Wednesday, October 01, 2008

The vaporization of value

David Seaton's News Links
Part of today's hysteria is sensation that value is disappearing into thin air. However, this has been going on for a long time.

If every dollar printed represented an actual quantity of gold which you could redeem and take home, then naturally the amount of money available would be very small and there wouldn't be enough to go around. Scarcity and value are closely connected.

The rebellion against "hard", gold based money the working people's eternal need for easy credit, was what was behind William Jennings Bryant's famous, "You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold" speech.

Making easy credit available has made it possible for modern capitalism to avoid the tensions that Marx predicted would finally bring it down. Now instead of being "prisoners of want", most of us have houses, cars, fine clothing and travel, all on credit or what the English used to call the "never, never". Things that in Bryant's day only rich people could ever dream of.

So, when people described as NINJA or "No Income, No Job, No Assets" were given mortgages for expensive homes, this was just taking installment purchasing to its ad absurdum conclusion. Why not eliminate value from the transaction altogether? The only value would be the service charges and commissions. Brilliant. Why not sell the resultant paper over and over again, take a commission every time? Who is keeping score? Brilliant.

All this is a bit of a house of cards, it depends on people actually believing that dollar bills, which are only colored pieces of paper, a "fiat currency," which cannot be redeemed for gold, have any value or, stretching that belief even farther, that pieces of paper or electronic symbols on a computer screen that only represent those intrinsically worthless dollar bills have any actual value. If people lose that confidence even for a moment, then, like Saint Peter trying to walk on the water, or Wylie Coyote trying to walk on air, they sink.... heh, heh... we all sink... it now appears. DS

1 comment:

Forensic economist said...

Unfortunately gold is not the panacea some think it is. The heyday of the gold standard - the late 19th century - was a period of deflation. If you had fixed costs such as a mortgage on your farm you were screwed as your crop was worth less every year but your costs were the same.

Deflation is as bad as inflation. There was deflation in the 1920s at least in farm products; then deflation in everything in the 30s until the gold standard was ended.

That is why Bryan made his speech against gold - he was in favor of inflating the money supply with the use of silver.

Fiat money leads to inflation and debasement of currencies. At least in the US we had relatively well managed fiat money in the 50s and 60s and it has been getting worse ever since.

There were credit bubbles under the gold standard followed by crashes - they just weren't as big as we have now. Check the record of the Panics of 1873, 1884, and 1907.

I don't have a solution.