MONEY: What is a dollar?

http://www.lewrockwell.com/rajiva/rajiva12.html

Fiat Law and Fiat Currencies – the Relic of Barbarians
by Lila Rajiva

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The free market arose wherever there were laws and systems like that – whether in Europe or Africa or Asia. One way to think about this difference would be to see it as the difference between a fiat money, like paper, and a real store of value, like gold. You can print all the money you want, but if there’s nothing to back it up, then you’re in a bit of trouble. Your creditors are unlikely to put much store in you as a credit risk, just as the world’s wringing its hands today over the dollar. Pretty soon, they come calling for their loans with cudgels and pitchforks.

Gold does not have the same problem, because there’s a limited supply of it. It has to occur in nature. It has to be found somewhere underground and then mined and refined. It’s an expensive business – that takes risk, time, and money. There are costs attached to it that someone has to pay. Paper money, on the other hand, can be printed any time you want. Just ask Ben Bernanke. He’s dropping it by the helicopter load from the clouds.

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They are “counterfeiting value” by printing more money electronically. It’s slight of hand. To understand, you have to understand the answer to the question: “What is a dollar?” and proceed from there.

The answer is it’s NOW an imaginary unit, backed by the belief that you can exchange a green peice of paper for something. A Keynesian (http://en.wikipedia.org/wiki/Keynesian) will never talk about what the definition of money is. An Austrian (http://en.wikipedia.org/wiki/Austrian_School) will insist that the pricing mechanism in the economy have commodity money. It USED to be tied to gold.

Sadly, as an Austrian, I think you are in for hard times. O is going to “finance” 2T$ in current spending. By monetizing it. A fancy word for counterfeiting. And, the value of the dollar is going down even further.

To understand, you have to go to Robinson Crusoe’s island, that economist’s use to simplify ideas. A fisherman, egg gatherer, and a fruit gatherer are on the island. (Magic; don’t ask questions yet!) They barter between themselves. After a while, 1 fish = 2 eggs = 4 coconuts. Due to the relative difficulty of effort. But the fisherman and fruit gatherer don’t deal directly. The egg gather is the middle man. Then a banker arrives. He creates money so that the Fisherman can deal directly with the Egg guy. He uses seashells. Then the value equation is 1 fish = 2 eggs = 4 coconuts = 8 seashells. The evil banker after a while introduces more seashells into circulation by spending them. So he get more stuff. Similarly through out the ages, the King (Government) seeks to enrich itself that way. When the currency is gold coins, it’s much harder. (I first learned this when I saw an exhibit at the Smithsonian of French Francs over time. The French Franc of Louis I was a gold hockey puck; Louis XIV’s was a very thin button. Inflation!) When the currency is pretty green pieces of paper, it’s much easier.

So there you have how O44 is goign to spend 2T$ that we don’t have.

Basically, it’s a “tax” on anyone who has a dollar or dollar denominated assets. By adding a “seashell”, the value of all the other seashells is adulterated. Watered down.

So who get’s screwed?

The Chinese have 5T$. There’s a lot of dollars out there. The poor and people on fixed incomes (i.e., the purchasing power of their few dollars goes down) get less for their money.

Who makes out?

The US Government mostly. People who have “valuable stuff”. Commodities, commodity producers, land owners, people who produce stuff that others want.

So that’s how O will spend what he ain’t got.

He’s betting that before the inflation comes, the economy will “restart” and we won’t notice. (Think LBJ and Carter!) It worked for Kennedy because he lowered taxes on the productive class and everyone was motivated to get to work. His quote was: “A rising tide raise all boats!”

Sadly, I don’t see O or his staff being that smart.

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