Money: It Ain’t Worth What It Usedta Be

Of late, I’ve been rereading the Neal Stephenson classic The System of the World, which is part of The Baroque Cycle trilogy (or octalogy, depending on how you count them).  This book of the series focuses a great deal on Isaac Newton’s attempts to refine and regulate the coinage of Britain: to make sure that each coin minted has the correct amount of metal in it and only that much, since that’s what coins used to be.  A “dollar” or a “pound” was a specific amount of gold or silver that was fixed by law.

These days, that’s no longer the case.  Our money is based on a fiat system and the least expensive possible metals are used to create our coins, which essentially means the government is creating value where there was none before, just by shaping that metal into certain shapes.

I had a grand plan to figure out what the various metals are that make up each kind of coin and then try to figure out what they’re worth in reality, but someone else on the internet already did it!  Coinflation.com has the “current melt value” of most U.S. coins.  This is a good thing because I can avoid work and my numbers would have been fixed (the site in question uses current prices for each kind of metal.)  I find all this very interesting: Pennies minted before 1982 are worth more than their face value and Nickels are holding their value rather well, but almost all other coins are worth a pittance compared to their face value.

I started thinking about this after obtaining some $1 coins out of the New York City subway system card vending machines.  These coins are cute and I am going to start asking after them at the bank like I do for $2 bills as well.  They look golden, but actually they’re made of mostly copper, with some manganese, zinc, and nickel.  They have some cool printing along the sides as well, instead of the normal grooved edges.  I hope to circulate as many as I possibly can, but that might involve buying some kind of coin purse.

Reading up on these coins on Wikipedia, I discovered that the mint is also offering some pure gold coins as companions to these coins: The First Spouse Program.  First ladies throughout history are being featured on these gold coins, which contain .5oz of gold.  While these coins are worth about $430 in fiat dollars, they are marked $10 on their face.  That’s because, when dollars were fixed to gold, one dollar was defined to be 1/20th of an ounce of gold.  Someone, somewhere at the mint must be nostalgic for those days, to be stamping these coins with that $10 number.

Hi! Gas Prices?

I just bought gas for the first time since I’ve been a single guy. If you’re counting, it’s been 30 days. I spent $35 at the pump, which netted a little less than ten gallons. I could have probably put it off another week, but I figure prices are only going to be going up, so I might as well fill up earlier rather than later.

I don’t think I’m doing too bad, comparatively. I’ve tried to structure my life so that if gas goes up, it doesn’t hurt me too badly. I think I would be comfortable if it went up to $5 or $7 a gallon. Would you be? I think it would be a good idea for people to start making the longer term structural changes for that scenario now. Move closer to work and buy more fuel efficient cars, if you can.

Apparently it costs $1400 to fill up some tractor trailers with diesel fuel. I can’t even imagine that kind of cost.

What is everyone else’s gas budget?

Problem: inflation. Solution: free markets in money.

A few people asked in comments on the inflation post about the problems with restricting the market for money in our country. We do have the option of holding foreign currencies instead of dollars, and many smart people take up that option, especially in times of volatility in the dollar. But why should we have to invest in the production of a foreign nation (especially a state) if we could have the option of using home-grown industry?

Seth asks:

I have heard questions of the US currency before, but is the alternative we want colonial US where each state has their own currency?

This is not specifically what I’m proposing. Yes, if they want to, I think every state should be able to issue its own money, fiat or otherwise. That’s not the only thing I want to see. Banks should be able to do the same! The first paper money was issued solely by banks, and has evolved into something many of us use every day: checks. When Seth says

There is a great benefit to using one currency, I know what money is suppose to look like, it is hard to counterfeit.

he seems to forget that checks are money too; and issued by private companies. Norms and procedures have evolved to verify that checks are not counterfeited, and the same would be true of any private currency.

Money issue should not be limited to only states and banks forced to register with those states. Frankly, any entity that chooses to issue money should be allowed to do so. One example is the Liberty Dollar, which is a gold and silver-backed private voluntary currency who recently had assets seized by the government for no reason. Liberty Dollars are redeemable for a certain fixed amount of gold or silver, which means that it is very hard for them to inflate. They are better holding than dollars in some cases for that reason. There is a reason the constitution says “No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.

