by government and industry over the past hundred years. In our planned economy, consumer spending is supposed to make up some 70% of US GDP. When consumption lags, our economic managers feel the need to stimulate spending — even, apparently, if that means cutting work out of the equation and distributing digital dollars like welfare checks.

On this level of analysis, your job is merely a mechanism for exacting your participation in the economy: a justification for borrowing, and a means of putting money in your hands to keep you spending. This is because when a government can conjure currency from thin air, income tax is more symbolic than essential. When push comes to shove, they don’t need us to work as much as they need us to spend — even if they have to give us the money themselves.

As the detractors have warned time and again, the dollar may be rocketing toward a cliff’s edge, but the rough mountain terrain has been lousy with false summits. The question, as we go sailing off this precipice, is less about the natural effects of economic gravity and more about how long others will take an interest in keeping the dollar aloft with a steady supply of hot air.

Smiths, Banks, World

One way to understand the place of the dollar in the world is by analogy to goldsmiths and banks.

In the days before banks, people would deposit their precious metals with a smith, who would give them a deposit slip. Once these slips began to circulate as currency (often without withdrawal of the gold), the smiths realized that they could write deposit slips for metal that didn’t exist. Since the false slips were indistinguishable from real ones, they were accepted just as readily.

Over time, these goldsmiths evolved into the banks that you and I use today. They continue to deal in slips that represent nothing, but this fraud now has the blessing of the highest levels of officialdom, and is openly justified by the benefits of multitasking with money that isn’t there. This practice is called fractional-reserve banking, and it’s only the most basic of the many ways in which symbolic finance lends itself to profitable abuse.

Just as goldsmiths provided a service for townspeople, and commercial banks provide services for the citizens of their respective countries, so the world as a whole needed some trustworthy entity to provide the same basic services. That responsibility fell to (or was nabbed by) the United States — probably due to geographic insularity, an ethic of honesty, and military might — just as smiths were chosen for their strong safes and sterling reputations.

Like the smiths before us, however, we’ve found little reason to resist the siren song of maximizing financial efficiency. It’s a song that begins with sparks of incredulous delight, but shades into tones of darkening desperation, which is where we find ourselves today — experimenting with how much value we can extract from our markets before those holding them up find better options and walk away.