Quantitative Easing

QE, by the way, did not start in 2009 in the US. It started in 1913 with the establishment of the Federal Reserve. It took a while to really get going though. The practice of the wholesale creation of money out of thin air could not hit its stride until the major impediment of Gold was kicked out of the way. That happened in 1971. Look at the proportion of today’s Treasury funded debt total which has been borrowed since then. But the period between 1971 and 1982 did suffer from one final impediment. This was the fiction that the debt limit increases necessary to fund deficit spending in the 1970's were temporary.

The permanent ceiling of $US 400 Billion was mandated in 1971. By 1978, the funded debt of the Treasury had doubled that figure to reach $US 800 Billion. By late 1982 it had more than tripled it to reach almost $US 1.3 Trillion. Throughout this period, the figure of $US 400 Billion remained the permanent limit and all the additions were deemed temporary. The pathetic implication was that once the US government got the economy on an even keel again, they would pay the debt back down to the limit they had set just before they repudiated Gold as money.

Just as the Nixon administration could have chosen to cease their deficit spending in 1971 in order to preserve the link between the US Dollar and Gold, the Reagan administration could have chosen to do the same thing in order to roll back the debt explosion that had taken place in the intervening eleven years.

Neither chose to do this. Nixon repudiated Gold. Reagan repudiated any idea that there was a limit to the amount the US Treasury could borrow. The only difference in this whole sequence is that the US Treasury still has an official debt limit on the statute books. The only thing new about quantitative easing is the name itself, concocted as yet another euphemism for something which had been going on for a long time.

In 1791, four years after the signing of the US Constitution and two years after George Washington was inaugurated as the first President of the United States, the US government was laboring under a debt of $US 75 million. Almost all of this debt had been taken on to pay the costs of the recently completed revolution from Great Britain. Seventy years later in 1860, as the Civil War loomed large on the horizon that debt had been reduced by $US 10 million to $US 65 million. By 1866, the year after the end of that war, the debt of the US Treasury had ballooned out to $US 2.77 Billion. It did not exceed that level until 1912, a century ago. By 1919, the year after the end of WWI, Treasury debt hit $US 27.4 Billion. In 1940, the year before the US got involved in WWII, the debt was $US 43 Billion. Six years later in 1946 it had ballooned out again, this time to $US 270 Billion. WW II was the last war fought by the US which was declared by the US Congress as laid down in the US Constitution.

Borrowing to finance these wars, all of which were duly declared by the US Congress, totaled $US 255 Billion. In 1791, the new US government was already carrying the debts of the revolutionary wars. In the following 154 years up to 1945, it was engaged in three more major wars. The civil war took four years from 1861 to 1865. The US was actively involved in WW I for 1.6 years from April 1917 to November 1918. Finally, the US declared war in December 1941 and accepted the Japanese surrender in Tokyo Bay in September 1945. WWII cost the US 3.7 years. Add these periods of active participation in war together and you get a total of nine years and three months out of the 154 years between 1791 and 1945. That period of less than a decade saw the US Treasury borrow $US 255 Billion or 94% of the $US 270 Billion in funded debt they owed in 1945. Wars are always expensive.

Now, throw in the two undeclared wars between 1945 and 1971, the Korean war and the Vietnam war. US Treasury debt went up $US 20 Billion between 1951 and 1953. It went up $US 80 Billion between 1965 and 1971. Add that to the $255 Billion the US government had previously borrowed during its years of active war and you reach a total of $US 355 Billion out of the $US 400 Billion funded debt owed by the Treasury in 1971. Yes, the US government was borrowing for other purposes during this period, notably during Roosevelt’s new deal period in the 1930s and Johnson’s great society period in the 1960s. But the fact remains that the few years in which the government of the US was actively engaged in war contributed the vast majority of the funded debt owed by the US Treasury in 1971.

The precedents for this type of burgeoning government indebtedness are as old as recorded history. All of the predecessors of the US as global “superpowers” had followed the same path. That path had, in its turn, impoverished all of them. The US was travelling a well-beaten historical path up until 1971. But there is no historical precedent for what has happened since 1971.

