The middle class better watch out for what’s coming next

How long has our money system been with us?

Humans are great adapters.

I find it astonishing how quickly we adapt to new technology and forget the old things.

Grandparents who grew up without age spots on their hands, chronic medication, cell phones and credit card debt remember these things – but usually only when reminded!

We ourselves have seen cell phones and internet access completely, radically change our lives in a matter of a few years, and we’ve already forgotten what it was like without them.

This ability to adapt is our strength as our species, but also our weakness.

Our Achilles heel.

Why?

Because it gives us short memories.

Very short memories. To our detriment.

As over-extended homeowners discovered when they realized the rules about property hadn’t miraculously changed – busts still follow booms.

How does this apply to money?

We should understand the history of our money system in order to plan and protect ourselves best.

How old is it?

How long has our money system been around?

Well, money itself is almost as old as civilization, and banks date back many hundreds of years.

We assume that our money system has been with us pretty much forever. But we’re wrong. Changes have been made that are very recent. Changes that make a big difference.

For example, during the Great Depression Roosevelt confiscated all gold that was owned by private citizens in America. He just took it. If we did it, it would be theft. But because the government did it, no-one went to jail (unless, I suppose, you resisted the confiscation!)

Another very big change took place in 1971 when Nixon unpegged the dollar from gold.

That means it is no longer backed by gold. The dollar bill or the Rand is no longer exchangeable for some gold.

It is worth no more than the paper it is printed on – and all that trust and faith we mentioned right back at the beginning, of course.

America, and therefore the world, has been running on that faith ever since. And there is no limit to the dollars that can be printed because there is no gold requirement holding them back.

It makes you realize how powerful a mindset can be. A mass mindset of faith in the paper dollar has sustained and grown economies for more than 40 years.

But can you also see how important, how crucial it is, that most people do not question how things are or that faith will be broken?

Hence the importance of keeping the population well and truly confokulated.

Let’s take a closer look at what happened in 1971 because it matters!

After a very important conference at Bretton Woods in 1944, at which the future of money was ‘designed’, the U.S. dollar was made the global reserve currency and other currencies had fixed rates of exchange with the dollar.

The dollar itself had a fixed rate of exchange with gold.

That was the foundation.

And it led to an era of post-war growth that has gone down in history as perhaps the most optimistic, positive time ever, a time when quality of life really blossomed.

As Bill Bryson wrote in his memoir, there was a heady innocence and excitement about getting your first refrigerator, your first family car, television, household appliances and all that ‘stuff’.

Right from the start it changed households, though it took quite some time for people to notice.

But aside from that, it was famous for unprecedented prosperity.

Things had never been so good.

Quietly, though, in the background, the U.S. was printing more dollars and running out of gold to back them to the agreed level.

The Vietnam war was expensive and the U.S. had budget deficits in spite of all those Fords and Hoovers it was making and exporting.

And we now know that governments print money to cover their deficits, even though it is just a short-term cosmetic solution that in the long run weakens its currency.

About this time, France wanted to exchange its dollars for gold because it suspected that America was short on ‘real money’ – the gold backing the dollar.

This was similar to a run on the bank.

When all your customers, or just one very big one like France, want to withdraw all their money all at one time it cannot be done and banks go under.

Now this could not happen to America!

So what Nixon did was, he changed a rule.

The rule that said he had to give you gold for your dollars if you asked for it.

He said no. He wasn’t giving any gold anymore. The dollar was no longer backed by gold.

It was the same thing as the bank closing its doors in your face and saying no, sorry, you can’t have your money back.

But because it was a government, a very big and powerful government, they could and did get away with it.

Essentially they defaulted, they admitted insolvency – something that should have been earth-shattering and would have been if any one of us did it (for us and our creditors anyway).

How much of this was realized at the time? How much is realized now? I suspect that it all seemed dull and boring and financial and hard to understand. Like the financial pages in the newspaper. Also, irrelevant to the ordinary person. Thanks to our education, and our conditioning!

I don’t think it was irrelevant.

But I do think that the power of mass thinking, and of the government, was such that they were able to get away with it.

This set the stage for the “money-backed-by-nothing” era of massive growth and instability that has followed.

Want to know why bubbles like the dotcom and the sub-prime come along more and more often? The forces that underlie them were unleashed then.

Without a need for a certain amount of gold to back your currency, there is simply no limit to how many dollars you can print.

And because money is created from debt, and there is no limit, you can expect debt levels to rise when something like this happens.

Which was exactly the case.

