Easy Come, Easy Go
There is so much talk of "our current strong economy" that one might be tempted to believe it. The author of these words is not an economist, but his instincts, as well as his common sense, tell him that our current economy is as strong as the paper on which it's built.
In ages past, bankers fretted at the "inelasticity" of the money supply. It was, I suppose, much the same as the frustration felt by a theatre owner who had only four hundred seats for a performance that promised to be very popular. "Well, let's sell four hundred and fifty tickets," said the impresario, "and hope that fifty people don't show up." Of course, if even a few of them did, there would be a problem. Did it occur to the scheming ticket-seller to decry the rigidity imposed by the "seat standard?" It should have: it worked beautifully for the bankers who issued notes for non-existent deposits, and then, when caught red-handed during a run on the bank, decried the "inelastic money supply," resulting from the gold standard. If anyone raised the question of an honesty standard, he wasn't heard or quoted.
Of course, one could get away with that just so many times. The people who had deposits at the bank, and lost them during a run on that institution, didn't care to hear excuses, no matter how clever or imaginative. The way to eliminate, once and for all, the disastrous run on the bank was to eliminate anything to run to, and it was done. No more money, just banker's credit, created at the flick of a pen. (His, not yours. If you "create money" the law will look askance; if he does it, it's business as usual, although I've never encountered a law which authorizes the practice.)
Of course, if the banker felt inhibited by the inability to loan gold or silver (i.e., money) which he didn't have, such inhibitions were washed away by money's replacement with the psychological entity of credit, or "he believes it." And so, quite naturally and even inevitably, we find ourselves in the mess we're now in. And what mess is that? An economy built on wishful thinking, a bubble about to burst, a chimera about to devour us. Debt, in a word.
The problem is that, ultimately, the debt cannot be paid. If a banker creates one million dollars as a loan, he will expect back a million and a half, or two million, or three, depending upon the terms of the loan. Where are these extra dollars going to come from, if the existing money supply is not to be reduced, with a resulting depression of the economy? Why, from the only possible source, the banker's lending pen—always at interest, of course. The problem is insoluble; the bubble can only grow.
And are bankers, in fact, creating all these dollars? Don't they realize that if they overdo it, they, too, will suffer? Maybe they do, but the temptation is nearly irresistible. If banker A doesn't make the loan, banker B will. So what the heck!
Bankers are almost as likely as the rest of us to be misled by the wrong signals, which abound. "Gee," they tell themselves, "the economy must be good; just look at the way people are borrowing." And the borrowers tell themselves, "Gee, the economy must be good, just look how the banks are lending." But what is all this money creation for? Is it to create new industries, new jobs? It's one thing to lend (i.e., create) money for General Motors to build a new plant to manufacture additional automobiles. It's another to lend (i.e., create) money for people to use to buy GM stock. In one case we have an increase in the money supply matched by an increase in production. In the other, we have an increase of the money supply which merely bids up the price of a security. What's a share of GM worth? Well, I guess it's worth what anyone might want to pay for it. If a lot of people are determined to own securities, maybe to finance their retirement, they will bid up the price as long as the money is available; and it's available with the stroke of the pen. There isn't any reason, therefore, why the price of a share of GM couldn't reach a million dollars, so long as the people were optimistic, and the bankers willing to cooperate. And, of course, such economic optimism leads entrepreneurs to borrow for enterprises which might once have been thought too risky. Everyone is upbeat; everyone anticipates great things! And the current crop of politicians will eagerly claim credit for the good times, and insist that they are here to stay.
Sooner or later, a danger is perceived. The expansion is correctly diagnosed as a bubble, in danger of bursting. Tighten the credit spigot! Start calling in the shaky loans! When that happens, the optimism which drove the market to record levels, turns into pessimism which will have the opposite effect. That appears to be where we are, or where we are about to arrive.
The problem may be aggravated by the fact that so many companies have consolidated. If, years ago, Chrysler had failed, it would have been catastrophic for Chrysler, of course, and seriously harmful to many companies for whom Chrysler was an important customer. Today, were Chrysler to fail, it would probably drag down Mercedes, as well. The baleful effects of such a failure would be magnified. Similarly, Ford with Mazda and Jaguar, and GM with Opel.
And the banks, themselves, could fail, at least on paper, (what else is there? They don't risk any THING!) as the value of their assets---the IOU's of their borrowers---fell toward zero. And today, banks are conglomerates. The failure of a small local bank is painful; the failure of a large multi-state bank conglomerate could be fatal.
Is it going to happen? Is it already happening? Perhaps the best way to answer that question is with another question: What is to stop it from happening? How could it NOT happen, given the nature of our system? When there was actual money, its physical existence sufficed to prevent its inflation. You can't make an ounce of gold two ounces by declaring it doubled. Perhaps that caused the economy to grow at a slower rate than modern Americans deem acceptable, although I doubt it. Given our present system of credit "money," however, it is remarkable that the bubble hasn't burst already. Assuredly, it's only a matter of time, and probably not much time at that.
Dr. Paul Hein
17 May 2000
Also by Dr. Hein
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