January 2009

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Understanding the Economy of Today

January 13, 2009 in Finance Tips, Money for Christian by Joel

In order to understand where our economy is, it is necessary to understand what an economy is. Let’s go back to an earlier time and see how an economy comes into existence.

If we look back, we find that people were basically barterers. Unless every product needed could be grown on one farm, it was necessary for neighbors to trade products.

Let’s say, for example, that three individuals lived in a small community. One raised cows. The second raised corn, wheat, and barley. The third manufactured horseshoes and nails.

The dairyman decided he would like to build a barn for his cows. He had lots of timber on his property. He was able to cut down his trees and store his timber until it was cured and ready to use, but he was tired of using wooden pegs to put up his buildings—it’s so much trouble to drill holes, pound pegs and sand them down. Then he had an idea.

The dairyman used nails to build his barn and was so pleased he decided to get some more to repair his house.

He went back to the blacksmith to trade for some more nails.

Perplexed by the blacksmith’s refusal, the dairyman turned to his neighbor, the farmer, for help.

Trading his cow for some corn, the dairyman returned to the blacksmith.

The dairyman repaired his house and began to promote the virtues of using nails.

Soon other people began coming to the blacksmith to trade their products for nails.

Then the blacksmith had an idea! Why make horseshoes and other items? There seemed to be a good business in nails. So he began to specialize in manufacturing only nails!

As more and more people used nails, Dan developed a flourishing business. Everybody wanted nails to trade. Nails became what we call “money.” Money, in any system, must satisfy three basic functions: It must have value, it must be storable, and it must be divisible. Dan’s nails satisfied every one of these aspects and so they were used as money.

Dan had been in business several months when a farmer came by one afternoon with a large order.

When Dan wrote out a paper declaring that he had 100 bags of nails on hand for the farmer, he created a new medium of exchange—paper money. This paper money had to satisfy the same basic functions that our original money did to be called money, and it did. Nothing new was created by this paper money. It merely represented the nails in storage.

The distribution of paper money rather than nails continued as more and more people discovered that it was easier to carry pieces of paper than nails.

Dan began to notice that most of the nails remained in his warehouse. Although they belonged to somebody else, he always had surplus nails.

He began to think, “Why should I let these nails sit idle? No sense in making more nails when all these are here.”

Then one day a farmer needed some nails but couldn’t pay for them right them. So Dan loaned him some nails to be repaid later.

But this time, rather than making new nails, he simply issued paper on nails already stored in his warehouse. What had Dan become? A banker! He stored money (nails) for some and loaned it to others.

Dan had also created a new kind of money—credit!

Now credit seemed like a good thing. Without even knowing it, others were able to use this credit to build houses and barns. Dan’s business prospered through his use of credit—other people’s money.

Unfortunately, to keep his business growing, Dan was forced to expand using more and more credit. Then one day a depositor came to collect a large order of nails that Dan was supposed to be storing for him:

Quickly the farmers called a local meeting to compare nail receipts. One had 1,000 bags coming, another 500, etc.

It was obvious that something was wrong!

So they all rushed to Dan’s bank and demanded their nails back.

What happened? Dan went bankrupt. Why?

Credit was his downfall. When his depositors lost confidence in him, Dan was finished as a banker. He just loaned too many nails that belonged to others. You see, although credit looks like money, it isn’t. Credit is storable and divisible but it lacks one essential element—value. Credit cost nothing to create.

As we will see later, this same difficulty has occurred in real economics as well. Government, playing the role of world bankers, have issued credit until few people really believe they can ever repay their debts.

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The New System

January 12, 2009 in Finance Tips, Money for Christian by Joel

I believe that ultimately we can look for a new, cashless system. If the present system collapsed and we had high prices even in the midst of that collapse, people would become hysterical and even riot, stealing what they wanted. The government would be forced to establish some kind of control, which could best be done by temporarily stopping the flow of money and then totally reorganizing the monetary system. It would have to be virtually dictatorial under government control so that the new economic system could operate on a cashless or credit card system.

I believe that initially each individual will be issued a number of digits (or units) for the amount of money held in the bank and proportional to earnings. A master credit card will be used to make most or all purchases. Eventually, as the system progresses, there will be no money, only a credit card per individual. The card will be checked through the electronic cash register at the store and also against a central computer to determine allocation of credit so that no one will be able to borrow beyond his ability to repay, nor will anyone be able to accumulate excessive amounts of money. It is conceivable that each individual will have a definite accumulation limit so that no large surpluses will exist. Profits may be allowed in business, but they will be contained within the maximums that the government prescribes.

