The Garden

I have never really understood money. I don’t really know where it comes from, who decides what it is worth, or how it is affected by banks and stock markets for example. Granted, I have not actively sought to understand these things, but nevertheless I think it is fair to say that our financial system is way too complicated for the layperson to understand.

In the last week I have heard about major banks going bankrupt, the stock market crashing and plans from the federal government to “bail out” some major financial institutions—something that supposedly costs hundreds of billions of dollars…taxpayer dollars.

Even though I know very little about how money works (not least because I don’t really have any), it still seems odd to me that crises of this magnitude can arise seemingly unexpectedly. When I think about the basic idea of money, or currency, I can develop a fairly straight-forward idea about how it might work; but when I try to apply the same ideas to our current system, I get terribly confused.

Take gold for example. Historically, gold has been a popular unit of currency. The reasons for this are obvious to me. First, it is finite. That is to say, there is only so much gold in existence because it is created through slow, natural processes—kind of like oil. Second, gold is rare. Generally, when objects are rare, they have value—kind of like baseball cards. Third, gold is difficult to counterfeit. This feature entails that wherever you attempt to make a purchase with gold, others will be willing to trade with you.

Our financial system, however, does not operate on these gold-like principles; at least, not any more. Once upon a time, the U.S. dollar operated on the “gold standard” which meant that each dollar of paper money was backed by a discrete amount of real gold. This incarnation of paper money made sense because, after all, gold is a rather heavy, cumbersome item to carry around. The risk with this system, obviously, is that paper notes are much easier to counterfeit than gold.

Instead of using an intuitive system like the gold system, our country uses a system that relies on a central bank, and something called fiat currency. Here is where I get lost. The money that you and I work for, save, and buy things with is all regulated by a monetary system that fluctuates based on loans and interest rates; and instead of these loans and interest rates being determined by some fixed standard—like gold—they are instead determined by a variable and somewhat arcane central bank system. This system, amazingly, has the ability to literally create money; well, at least “paper” money. That is to say, the central bank can seemingly print as many notes as they see fit, irrespective of the fact that more paper money does not equal more value or purchasing power. In other words, the fiat system gives rise to what we know of as inflation.

In a loose sense, inflation is the devaluation of a unit of currency. My grandma used to recount to me how a movie used to cost a nickel back in her day. Presumably, if inflation didn’t exist, movies would still cost a nickel, or very close to it. This indicates how slippery our financial system is, and perhaps provides some insight into how financial crashes like the ones witnessed in the preceding weeks can come about.

Personally, I don’t like the idea that the money I work for and rely on is so unstable that immediate and drastic financial “bail outs” by our federal government are sometimes necessary to prevent the whole economy from imploding. Aside from the obvious questions about where our government even has the hundreds of billions of dollars to perform these “bail outs,” and the implication that taxpayers are going to have to pay for the mistakes of these private businesses, isn’t it odd that our financial system is so unreliable and obscure in the first place?

Think of it this way. The U.S. is supposedly trillions of dollars in debt, right? Well, it’s hard enough to imagine how it is that an ostensibly abundant and “wealthy” nation like the U.S. is actually trillions of dollars in debt (who exactly owns this debt?), and that the U.S. nevertheless continues to spend money that it doesn’t actually have to finance things like roads, politicians’ salaries, and wars (e.g. tanks, helicopters, deadly weapons, etc.), but it is even harder to imagine how it is that a government so far in the red has billions of dollars lying around to suddenly “bail” private financial institutions out of debt. Where, may I ask, is this money coming from? It seems to me that our financial system basically allows for one to use debt to pay off debt—a house of cards operation if ever there was one.

As I’ve said, I’m no financial expert. However, I am an educated person and I can tell when something is absurd. A financial system as intangible and insecure as ours, no matter how sophisticated people in suits and ties may dress it up to be, should not be blindly accepted. Something is amiss here, and if the American people foolishly believe that some ad hoc emergency “bail out” plan by our government will do anything more than temporarily sweep a massive problem under the rug, then the American people deserve whatever economic collapse most certainly will follow.

This entry was posted on Sunday, September 21st, 2008 at 19:16 and is filed under Ranger News Editorials. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.