Of what use is elastic money?
Humans, more than any other species on the planet, are rational creatures. Much of our progress in our lives depends our ability to think and make logical connections between events. Many, if not all of the benefits of scientific discovery have sprung forth from the human ability to connect specific causes to specific effects. Knowing how natural systems work in the world, humans have been able to predict and anticipate what effects would follow from which causes, and thus have managed to avoid unwanted dangers and create wanted conveniences in their lives. One key feature that has made all of this progress possible has been the apparent consistency and objectivity of the natural world—that is, the laws of nature appear to always remain constant without deviating even the slightest bit (well, at least until you consider quantum mechanics, which is unusually erratic and unpredictable compared to classical physics).
It stands to reason that the scientific progress humans have made in recent centuries would not have been possible if the laws of nature were found to be erratic and constantly changing from one moment to the next. If bricks were sturdy and solid one day—fit to build shelters with—it would be devastating to the person using the shelter to find those bricks turn to liquid mush the next day. Or if gravity were to behave in unpredictable ways, throwing objects upward or outward on random occasions, how would humans be able to function productively in such a world? It seems pretty obvious that humans have a far better chance of adapting to their environments in productive and constructive ways when they are confronted with objectively consistent rules or laws rather than whimsical, amorphous systems that function without rhyme or reason. If this is so, then why would we ever want our money system to be anything other than objective and consistent?
Unfortunately, the leaders of our financial system have decided (at least since we abandoned the gold standard under President Nixon in the late 1960s) against preserving an objective and consistent money supply in the U.S. The money that we save and rely on to purchase essential goods and services in our economy is not considered objective by our financial leaders, and last week held a shining example of how drastically the rules of our financial market can change. Last week, the Federal Reserve announced that it would basically go forward with the printing of at least one trillion dollars in another emergency effort to catapult our economy into a recovery. By printing this money, the Federal Reserve is essentially creating one trillion dollars out of thin air, thus augmenting the total size of our money supply. As a result of this, the money that you and I own is basically devalued and will no longer be worth as much as it was when we earned it—that is to say, the money we own loses purchasing power when the Federal Reserve increases the money supply. And, the more they print, the more our money is devalued.
For those of us who were perhaps saving money for an extended period of time to pay for something major in the future, our ability to make the payments we intended will now be compromised by this change in the money system. When our money is devalued, it takes more units of money to make purchases. But if you do not know in advance how the money system will change at any given time, it makes it nearly impossible to accurately judge how much money you will need to save. This is especially important for those nearing retirement or who are in retirement already. What once might have lasted a person 20 years may, at any time, only last 12 or 15 since the money supply is neither objective nor consistent.
When we compare the progress humans have had in the areas such as scientific discovery, we can appreciate that the objectivity found in natural systems has been useful; there’s a good fit between the rationality of the human mind and the objectivity of the human environment. Based on this reasoning, it is most unfortunate that our financial leaders have sought to undermine our attempts to predict and rely on a consistent monetary system. It is difficult to see how an elastic money system can work to the benefit of rational creatures such as you and me.