Additionally, crime could be drastically reduced through this system, since crime prevention will become one of the major goals of the government. As the economy continues to slip, the cashless system will be an important tool in the battle against criminals. Money thefts will become a thing of the past because there will be no money. It will be fruitless to rob banks because they will only store computer tapes. It will make no sense to kidnap someone, because the criminal could only have his account credited. Retail store thefts will be reduced to product losses only. Thus, two major problems could be solved at one time—crime reduced and a common medium of exchange established throughout the world. I believe that whatever system is enacted, it will have to be worldwide, thereby creating a common medium of exchange.

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The New Deal

January 12, 2009 in Finance Tips, Money for Christian by Joel

Each new wave of panic created more worldwide unemployment as the situation worsened. Then, in the 1930s, the New Deal brought stiff government controls and more people on welfare or on the government’s payroll.

The government first attempted to fund the increase in money by confiscating private stocks of gold and reissuing paper money. When that was exhausted, the treasury began printing credit-money for the first time (known in monetary circles as “funny money”). This new credit expanded the money supply, but without restoring something with sound value. During this period the national debt was established.

During the 1940s and World War II, the great national debt was firmly entrenched. Additional capital was created to fund the war effort, while products were consumed by the billions of tons.

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The Inflation Spiral

January 11, 2009 in Finance Tips, God’s Word, Money for Christian by Joel

Technological changes in the United States occur at a mind-boggling rate. New products are introduced every day. But though production is high, so is inflation. As the situation worsens, new theories develop and the government generates ideas to control recession—and then fight inflation. Unfortunately, all of these ideas are treating symptoms, and none are treating problems.

If the economy is in an inflationary spiral, the controls choke off the money supply (primarily credit) in an attempt to stop the increases. This stifles those segments of the economy that are dependent on credit, as most are. The economy then plunges into a recessionary period, and it takes greater quantities of money to reverse that trend. Each time the economy inflates, it generates higher prices. Each time it deflates, it picks up higher unemployment. What does the future hold for us economically? We will explore this in the next chapter.

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The Economy

January 9, 2009 in Finance Tips, Money for Christian by Joel

Isolating the economy from any other event, a prudent observer would say that we have a problem. Notice that the United States’ economy and most of the world’s economy is very unstable.

The value of the US dollar is shrinking on the world market. Consequently, most other countries that have depended on our stability in the past are pushed to virtual bankruptcy. The economic balance has shifted to the Mideast cartel where little money is actually necessary. What does all this mean? Where are we headed?

Obviously, inflation is growing. In recent years it has increased at an alarming rate, whereas real production has dropped off. Major industries are pursuing a self-preservation attitude—some of them to the brink of disaster. Prices continue to soar while real production declines. Thus a new term has been coined, “inflationary recession” (prices increase while output declines).

Inflationary recession is not unique in the world economy, but it is unique in the United States. For years we touted our fiscal controls in the belief that it couldn’t happen here. It was believed inflation could be halted simply by reducing the money supply and recession could be controlled by the opposite technique. This is no longer credible. If we enter an inflationary period and begin to control the money supply, the economy immediately slips into a recession. Then, in order to get out, it is necessary to flood the market with additional money which in turn fans the fires of inflation even further.

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Paper Prosperity

January 8, 2009 in Finance Tips, Money for Christian by Joel

The 1960s were thought to be years of endless prosperity. Few people thought that the boom would actually disappear. Europe began to adopt the credit system the United States had triggered, and individual credit cards, personal credit, and business debt grew astronomically. As the money supply grew faster, the product supply struggled to keep up. Production showed signs of difficulties and began to level off rather than climb, while the debt continued to accelerate.

Then, in the 1970s reality appeared. Worldwide, we began to suffer pollution because of the rapid industrialization that came about in the 1940s, 50s, and 60s. For the first time, shortages in basic commodities were apparent. Inflation, sparked by this rapid expansion of the money supply, became a critical statistic. More subsidies became necessary, with almost every major industry in the United States receiving government aid. Consequently, more new money was created to fund the subsidies. Foreign governments began to lack confidence in American currency and seek other security in international trade.

