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In ordinary times, it is usually the case that tolerating a recession is the more prudent (but less politically popular) option. However, the current crisis is not a typical one, as more and more people are coming to realize.
Given the extraordinary amount of leverage and debt that resulted from Alan Greenspan's ruinous policies of the early part of this decade, the prudent course of "taking our medicine" may simply not be a viable option. In past business cycles, it was possible to allow a recession to run its course, punishing the most imprudent market participants without threatening the foundations of the "blue chip" institutional players. However, this time around the blue chips themselves are in danger of collapse.
The incredibly complex web of indebtedness is such that once the process of reckoning begins, there may be no effective "fire-wall" to prevent the decimation of the entire financial system. That being the case, the other alternative may be the only real option, and recent policy moves seem to indicate that the government and the Fed realize this.
A big part of the problem lies in our collective lack of understanding of the nature of money itself. The relative stability of the US dollar over the past 60 years has served to obscure the fact that few people really understand what money is. We use phrases such as "medium of exchange" or "store of value", but do we really understand what we mean by such terms?
If money is a "store of value", how much value is stored in one dollar? The US government decrees that its currency is "legal tender for all debts public or private", but it doesn't tell us how much a unit of currency is actually worth.
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Re: American Economy: Crank Up The Printing Presses!
By Heather Wallace, January 23, 2008 at 08:29I heard the US has budgeted 30 billion for warfare? That's what's wrong with the American economy and the world: priorities. We've got an ecological crisis looming, which will make the economy a moot point.
Re: American Economy: Crank Up The Printing Presses!
By Paul Sullivan, January 22, 2008 at 13:34Hi Josh. Great article! Interesting as well to note that the US debt has nearly doubled from 5.7$ trillion when GWB took office. That's $30K per American. It's also interesting that much of the debt is held by the next great economic superpower, China. Meanwhile, the kids are still playing with matches. By lowering the cost of borrowing by .75 a point, the Fed is not only postponing the inevitable, it's making it worse. Cold turkey's really going to hurt...
Paul Sullivan,
Editor-In-Chief
Re: American Economy: Crank Up The Printing Presses!
By Michelle Kenneth, January 22, 2008 at 09:10Hi Josh,
Great article.
I was actually thinking about the fall of the economy and what I can do now if we were to head into another Great Depression. My brother and I have been discussing this in length for the past few months trying to come up with a plan. Sure, we know anything severe that could happen won't come immediately, but we foresee something horrible coming.
There's that part where we think why should we invest in a 401(K) or an IRA if the money won't retain it's value? Would it become completely worthless if the dollar fails? Sure, buying stocks helps our economy when it comes to purchasing power and investing in our economy, but not everyone is going to jump on that bandwagon. Just this morning, the stock market fell by 311.99 points at opening.
If I throw my money in a high interest checking/savings account, will it still be worthless down the road when we hit a depression? Sure, it will. I think the value of the dollar means more to people because we work hard to earn each and every dollar. That is where the true value of the dollar comes. Over the years I've been investing in gold, jewels, art, etc., just in case that greenback means nothing. I could trade something more valuable along the way. My friends and I have also been looking into investing in major natural resources like hydroelectricity and wind power. We've been looking at land across America to be ahead of the game and start investing in mother earth, because oil is killing us.
Also, we've been talking about stocking up on the things that we could possibly need (food, medical supplies, clothing, water, etc.) if something truly drastic were to happen. Even if the government could divert something horrible happening, those are all things we'll end up using anyway. Most importantly, it's better to prepare for a Great Depression now than to be in shock and unprepared when it does happen.
I consider President Bush's emergency telecast last week as a warning. That warning should not be tossed to the side, because a lot of us have been watching this for some time. That warning reminds me of the movie "Deep Impact." The President gives America a one year warning of bad things to come and people just sit around doing nothing waiting for the "just in case it doesn't happen." The asteroid still hit and killed a lot of people in the coastal regions. They tried to escape at the last minute and ended up dead. If they had left for higher ground much earlier than that, they would have survived.