The Making of Money

In different places all over the world, the idea of a medium of exchange grew. People noticed that some goods were easier to trade than others. And people also noticed that these more goods that were easier to trade had similar properties.  They were durable, they were easily divisible into larger or smaller amounts, they were comparatively scarce as procuring them required effort, they were homogeneous as every item of the commodity was exactly like every other item, and they were convenient. It was easy to carry enough around to made trades for other commodities.

Over time a shorter and shorter list of commodities passed all these tests. These select commodities began to exhibit a sixth property, all important in the evolution of money.

This short list of commodities, most of them metals, had one thing in common with all other commodities. They were useful and commanded an exchange value in their own right. But because they were easier to trade than any other goods, they came to be perceived as having a value over and above their basic utility. They came to have a value as a most good that was very easy to trade. They came to have a value as a MEDIUM OF EXCHANGE.

Once this value became widely recognized, the commodity in question was no longer consumed for anything but the most vital purposes. Instead, it was used in exchange. It had become a MONEY.

intrinsic (adj.) Of or relating to the essential nature of a thing, inherent.

There is no such thing as intrinsic value in economics. Value does not reside in the atoms, molecules, chemical composition, or structure of an economic good. It always resides in the mind of the individual seeing the good. When looking to acquire an economic good, an individual must decide how much time, or effort, or other economic goods he or she is willing to offer in exchange. That decision determines the value of that economic good, at that particular time, to that unique individual.  i.e. Is it worth one day of work for that dress?  If I buy the family size package then I am only giving up one hour of work for dinner.

This is a crucial difference. Value is not in what is beheld, it is in the eye and mind of the beholder. The reason why some goods become money while most others do not has nothing to do with the intrinsic value of the goods. It is because a large number of individuals have realized that goods used as money have a unique usefulness. Unlike all other goods, they can be exchanged easily, and at any time, for anything.

Exchange or Trade

Animals don't exchange or trade with each other. They are self-sufficient, or take from each other, or have superior strength and/or cunning. There are some human beings who get along in the same way, but the majority recognizes the benefits of voluntary exchange. The phrase "your money or your life" is not the beginnings of an exchange, whether the person uttering it waves a gun or a government id card.

The first rule of voluntary exchange is very simple. If two people are willing to exchange, each must view the results of the exchange as being beneficial. If either of them is not of that view, the exchange will not take place.  In other words, do unto others as you would have them do unto you.  Everyone must benefit or no exchange happens.

Direct exchange, or barter, is exactly that, my good or service for your good or service. The problem is that I might want what you have, but you might not want what I have to offer in exchange. With no medium of exchange, there is no deal. 

Indirect exchange takes place when one party has a medium that is always acceptable, not for what it is, but for what can be done with it. If you offer me money, I will accept it, because I know that I can exchange it for what I want, whenever I want it.

Indirect exchange involves the use of money or the medium of exchange. Money is the universal key, it fits all locks in the world. And the world it has unlocked is the world we live in today. Money has made the division of labor possible. It has made specialization possible. It has made the accumulation of wealth over periods which are longer than a human lifetime possible. But most of all, it has hugely advanced the potential for friendly interaction between people. To survive as such, and to prosper, a rational human being must exchange. He or she has language, to exchange ideas, and money, to exchange the fruits of ideas. From that foundation, everything else we see around us has been built.

What is money? 

It is a medium of exchange. 

What does it do? 

It ensures the success of exchange by being the one item on offer that is always acceptable. 

Why is it necessary? 

Because human beings must exchange to live together in peace, and to prosper. 

How important was the discovery of the idea of money? 

Look around you.

That covers the concept or idea of money. But an idea does not exist as a physical form. Money must be a physical form. Neither the electronic money of today nor the notes and coin which circulate as cash has any official or legal connection with Gold and Silver. 

They once did, and most people think that they still do. As long as that situation exists, the modern monetary system will continue to function.

That is what the Central Bankers of the world want you to believe.  What must be believed because the entire system is built on this one belief.

When the majority starts to understand what they have is not money at all but IOUs, then the fireworks will really fly. 

What Is Money?

Sure I am a housewife and mother.  I am a reluctant worker bee in the workforce as well and frankly very angry that I cannot pursue life, liberty and happiness as I wish.  Yes I am selfish.  We should all be.  When asked what three things are most important to you in your life, number one should be you.

