Welcome to Rubelandia
Biting your currency – instead of getting bit by it
- Friday, February 1, 2008
In the normal course of economic activity, you would never make an investment expecting that it will lose you money.
But making such investments is precisely what government's artificial creation of credit tricks business people into doing. And from this flows a huge proportion of the cyclical economic woes that afflict Nevada and the rest of the states.
To examine how this works, consider what happens when a gang of counterfeiters enters a small country – call it Rubelandia – and breaks into the treasury one night. Finding a duplicate set of the country's engraved currency plates, they abscond and proceed to print up a truckload of excellent bills indistinguishable from the "real," authorized, bills.
The original bills already in circulation in Rubelandia at this point, let's say, total one million units of the currency, the Rube. Over coming months, the gang surreptitiously passes another million units of the Rube into the economy.
The first individuals to pass the bogus bills – the counterfeiters themselves and their confederates – are able to buy goods and services from merchants at the same exchange rate as the honest citizens who are using the "real" money. And business people, at first, are ebullient. "The economy is great!" they tell each other. As time goes on, however, and as the new bills begin to permeate Rubelandia's economy, prices increasingly rise. At some point after all the million new bills have been placed in circulation, prices will have doubled (everything else equal). The reason is that the actual stock of real wealth in the country has not changed, though twice as many units of currency are circulating.
Soon, all merchants are recognizing that the money they collected from their first transactions with the gang is actually worth only about half what it was when those transactions were made. Merchants also discover, as they seek to replenish their stores of goods to sell, that prices for replacement goods are now about double their level when the process started.
Because of the counterfeiters' deceptions, many plans for the future made by honest business people increasingly turn out to have been mistaken. They thought the money they saved from those transactions was worth a certain amount, but now it is worth much less. Additionally, because shopkeepers and business people all across Rubelandia mistook what the gang was really doing, they over-estimated their real wealth and real savings, spent more on personal luxuries, and made business loans that were actually much more speculative than they knew at the time. Unbeknownst to them, the country was not actually sufficiently prosperous to support many of the new projects that were receiving loans. They'd been misled by low credit rates that reflected – not any genuinely higher level of savings and prosperity – but merely the monetary shenanigans of the gang of counterfeiters.
Widespread carnage in Rubelandia's housing market stems from the same cause: More credit had been advanced to people who wanted to buy homes than many of these individuals could pay back, given the actual conditions in Rubelandia's economy and job market. Virtually everyone in the country had been poorer, in fact, than they knew. Now, because of all the bad investments and wasting of resources precipitated by the ring of counterfeiters, Rubelandians find they have become poorer yet.
In the history of the world, gangs controlling governments have done this to their subjects innumerable times. For most of human history, however, people were safer from these scams than they are today. That's because modern central banking – i.e., government's centralized, monopoly control over currency – did not yet exist. Money was then still some tangible commodity such as gold or silver that was universally valued for itself, and so could be used as medium of exchange. This limited governments in how far they could debauch the currency. While emperors, kings and kaisers would frequently debase the gold or silver with baser metals when short of cash, common people were basically wise to such antics. That's why, in period films, one still sees individuals testing newly received coins by biting them.
Unfortunately, no such simple test exists today for the actual value of what we all, by habit and convention, call money. But behind those bills are increasingly only bank credits that the Federal Reserve has generated out of thin air.
And in principle, that's little different from the counterfeiter gang antics in little Rubelandia.
Steven Miller is vice president for policy at the Nevada Policy Research Institute.