FIAT MONEY
  Karl Arnold Belser
18 May 2018



I talked about "bad Money" in my last post Competition Between Nations.  The question is "Is Fiat Money Bad Money?". I think that the answer is NO, but the mismanagement of fiat money is in fact very dangerous and can result in fiat money being worthless.

I describe the fictions that human beings have created in order to have a civilized world in my post A Short History Of the world. