We Are All Screwed

Travels have taken us to Pueblo, Colorado.  Until a week ago we’d never heard of the place. Yet here we are, observing life outside the Los Angeles Basin, and writing to you from the banks of the Arkansas River.

If you didn’t know, Pueblo’s located about 45 miles south of Colorado Springs.  The place was founded as a trading settlement in this mid-19th century, before Utes and Jicarilla Apaches raided the place.  But for the Native Americans it was a short victory… Steel mining and milling led to a boom several decades later and Pueblo passed from the hand of Indian tribal rule forever.

Yesterday we rode the historic Royal Gorge railroad route beneath gigantic 1,000 foot granite walls, along the winding waters of the Arkansas River.  Today we’ll be making our way to the 700 plus year old Anasazi dwellings leading to Pikes Peak.

Coincidentally, Pike’s Peak was the site of one of the greatest gold rushes of North American history.  In 1859, it was “Pike’s Peak or Bust!” for the estimated 100,000 gold seeking “Fifty-Niners” who crashed the Southern Rocky Mountains with gold fever.

Back then gold was money.  There was no Federal Reserve to print up paper notes.  To obtain money, you either had to trade a product or a service for it.  Or you had to mine for it.  Either way, you had to work for it.  Thus, money was intrinsically backed by gold and the money supply, even with the occasional gold rush, was relatively stable.

So with gold on the mind, we’ll turn our attention to the more recent history of gold and the U.S. monetary system…

Symbiotic Disharmony

On August 15, 1971, just over 40 years ago, President Richard M. Nixon seized the unique and exceptional opportunity he had, and defaulted on the Bretton Woods system.  In doing so, he stiffed the world unconditionally.  From this point on, dollars have been irredeemable for gold.  They’ve been wholly the fiat – paper money – of government.

What a mess it has made of things.  Without gold holding tether to the dollar, the world’s currencies have floated like anchorless buoys…rising and falling on a sea of surging currents.  And the imbalances that have resulted in international trade are astounding.

Exports from countries with weaker currencies dominate trade as their goods are less expensive when priced in countries with stronger currencies.  Services also migrate to countries with weaker currencies in the phenomenon known as globalization.  Countries with stronger currencies, in turn, import more goods than they export and run trade deficits.

But as a trade deficit expands, instability also expands, should surplus countries panic and dump the excess reserves they have accumulated from deficit countries.  This arrangement of symbiotic disharmony, which underpins the global monetary system, is incredible.  But that is not all – it gets far zanier…

Countries are now unofficially engaged in competitive currency devaluation.  In this bizarre global monetary system, countries are fighting for a competitive advantage by weakening their currency in world markets.  Thus, while currencies fluctuate in relationship to each other, prices of commodities largely increase, as measured by each individual currency.  In other words, no currency will protect you from the loss of purchasing power; how much and how fast will your money lose value is the real concern.

We Are All Screwed

When Tricky Dick removed the last vestige of money’s backing by gold he also unleashed the Federal Reserve to print up as much money as Congress could demand.  During the 1980’s and 1990’s it appeared that man had conquered the money problem.  The goldilocks economy of low inflation and strong growth was making everyone rich…or at least it seemed that way.

But when the economic floors creaked and cracked in 2001 Alan Greenspan pressed the monetary button and an epic debt binge followed.  Things got so out of whack that people were lining up to through money at spec condo developments in Miami Beach.  What’s more the units would be flipped twice at a 50 percent profit before they’d ever been lived in.

Everyone knows what happened when the music stopped.  The sky fell and Bernanke hit the monetary panic button again.  Between November of 2008 and today the Federal Reserve’s created somewhere around $2 trillion from nothing.  It took no sweat, no toil, no labor, no productivity for Bernanke to gift this free money to the world.  Consequently, there will be some most unfavorable effects.

The population in Pueblo is approximately 105,000.  Of this, about 68,000 are between 18 and 64 years old, which is generally considered working age.  The median income for the city is about $30,000 per year.  So, with this rough calculation, and assuming there’s full employment, the city’s gross income is around $2 billion per year – not bad.

There’s no beltway money suck here.  There’s no Wall Street con machine.  These people ‘earn’ every last cent they receive.  Yet it would take the entire city, laboring year-in and year-out, for 1,000 years to earn what the Federal Reserve counterfeited in less than three years.  This can only mean one thing…

We are all screwed.

Sincerely,

MN Gordon
for Economic Prism

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