Everybody is talking about "the economy." It's doing great. It's strong. It's soaring, rising, bounding, booming. It's powerful, and nary a voice is raised in dissent. As someone with no training in economics, I guess I should be reassured; but two things give me pause: One is that I am instinctively doubtful about those things that "everybody knows." The other is that I don't know exactly what "the economy" is; and I'm not sure that many other people do, either.
I've made a modest effort to find out. I checked the internet for "the economy." I found one source offering a primer on the subject, but it immediately dealt with differences between the "old economy," and the "new economy." Evidently a primer for those with some degree of expertise. No help there. Other search engines led me immediately into the deep water, with impressive charts and statistics, and I can't swim yet.
Of course, it's always a good idea to check with Webster, and I did. He said "economy" was about managing assets, but also that it was a term used for a system of producing, managing, and distributing wealth. So a strong economy is a strong system of producing, managing, and distributing wealth. You can get your teeth into that, but you'll immediately run into a problem: how can you measure these things? Even a cursory study of the subject will force you to the conclusion that the economy is a matter of information, and lots of it. For instance, every discussion of "the economy" involves statistics on employment. And you'll encounter "housing starts," and things like inventory, retail sales, gross national product, etc. And all of these things are measured in "dollars," and there is no definition of that term anywhere. NobodyŚwell, almost nobody---seems to care, although making forecasts on the basis of measurements made with an undefined, but obviously variable, measuring unit, is clearly madness.
I am old enough to remember when we used silver as money. My Dad, who died a dozen years ago at the age of 93, told me about cashing his paycheck for gold. Gold and silver were, and are, wealth. In those days, money itself was wealth, part of that which was produced and managed and distributed: the economy. Today we still use the word "dollar" to signify an amount of money, but is it an amount by weight or volume? And what is the money of which it is the standard unit? Modern money is not tangible, but rather a number, signifying nothing, engraved on a federal reserve "note," or written in a checking or savings account. Unlike precious metal money, which was produced and owned by the workers who unearthed and refined it, and which did not have to be returned to its source, the earth, modern money is produced with a stroke of the banker's computer, and always as a loan at interest, thus guaranteeing that no matter how much is created, even more will be owed. Of course this costs the banker nothing, for he can "pay" all his expenses with more keystrokes.
This would seem to be of enormous significance in assessing the economy, but I seem to be the only one who thinks so, and my credentials are unimpressive. Still, to evaluate the production and distribution of real goods in terms of fictional "money" seems very dangerous. The status of the automobile business is not measured by the number of cars manufactured and sold, but by the "bottom line," meaning a number representing nothing. You'd think there was a better way to measure than with an imaginary yardstick marked in non-defined units!
Consider employment. If you could create money, you could have as much or as little employment as you wanted. Create plenty (by lowering interest rates) and lots of people will be hired. Hike the rates, reducing borrowing, and the effect will be to increase unemployment. And your agent, the U.S. (Franklin Roosevelt remarked that "certain financial interests" owned the United States government since the days of Andrew Jackson) can always put people to work, digging ditches one day, and filling them in the next. Or, less obviously, sending rockets into space, or exploring ocean depths, etc.
Housing starts, likewise, can be boosted or lowered by juggling interest rates for home loans. To an economic tyro like myself, there seems almost to be a conspiracy in the housing market. What else do you buy that becomes more valuable as it deteriorates? Of course, the loss of buying power of the money means that the appreciation is largely illusory, but it still beats the gross loss of value of such other expensive items, such as automobiles. A clever friend of mine has suggested that, instead of waiting fifteen years for the value of your home to double, build it out of second hand materials to begin with, and attain instant appreciation! In any event, the magical appreciation of housing has lured millions to become homeowners, meaning that they are interest-payers.
Wages are also an important statistic in evaluating the economy, and there is no reason why they can't keep going up. As long as the bankers can pump money into the economy at no cost to themselves, they can guarantee that prosperity, or what appears to be prosperity, has arrived. Workers with clout, such as those in unions, can obtain raises to more than compensate for the increasing prices wrought by inflation (i.e., an increasing money supply). Of course, those less fortunate, such as retirees on fixed incomes, will suffer, as their incomes remain static while prices increase; but they, too are organized, and the government will look after them, or promise to. Perhaps it would be cynical to suggest that the group with the most votes will enjoy the most prosperity, so I won't suggest it. (But I'm thinking it) Of course, taxes are not on buying power, which may be only standing pat, but "dollar" income, which is increasing, so the prosperity may well be a disappointment, except to the taxing agency. Husband and wife both work, and earn such large numbers, but it just isn't enough! Is there an economic indicator that depicts the number of two wage-earner families? Even as they struggle to keep up, however, the couple will likely declare that they're making plenty of money! And, don't forget, the economy is strong! Everybody knows that!
For some reason, we tend to remember the relatively meaningless things our leaders say. "Ich bin ein Berliner!" "I hate war!" President Garfield said something of greater moment when he declared, "Whoever controls the volume of money in any country is absolute master of all industry and commerce." Which means absolute master of the economy. It is remarkable that so little attention is paid by economists to the nature of the money. Garfield wasn't the only one to recognize the danger. Reginald McKenna, former Chancellor of the Exchequer, acknowledged that "Those who create and issue money and credit direct the policies of government and hold in the hollow of their hands the destiny of the people." His colleague, Sir Josiah Stamp, former president of the Bank of England, declared, "Bankers own the earth. Take it away from them, but leave them the power to create money and control credit, and with a flick of a pen they will create enough to buy it back."
It would seem, therefore, to this economic innocent, that "the economy" will do whatever the issuers of money and credit want it to do. Moreover, the people, trusting and unaware, will take the word of the pundits. Although the evidence of their own eyes may be that the mall has plenty of space for rent, and large firms are laying off thousands, or tens of thousands, of workers, as long as the numbers on their paychecks remain so impressively large, and the evening news keeps reiterating the strength of our burgeoning economy (which apparently is simply a collection of carefully chosen statistics) they are willing to believe that times are good, and getting better.
Personally, I believe that times are bad, and getting worse, and given the resources available to the powers-that-be, I could produce abundant statistical evidence to prove it. John Adams wrote a letter to Thomas Jefferson, in which he pointed out that "All the perplexities, confusions and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much as from downright ignorance of the nature of coin, credit, and circulation." True then, and infinitely more true now. A manifestation of that "downright ignorance" is the belief of most Americans in their "strong" economy. Would that it were so!
Dr. Paul Hein
21 August 2000