Frankly, I’ve seen how well the government manages things. I’ve seen how well the manage the dollar which, frankly, is not very well. I would definitely trust currency backed with something over currency which is not backed (like U.S. Dollars currently, which are only worth something because the government requires people to accept them as payment for things). For example, if Google or Paypal introduced silver-backed “Googlebucks” or “Payps,” you could use those. There would be a floating exchange rate and you could use a check card anywhere that automatically converts them to dollars at point of sale (or doesn’t if the merchant prefers payment in one of these currencies!) Check cards do this already with foreign currencies. This is only one step farther.

So, I’ve tried to explain what I think should happen, and how it’s plausible that it could happen. We come to why I think it should happen. Here are a few reasons:

  • I am a big believer in freedom. People should be able to choose to engage in mutually beneficial trade without anyone stopping them. Freely chosen trade always creates a benefit to all parties involved. It is positive sum; value is created from nothing when I choose to make a trade with someone else. Trading items of value for any currency that the seller desires is a mutually beneficial trade and so should be allowed and encouraged. Legal tender laws (saying that U.S. Dollars must be accepted) and government strong-arming of private currencies both diminish this freedom, and thus create less trades than there otherwise would be.
  • A free market in money is good for all the reasons that a free market is always good: competition provides incentives to achieve better service, lower costs, and lower profits. Government dollars are currently more expensive than they should be, and when they inflate it causes massive headaches. That inflation is usually directly a result of poor management of the money supply by the government itself. Competition in this arena would solve that problem. A monopoly enforced at the point of a gun is always bad. In this case, nothing is different.
  • Ultimately, in a mutualist society, every person would be able to issue their own money backed by their own assets, or combine together to form a mutual bank backed by all the assets of its members. This would incentivize local currencies. If you, and the person you are buying from are both members of the same mutual bank, you are free to make trades and purchase from each other without having to deal with any money monopoly at all. Essentially all the members of a town could get together and create “town dollars” which are backed by all the assets owned by people in that town. Only people in the town would accept town dollars and there would be an exchange rate with other currencies. This means people will have a strong incentive to buy and sell locally, which, in my opinion, would be a good thing. And, if a town (or members of a mutual bank scattered across the country) managed itself very well, with everyone gaining many assets, their money would be worth more when traded with the outside world (they would get a better exchange rate). The problems of inflation and poor management only affect small groups of people, rather than the economy as a whole. Decentralization is usually a benefit in this way.

I’m sure many people found this post rather dull, but I don’t think what I’m advocating here is that crazy or that complex.

This post has been inflation adjusted: actually 1.7 posts

My Grinnellian friends Ms. Sherwood and Mr. Gitter have been writings some posts about inflation.  As a journalist and an economist, respectively, they have made some good points.  As an internet crazy, I have made some mediocre comments.  But, as it happens, I do have some thoughts on the recent rise in prices we’ve been experiencing in the United States.

The first thing I would like to say is that I don’t support the money monopoly that we have in this country.  The fiat dollar is legally mandated and any other remotely competitive currency is shut down if it even has a chance of taking root.  The real solution to an inflation problem is a free market in money.  If you can decide to store your funds in another private currency, inflation in the dollar would not be a problem.

But this is just one of many ways that our government aggravates painful inflation and prevents the kind of relief that would be available in the free market.

  1. Corn ethanol subsidies create a false market for corn as energy, raising the prices of a) most of our food, b) energy, and c) our taxes.
  2. Sugar subsidies and tariffs also raise the price of food substantially.  Basically the whole farm subsidy system means we pay a whole lot more for food than we should.  See also: milk.
  3. The Federal Reserve has pursued a policy of constant inflation for almost its entire history; in a normal market there are periods of inflation and deflation, but since the money supply is controlled by the Fed, we no longer have these natural periods of deflation. Instead, we have periods of low inflation (the 90’s) and periods of high inflation (now).
  4. My whole theory on 401(k)s and IRAs, which I explain (poorly) on my blog.  It’s actually the most viewed post on here, though.
  5. Running deficits all these years is what has caused the dollar to weaken, meaning higher costs for imports, and we import almost everything these days.

