OK, I have to admit I didn't think through my topic of "32% Raise!" very well. One of my readers who posted their comment simply asked me about inflation rising from just giving the money away to the people instead of the banks. He/she brought up a very good point and now, in retrospect, is the driving factor in the madness of methodology that our SecTreas is imbibing in. The value of money.
When the US moved off of the gold standard in the early 20th century, we moved to the paper currency that we use today. This system of money is based on the fiat system wherein the gold standard is transacted money based upon actual gold reserves, the fiat system is money based upon the value backed by the issuing government. Moving away from the gold standard allowed for much more aggressive economic growth for governments/countries but with it came it's own set of issues.
The actual perceived value of the money is directly tied to the faith in the issuing government. Basically, if people believe in the value of the government's treasury then the value of the money issued by it's mints have a commensurate value. Now, I'm going to go out on a limb here because this seems reasonable to me (I am definitely not a currency exchange expert), but exchange rates between nations and the trading value of the US dollar against the Euro or the Pound or the Yen for example is based upon the world market of the faith in those traders in the issuing government. So having a weak US dollar (for example) is a reflection of the general consensus of the world traders that our government backed funds aren't up to snuff as other issuing nations (such as the European Union).
Inflation is a term used to describe the rise in the value of goods and services against the purchasing power the consumers. Inflation in the US has been relatively consistent at a rise of approximately 3% annually. It's a spiraling set of circumstances - if it costs more to make a product (like increased labor, health benefits, insurance, raw materials) then the product has to sell for more. But for the consumers to actually purchase it, they need to make more money to afford it and the vicious cycle continues.
Inflation can also occur due to scarcity of product/service. If you have 100 items and 1,000 people want it, the value can drive up (such as the Toyota Prius when it was a hot item - dealers were selling it above the MSRP sticker price due to demand in some areas).
Inflation can also happens if there is a devaluing of the trading currency. If people have lost faith in the value of the dollar, then it takes more to purchase that same product or service. So if people believe that the US dollar is only worth $0.10, then it will take $10.00 to buy what used to cost $1.00.
Hyperinflation is really bad. This is where there is a short term skyrocketing of goods and services due to either scarcity (like in the wake of a natural disaster) or a collapse in the value of the trading currency. This has happened around the world in nations that are typically under severe political unrest and are shifting regimes (Bosnia for example in the late 1990s). This occurs when the people using the currency have lost all faith in the value of money. In Germany post WWI, the money had better use as burning fuel than for trading purposes (which also made the nation ripe for a dictator like Hitler to rise to power because things were so economically bad in Germany post WWI).
What makes this so bad is that trading and bartering are now based on transient forms of "currency". If you have clean drinking water and there are a lot of people who need it, you can "sell" you water to them in exchange for products that you may want or need. Depending on the demand, you could "charge" extravagant prices to those who need what you have. Social unrest starts to occur and social and governmental collapse usually follows (this is a way for nations fall and new nations arise).
Where I went wrong in my post was that if the US government were to give every household their annual salary for a year plus a 32% raise, the actual value of the dollar would plummet and the currency would collapse. It wouldn't matter if they gave you $50,000 - it couldn't buy anything anyway since no one would actually have the intrinsic value of the trading currency. The money literally wouldn't be worth the paper it was printed on.
So our government attempts to "save" the banks in really their attempt to stabilize the value of the money being exchanged. Without that faith in our currency, then everything would fall apart. And I mean, everything.
This is actually rather sobering. In that how much of our economy is really based upon the perception and belief rather than hard empirical evidence and facts. It goes a long way to understand why economist, with their advanced mathematical formulas for predicting probability can get it so, so wrong. It would be like trying to create a mathematical model of exactly how the ocean's waves are going to behave. They can create probability, but not actuality, and that is a big, big chasm to bridge.
Perception and belief - our economy's foundation. This is where the media comes into play. Every day on the news, websites, newspapers, radio talk, etc, when the media pounds (to death) the state of our economy, I believe they actually compound the circumstances since it is our primary "sense" of how things are going. If the media is generally positive, then things are great - if they are generally negative, then it is bad. And since we fear the consequences of bad (versus the consequences of great), then it commands our collective attention. In bad times (like now) we are our own worst enemy.
So our economy follows our collective will. If we choose to be in a recession and/ord a depression, then we will be. If we choose to move to a period of growth, then we will be. But with all radical changes - it starts at the grass roots level and trickles out to everyone. Sooner or later the "buzz" shifts and our collective thinking actually believes what's going on around us.