We have to remember that the President has access to more information than we have. If he has to give an emergency warning to America about our economy, then I think America should listen. We can always avoid disaster if we work together and try to save ourselves instead of waiting until the last minute for it to destroy us.
Re: American Economy: Crank Up The Printing Presses!
By luyen, January 16, 2008 at 13:40I found this article a bit over my head, knowing very little about economics, my simple question is if the mighty U.S. dollar were to keep falling, wouldn't it be backed again by gold to stabilize it?
I do like the philosophical angle of this story, what is money? you can ask that of a lot of things, but certainly the financial pinnings of a country are as elusive the government fiscal policies that run it!
Re: American Economy: Crank Up The Printing Presses!
By Josh Sidman, January 16, 2008 at 14:07Hi Luyen,
Thanks for reading! I hope you won't take my response as personally insulting, but your question is actually a perfect example of my point that the public doesn't really understand the nature of money. The US dollar has not been convertible to gold since 1933. So, to answer your question, no there is absolutely nothing backing up the dollar. The only reason it has any value is because we believe it does, and that is why I think the reckless policies of the government and the Fed are so dangerous. Every time the government decides to print another hundred billion dollars to finance a war or prop up a bank, the average citizen is given another reminder of the illusory value of money. After all, if the government can just print as much as it wants, why should any of us be willing to accept this stuff in exchange for things of real value? And, the more the government does to prompt people to ask such questions, the more likely it is that people will eventually opt out of the collective leap-of-faith that gives the dollar its value. After all, dollars aren't the only form in which people can hold wealth. They can convert it into other currencies, gold, silver, oil, antiques, art, etc. This is why you have seen the price of gold go from $250/oz to $900/oz over the past decade. Its not that people are all of a sudden demanding three times as many gold necklaces, but rather it is an indication of a declining faith in the value of paper currency and a preference for holding wealth in the form of gold rather than dollars.
Regards,
Josh
Re: American Economy: Crank Up The Printing Presses!
By luyen, January 16, 2008 at 17:30Hi Josh, thanks for replying in such detail - no i don't take it personally, i'll admit to anybody that i have the slightest clue how most of our economic machine, from the personal level to the corporate level and beyond works... - I had always assumed that gold still played a role somehow, you know with Fort Knox and all that, but just like most people, never really pondered further than that...
So what you're saying is that there is a complete lack of accountability when it comes to the government using money, and a certain level of hmm, i guess, ignorance on the part of people who use it?
Does inflation go up whenever there is excessive spending and borrowing by the government?
On a personal level, i don't think it'd care if is money or chocolate coins, but I do care about accountability and responsibility.
Re: American Economy: Crank Up The Printing Presses!
By Josh Sidman, January 16, 2008 at 18:26Hey Luyen,
You are correct that the government holds substantial gold reserves, but the currency is not convertible, so gold is no longer a guarantee of the solidity of money. I do not, however, advocate a return to the gold standard. That has other problems and was largely responsible for the Great Depression. As with most important issues, the truth is far more complicated, and there are no easy answers. I believe a fiat currency with prudent monetary policy is the best answer, but the problem is that as previous financial crises recede into the past, monetary discipline inevitably wanes, and this is precisely what happened over the last 20 years.
To answer your other question, it is not necessarily the case that excessive borrowing and spending on the part of the government causes inflation. Keynes (who I quoted above) was the intellectual father of the New Deal. He argued that when the economy is sluggish the government can borrow and spend without causing inflation, thereby spurring the economy to growth. So, while I do consider fiscal irresponsibility to be a contributory factor to the inflation we are now seeing, I believe a much larger share of the blame falls to the Fed's easy-money policy during the first half of this decade. By enabling the public to borrow money on artificially easy terms, the Fed caused the bubble in real estate, which is by far the biggest part of our current problems.
Anyway, thanks for engaging in discussion with me on these matters. Its difficult stuff, and it is vitally important that we all do whatever we can to further our own understanding.
Josh
Re: American Economy: Crank Up The Printing Presses!
By Robyn Stubbs, January 16, 2008 at 13:19I love that question, "what is money?" No one really asks it, hence the problem at hand.