These are just a few of the myriad of ways that the government helps cause inflation.  That’s my take on the issue.

Savings in Danger?

I upvoted this story on Reddit, which you can see in the sidebar (or, apparently, bottom bar on old versions of IE), but I think it deserves extra consideration:

A Society that Punishes Savers

Essentially it argues that high inflation combined with low interest rates means that keeping money in a money market, savings, or even the stock market short term will lose you money. There really isn’t a reliable way not to lose your money, if you are trying to save it.

This is Madness!

At the grocery store today, I paid $3.99 for a gallon of orange juice, and $4.08 for a gallon of milk!

Milk more than orange juice?  Crazy!

Our financial future: the problem with 401(k)

In the past few days we have seen something of a crisis brewing in the financial centers of the country. There have been crashes, bailouts, and the housing bubble has burst. I have a unique take on the cause of all of these problems, and I am going to try to explain it as simply as I can, I hope I can do it justice.

The problem with the markets today is that there is a glut of capital that is essentially mandated for investment into stocks. This glut has been deliberately and directly created by act of the U.S. Government. These trillions of dollars are by statute required to be invested in one of two things: mutual funds or government bonds. Those who choose government bonds are doing nothing more than propping up the government with free credit (though supposedly paying less taxes while they do so), but the more insidious problem is that the majority invest in mutual funds, and their money is trapped in the market, and cannot be withdrawn.

Of course, I am talking about the 401(k) plan and its sister, the IRA. These plans were set up ostensibly to ensure people will save for their retirement, and they have, to some extent, achieved that goal. However, they have also skewed the market by providing what amounts to unlimited and unretractable money to mutual funds who have something, anything, to offer.

Let me go back to the conventional wisdom. The current crisis is supposedly the result of reckless lending to people trying to buy homes. The lending institutions would loan money to anyone who came asking, and then bundle those loans together and sell them to mutual funds, who would be making good interest on the mortgages as the borrowers started paying in. The incentive to bundle the loans and offer them on the market was this: there was so much money in the market that funds were desperate for things to buy!

We have a word for what happens when there is too much money in the market: inflation. If the Consumer Price Index, which is what is used to measure inflation, included investments in its list of things that it checks prices for, the measurement would have been through the roof over the last 15 years. It is not unreasonable to assume that the average American is going to be invested in the stock market, so there is no reason not to include a bundle of stocks when considering prices. If you want to enter the market today, you will paying a lot more for equivalent resources than someone who entered 20 years ago!

This inflationary effect has largely been ignored, or lauded as a true increase in value, when really it is a unique situation in history. A cause, and I think the main cause, of high inflation in the stock market when “consumer” inflation is so low is the glut of money mandated to stay in the market by these government plans.

If the money that is trapped in these 401(k) and IRA plans were released, or had never been stuck there, the market would be less skewed. People could have and probably would have used the money to start small businesses, buy commodities like gold and oil, or simply saved in a savings account. Many also would have invested the money in stocks of their choosing, rather than the broad managed mutual funds (where their money may be supporting companies and initiatives that they dislike, though they will not do the work to discover this).

The structure of the 401(k) and IRA systems make them essentially a direct subsidy to two groups: retirement plan managers and companies that are issuing common stock. They drastically increase the ability for common stock companies to get credit and they line the pockets of the owners of the largest financial firms. Here is a list of some of the top retirement benefit companies. You’ll note that the top few control the vast majority of accounts. These companies and the companies that offer the mutual funds they select as investment choices make billions because the government mandates they, or people like them, manage your retirement funds.

To sum up: the government has told companies that the best way to handle their employee’s retirement is to require the employees to invest in either a) government bonds, free credit for the government or b) mutual funds, free credit for corporations and controlled by the biggest financial companies. Many companies have done as the government told them. This has caused a glut of money and artificial inflation in the stock markets, especially the markets for mutual funds. This artificial inflation and easy credit to corporations is what is coming back to bite us in the butt now.

The government has no plans to do this any differently in the future.