I have read Ayn Rand, as well as too many authors to list here.  But the point is I have the right, conferred in 1776, to these civil liberties.  This country was built on the escape from government interference into people's lives.  Just because it is not religious in nature doesn't mean it isn't happening.

Unfortunately you can cry and scream all you want but the root cause is what we need to find so we can fix it.

It's the money.  The money is bad.  Never in the history of human beings has the money not been tied to something real, like gold or silver, until August 15, 1971  This action by Nixon was more criminal than Watergate.  No one says anything about it.  Frankly, my personal opinion, Nixon was the beginning of the finale.  The end had come but it could have been reversed.  No one had the guts to do it.  They let the whims of the day shine in their eyes and eventually we lost focus on the things that truly matter.

Free capital markets encourage the behaviors of all those who truly believe they should treat others as they wish to be treated.  If you treat others as you wish to be treated then the riches are yours.  Free markets demand that what you produce helps others.  That is the only way you are rewarded.  If it does not help others, then you go out of business or are run out of business.  You are punished.  But at the root of all this is money.

We have fallen into the trap of mistaking paper for money!  What is urgently needed is someone that can tell the difference between paper/plastic and money. The need becomes obvious when one considers the current attitude to Gold and money.

I have heard it all.  Those Nobel Peace Prize economists and Federal Reserve Bankers, and economists say it over and over.  Gold as money??  Ridiculous!

The arguments are varied and listed below.

• There's not enough of it!
• It doesn't allow for the flexibility so necessary for modern monetary policy to be utilized properly.
• There's not enough of it!
• It is too rigid to meet the often rapidly changing needs of business and trade.
• There's not enough of it!
• It would give an unacceptable amount of economic power upon those nations which are lucky enough to have large deposits within their borders.
• There's not enough of it!
• It would stifle economic growth by drastically interfering with and even curtailing the present finely tuned lending practices of Central and commercial banks.
• Besides - there's not enough of it!

Bernanke listed all these reasons when he was lecturing at George Washington University in March 2012.

You see there is no place for Gold in the financial system today. The most frightening thing about this argument is that it is true! There really is no place for Gold in the financial system today. 

Most people don't spend much time wondering what money is, their major concern is how much they have, and how to get more. Usually, the question of what money is arises only when money ceases to work correctly. In economics, the answer to the question what is money? consists of three words:

Money is a medium of exchange.

That's all. Yet the conception of a medium of exchange ranks below only language with its outcomes such as speech and the written word as the greatest intellectual discovery in history. Without language, the exchange of anything but the most rudimentary ideas is impossible. Without money, the production and exchange of anything but the most rudimentary goods and services is impossible. It is not difficult or time consuming, or inefficient, it is IMPOSSIBLE!

Whatever Happened To The Money??

Did you ever wonder as your kids grew up, why, even though more money than ever was being made by you, it always never seemed to be enough?  Why is it when I was little only my father worked?  All I ever wanted to be when I was growing up was a housewife and mother.  When I married I dreamed about volunteering for my kids at their school, helping with school functions, making Halloween costumes and volunteering for girl scouts and little league baseball.  And when my kids grew up, I would read to the elementary kids, help with Art shows, have tea parties with the neighbors and plan fund raising events.  When I was growing up that wasn't far fetched and it wasn't that long ago.

What has happened to us?  Why are we falling apart?  Why are those schooled in the Universities get accolades while those who read voraciously and industrially get overlooked as uneducated? Why are those that have worked hard, saved and invested and created new companies being vilified?  These are the entrepreneurial values I taught my children!  When did people start having such low self esteem in America?  Why?

Confused?  I was when I first tried to figure all this out.  It's so simple that most people don't believe me.  They tell me that is impossible, you can't possibly know all the intricacies of the economy and politics and government to know this.  It is to simplistic.  You don't have a degree so how would you know anything?  You only think in black and white.

Yes I suppose I do but that is no different than some of the greatest minds in the world. But I am right. I have tried for over 15 years to find a flaw but there isn't one.  The answer is simple.

It's the money.  

The money is bad and the government passed a law saying they know it is bad and we will all go to jail if we try to use anything other than this paper they call money as money.