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Future Economic Trends

January 7, 2009 in Finance Tips, Money for Christian by Joel

I believe we are going to see ever intensifying recessionary and inflationary spiral. During the inflationary periods, Americans will experience higher prices. These prices will be caused by more money being created and disbursed into the market, with fewer products being produced to offset this new money. Government controls will expand, causing increased subsidies with fewer people contributing. Combined with the higher prices will be higher taxes.

During the recessions, more individuals will become unemployed as basic industries contract. Many of these people will be added to the government payrolls in an effort to appease those being hurt by the system. I believe we will develop what might be termed “shear economy.” In a shear economy, one segment will boom while another will suffer. Workers in the boom industries will be able to demand higher wages, while those in a lagging industry will be laid off. The unemployed will then demand compensation from the government, which will step in with subsidies, welfare and job supports, thus creating the need for more money to be put back into the system.

It is easy to envision shortages in industries involving fuel, food, and shelter. As other nations such as oil countries, demand higher levels of affluence for their people, we must begin to relinquish some of our affluence to compensate.

In this situation, more people will depend on the government for the answers—perhaps even a national hysteria in which the government is expected to make virtually every decision.

Pressure groups will chastise government leaders whenever they make wrong decisions. Consequently officials will become less prone to make any decisions, but when forced to act, they will be more likely to just treat the symptom to pacify the people, whatever the cost. During the recessions, they will spend all the money necessary to reverse the cycle. In inflationary spirals, leaders will try to appease the people by giving them something “for nothing.” The attitude will be to deal with whatever happens to exist at that time. It will become almost a necessity for the government to have total control of the money supply through some form of nationalization of the banking interests.

Will we ever have another great depression or collapse? I don’t know. But I do know that we are evolving into a new system, perhaps precipitated by a collapse. No matter what happens, we will have another “new deal”—one that people will ask for because of devastating problems (high prices, high unemployment, money almost worthless because of inflation and the prospect of a crime epidemic).

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Economic Trend

January 6, 2009 in Finance Tips, Money for Christian by Joel

These events should alarm economic decision-makers, because they verify that the highly publicized controls no longer work. The trend toward economic collapse—runaway inflation followed by major depression—seems irreversible.

Lack of fiscal discipline and sound management is partly responsible for the trend. These inadequacies reflect an economic system created by popularity. Politicians who make decisions based on what is popular rather than what is financially sound have virtually bankrupted us.

It is hard to visualize the kind of political climate necessary to reverse this trend.

Rather than working on a feasible solution to our problems, government officials quibble about which group should get the most handouts. They grant price supports to one group, unemployment benefits to another, and gratuities to many people who are undeserving. They provide grants to New England ski resorts because of insufficient snow one year, then support beaches in the south because of too much rain. They pay people not to grow products in a time of shortage, apply price supports to foods when they begin to drop and then complain of runaway inflation on these same products.

The Federal Reserve System cuts off credit to industries that are profitable, protesting that they should be more self-sufficient without credit, when for forty years the system promoted the use of nothing but credit. Nor is the “average” American guiltless either. Most families today live on the brink of disaster. The excessive use of personal and business credit has weakened the already shaky family structure. All of these factors contribute to an almost uncontrollable economy.

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Depression Speculation

January 5, 2009 in God’s Word, Money for Christian by Joel

It was speculation, not expansion, that sparked the Great Depression. Expansion was proper as long as it was based on sound value; it was when individuals began to borrow money to speculate in stocks, and businesses used this borrowed money to expand, that disaster occurred. When caught in the squeeze, neither were able to pay their bills.

By the late 1920s, the stock market had inflated completely out of proportion. It was being used as a vehicle for “get rich quick” speculation, rather than long-term growth.

During the pre-depression era, the banking industry, in spite of the Federal Reserve System controls, was generally unregulated. Just as in Dan’s nail bank, few, if any, real controls were enforced. Banks made speculative loans backed by little or no security. They used credit to expand, just as Dan had.

Then, in 1929, the collapse came. First the stock market collapsed, followed by large-scale loan defaults and almost total economic devastation. Shortly thereafter, banks that were thought stable and had been so for decades, collapsed. Unable to recover their deposits, individuals lost their life savings, and companies lost most of their operating capital. Businesses that were heavily credit-oriented were forced out of existence.

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Current Situation

January 5, 2009 in Money for Christian by Joel

The dollar is no longer the standard for exchange throughout the would, and larger amounts of American currency are necessary due to this lack of confidence. Where will it end? It is difficult to assess the exact changes, but with some reasoning, I believe it is possible to determine the direction we are going.

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