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Wednesday, March 11, 2009

The medium of exchange has been compromised

Three years ago the world was happily booming, everyone had a job, miners and merchants, factory workers and farmers, all gainfully employed helping each other out.

Today, job losses mean idleness has replaced industry. Need replaces plenty. Insecurity replaces confidence. People are not able to obtain the goods and services they need. Artists and artisans go wanting. The higher aspects of our culture are discretionary purposes.

What is the difference between then and now? Are there fewer industrious people, less commodities, a cut in plant and equipment? No. The difference between then and now is that the financial sector has screwed up the medium of exchange.

It is not that there is not enough money, it is that the money itself is compromised. The way we transfer value from the future to the present, from one person to another, from producer to consumer. The object of any economy, market, socialist, or Martian, should be to keep its members employed in productive enterprises and provision them as well as sustainably possible.

Where is the money going to come from? Well, Where did it go? Who has it? Money is not magical stuff that morphs into whatever you need, so you need to hoard it. Money is the medium of exchange. It allows my work to be traded for your work without barter. It allows me to accumulate credits to use in my retirement, exchanging work then for resources now. It allows the future benefit of a good, say a car or house, to be tapped to pay for it today.

Unfortunately, the credit aspect has been ultimately compromised by those we have allowed to be in charge of it, and in turn has compromised the system. Much of the activity was for the purpose of getting rich, rather than producing value, and in consequence has done neither. Now the unwinding of all that leverage is eating the money up.

To compensate, the Federal Reserve is producing as much money in as many different ways as it can think of, under the assumption that more money will produce more activity. In normal times, such a frantic effort by the Fed would have created hyperinflation. But it is not the amount of money, but the amount of exchange. This amount of exchange is called by economists, the "velocity" of money.

Never well understood by Monetarists, it has always frustrated their math.

The private sector has never been responsible enough to have the authority we have given them by abdication. The province of greed is no place for discipline in this most sensitive mechanism of exchange.

The dollar may still be strong, but the currencies of other countries have been compromised by the free flow of capital. The credit these economies need is flowing into the perceived safety of the strongest money. The dollar. The strength of the dollar comes from the weakness of the system. Not a good sign.

But by returning to basics, the activities, the productive activities of the societies, we can return value and stability to the medium of exchange.

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