Debt rose dramatically. Debt was easier to get, it was sold hard, marketed like mad, and later other relaxations to rules followed.

In about 1980, credit card rule changes to how much you could charge in interest made credit card debt hugely more profitable to banks.

Who then sold lots and lots of credit cards! ‘Restrictive’ rules on many things that were put in place to avoid the mistakes of the past that led to things like the Great Depression were swept aside, most famously by Alan Greenspan.

Profits, bubbles and busts followed.

As a private citizen there s a limit to how much debt you can carry (although banks have lobbied hard to get those limits relaxed so that you can borrow more and they can make more money).

But for a country as a whole, who’s going to say you have too much debt?

Who is going to say you’re living beyond your means?

The current situation is that truly growing economies like China, who actually make things, tangible goods, are supporting this system because America is a big market for them.

They support it by buying U.S. government bonds which is a form of a loan taken out by America as a whole.

The government is living on debt, borrowed from China and other such countries.

It can carry on as long as it suits China. Which of course it does – or used to, anyway.

Although China has taken a knock, as has everyone, following the depression caused by the housing bubble, it’s also turned its eyes elsewhere for markets, specially to its own people.

So nobody really knows for sure how long this status quo will carry on for.

One thing I do know is that the size and scale of the American economy is big enough to support the insupportable for far longer than you would think.

And that fundamental problems with the economy can be hidden for long periods and covered over by things like the multi-billion dollar bank bailout.

This is good, in a way – it gives us time to make the changes we want to make in our own lives. Without going into it too much here, I would say that personal debt eradication is a crucial aspect of the changes we need to make, which is why I have set up Warriors Against Debt Organization.( http://www.warriorsagainstdebt.com/)

The amount of money in circulation is closely tied with debt, as we explained. So the amount of money in circulation tells us of the size of this system we have just been looking into.

The numbers are amazing.

For the first three hundred years of America’s modern economy, there was never that much money around – not by modern standards.

It took all that time to create the first trillion dollars.

Now those three hundred years were the years in which America was built.

From forest and prairie, a modern industrialized country was created, with factories, cities, roads, railways, ports, mines, houses and everything you think of when you think of modern life. All of that took a trillion dollars.

Right up until 1973, the period during which so much of the country’s development took place, everything in that economy added together came to less than a trillion dollars.

How fast do they now add a trillion dollars?

The U.S. national debt has increased by more than 1.6 trillion dollars since the Republicans took control of the U.S. House of Representatives.

So far, this Congress has added more to the national debt than the first 97 Congresses combined.

Did they build another whole America-worth of buildings and cities, roads and bridges and ports and factories and mines and houses?

No. In fact America’s crumbling infrastructure is cause for concern.

Where did it go? Is a trillion dollars now worth a trillion dollars then? Did a trillion dollars’ more value get created out of the labor of the population? What with layoffs and job losses and people desperate for jobs that no longer exist, for work that is no longer there to be done, it doesn’t look like it.

There are people who think this kind of money situation is very flawed and has not worked properly in the very short period of time it has existed (since early in the 20^th Century when the Federal Reserve was created). Since then we have had …

• the great Depression;
• Roosevelt’s private gold confiscation;
• Nixon’s gold-default;
• no limit to money growth since then;
• and a regular pattern of booms and busts that have speeded up no end in the past decade or so.

We have also seen …

• growth like never before;
• debt like never before;
• volatility like never before.

There are people who say that the old rule – export more to pay for your imports – has to come back. Which means, build your economy in the old-fashioned way (make things, and make sure your people can buy them!).

• They say that the government is lying when it equates spending with growth;
• that it is lying when it says debt and consumption equal a health economy.
• And that it cannot carry on like this forever.
• Just as it can’t for a private citizen.
• The economics are the same – the sums.
• The man-made rules may be different in the short term when they can be defied by Nixon and Roosevelt, but in the long run the eternal rules of economics can’t be overturned.

How do we tie these big things back to what affects us day to day? Very recently, in my opinion, we have seen:

• the mining of the middle classes for corporate profits like never before –
• in the form of ‘easy’ consumer credit and the housing boom –
• is America mining its people because it no longer mines its resources and turns them into exports?

If so, it would explain falling standards of living and tougher financial strains and stresses.

It would also suggest that the middle class better watch out for what’s coming next.

We simply have to be aware of what’s going on or else we are just like sheep to the slaughter.

So here is the trillion-dollar question. What are you doing about the situation?

Please add your comments to this blog in the comment section.