Understanding Money: The Implications of Overreliance on Fake Currency
As we delve into the nature of our economic principles, we start with a pivotal inquiry: What exactly is money?
This question holds significant weight. Our aim is to gain insights into how the United States has accumulated a staggering trade deficit with China.
In 2017, America’s trade deficit with China reached a staggering $375 billion. That translates to over $31 billion each month, or approximately $1 billion on a daily basis. Understanding the concept of money can shed light on the substantial trade deficit that has fueled today’s escalating trade conflict.
To better explore our initial question, we turn to the insights of Victorian economist William Stanley Jevons, who, in his 1875 publication Money and the Mechanism of Exchange, identified four essential functions of money: it serves as a medium of exchange, a common measure of value, a standard of value, and a store of value.
However, when we examine modern iterations of money, particularly the dollar, through these lenses, multiple shortcomings become evident, especially within our current floating exchange rate system. While the dollar functions adequately as a medium of exchange, it fails to fulfill its roles as a common measure of value, a standard of value, and a store of value.
Consequently, today’s currency does not represent true money; instead, it can be characterized as fake money. The repercussions of this flawed system affect how individuals earn, save, invest, and navigate their financial obligations in today’s world, distorting nearly every aspect of economic interaction.
The Consequences of Fake Money
The deficiencies of contemporary fake money primarily arise from its origin: it is fundamentally debt-derived. Money is practically created from nothing through borrowing, seemingly without limitation. Pairing this with fluctuating exchange rates and the constant erosion of currency value due to inflation renders it inadequate as a common measure of value, a standard of value, or a store of value.
Consider the dollar. Over the past century, it has lost more than 95 percent of its purchasing power. Amazingly, despite this drastic decline, the dollar boasts a relatively stronger historical performance compared to many other currencies that have entirely faded away, reduced to their base worth—often mere fire starters or toilet paper.
So, how can America maintain such a colossal trade deficit with China? By tracing the flow of fake money, we can start to uncover the answer.
The U.S. Treasury creates money through budget deficits, while commercial banks generate money via fractional reserve banking. The Federal Reserve stimulates a surge in credit issuance by keeping interest rates incredibly low for prolonged periods—sometimes for a decade or more.
This incessant influx of credit—essentially the flip side of debt—manifests in equity markets, the real estate sector, and imports from foreign countries. For example, some of this monetary supply ends up funding extravagant purchases like oversized flat-screen televisions. Trading partners, particularly China, recycle these dollars back into U.S. Treasuries, thereby perpetuating debt expansion and enlarging the trade deficit.
Ultimately, the trade deficit is a direct outcome of fake money and expansive fiscal and monetary policies. Without the existence of fake money, the trade gap could never have reached its current staggering level. Unfortunately, our economy has become so reliant on perpetual debt that even a slight interruption—as witnessed in 2008—could jeopardize the entire financial system. So, where does this situation lead us?
Are You Ready for the Collapse of Fake Money?
Many readers often remind us of the dollar’s unique status as the world’s reserve currency. They stress the necessity for abundant dollars to facilitate global trade. Additionally, they point to the concept of Triffin’s dilemma and expect us to address it.
Coined by Belgian-American economist Robert Triffin about 50 years ago, this dilemma outlines that the U.S. must supply the global economy with considerable dollar reserves as the issuer of the world reserve currency. Consequently, this necessitates the U.S. to run a trade deficit, implying that it imports more than it exports, leading to a situation where it is spending more than it earns, eventually facing insolvency.
Is Triffin’s dilemma an undeniable truth? The jury is still out. However, its mention certainly raises our intellectual curiosity.
Readers who challenge our viewpoints on Triffin’s dilemma are quick to speak of the ‘exorbitant privilege’ that the U.S. enjoys as the issuer of the world’s reserve currency, presenting complex arguments in its favor.
From our understanding, this ‘exorbitant privilege’ allows the U.S. to create money out of thin air and exchange it for tangible goods with other countries. According to this perspective, the trade deficit can theoretically expand indefinitely without negative consequences.
While this may sound appealing, akin to having it all, we remain skeptical. There’s an underlying unease that we have yet to alleviate.
We suspect that fake money breeds misleading theories that seek to rationalize an economic illness. Additionally, we question the long-term sustainability of the dollar’s superiority.
Maintaining faith in fake money requires an extraordinary level of misplaced trust. Yet, just as public adoration for Hollywood celebrities can falter, so can trust in the dollar. Events such as trade wars, currency conflicts, military confrontations, or sudden realizations regarding the Federal Reserve’s inability to manage extreme inflation or deflation can rapidly diminish confidence in today’s fake currency. Indeed, we are witnessing early signs of this decline.
True money, characterized as the ultimate fallback, fulfilling all four of Jevons’s defined functions, is physical gold. Readers—whether they choose to believe it or not—should consider safeguarding a bit of gold or silver bullion as we transition from summer to fall.
The shadows of uncertainty loom ahead. The time to prepare for the inevitable end of fake money is now.
Sincerely,
MN Gordon
for Economic Prism
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