We have our choice - it just depends on who wants to be the leader and convince the rest of us to follow.
When the US moved off of the gold standard in the early 20th century, we moved to the paper currency that we use today. This system of money is based on the fiat system wherein the gold standard is transacted money based upon actual gold reserves, the fiat system is money based upon the value backed by the issuing government. Moving away from the gold standard allowed for much more aggressive economic growth for governments/countries but with it came it's own set of issues.
The actual perceived value of the money is directly tied to the faith in the issuing government. Basically, if people believe in the value of the government's treasury then the value of the money issued by it's mints have a commensurate value. Now, I'm going to go out on a limb here because this seems reasonable to me (I am definitely not a currency exchange expert), but exchange rates between nations and the trading value of the US dollar against the Euro or the Pound or the Yen for example is based upon the world market of the faith in those traders in the issuing government. So having a weak US dollar (for example) is a reflection of the general consensus of the world traders that our government backed funds aren't up to snuff as other issuing nations (such as the European Union).
Inflation is a term used to describe the rise in the value of goods and services against the purchasing power the consumers. Inflation in the US has been relatively consistent at a rise of approximately 3% annually. It's a spiraling set of circumstances - if it costs more to make a product (like increased labor, health benefits, insurance, raw materials) then the product has to sell for more. But for the consumers to actually purchase it, they need to make more money to afford it and the vicious cycle continues.
Inflation can also occur due to scarcity of product/service. If you have 100 items and 1,000 people want it, the value can drive up (such as the Toyota Prius when it was a hot item - dealers were selling it above the MSRP sticker price due to demand in some areas).
Inflation can also happens if there is a devaluing of the trading currency. If people have lost faith in the value of the dollar, then it takes more to purchase that same product or service. So if people believe that the US dollar is only worth $0.10, then it will take $10.00 to buy what used to cost $1.00.
Hyperinflation is really bad. This is where there is a short term skyrocketing of goods and services due to either scarcity (like in the wake of a natural disaster) or a collapse in the value of the trading currency. This has happened around the world in nations that are typically under severe political unrest and are shifting regimes (Bosnia for example in the late 1990s). This occurs when the people using the currency have lost all faith in the value of money. In Germany post WWI, the money had better use as burning fuel than for trading purposes (which also made the nation ripe for a dictator like Hitler to rise to power because things were so economically bad in Germany post WWI).
What makes this so bad is that trading and bartering are now based on transient forms of "currency". If you have clean drinking water and there are a lot of people who need it, you can "sell" you water to them in exchange for products that you may want or need. Depending on the demand, you could "charge" extravagant prices to those who need what you have. Social unrest starts to occur and social and governmental collapse usually follows (this is a way for nations fall and new nations arise).
Where I went wrong in my post was that if the US government were to give every household their annual salary for a year plus a 32% raise, the actual value of the dollar would plummet and the currency would collapse. It wouldn't matter if they gave you $50,000 - it couldn't buy anything anyway since no one would actually have the intrinsic value of the trading currency. The money literally wouldn't be worth the paper it was printed on.
So our government attempts to "save" the banks in really their attempt to stabilize the value of the money being exchanged. Without that faith in our currency, then everything would fall apart. And I mean, everything.
This is actually rather sobering. In that how much of our economy is really based upon the perception and belief rather than hard empirical evidence and facts. It goes a long way to understand why economist, with their advanced mathematical formulas for predicting probability can get it so, so wrong. It would be like trying to create a mathematical model of exactly how the ocean's waves are going to behave. They can create probability, but not actuality, and that is a big, big chasm to bridge.
Perception and belief - our economy's foundation. This is where the media comes into play. Every day on the news, websites, newspapers, radio talk, etc, when the media pounds (to death) the state of our economy, I believe they actually compound the circumstances since it is our primary "sense" of how things are going. If the media is generally positive, then things are great - if they are generally negative, then it is bad. And since we fear the consequences of bad (versus the consequences of great), then it commands our collective attention. In bad times (like now) we are our own worst enemy.
So our economy follows our collective will. If we choose to be in a recession and/ord a depression, then we will be. If we choose to move to a period of growth, then we will be. But with all radical changes - it starts at the grass roots level and trickles out to everyone. Sooner or later the "buzz" shifts and our collective thinking actually believes what's going on around us.
We have our choice - it just depends on who wants to be the leader and convince the rest of us to follow.
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1 comment:
Good point!
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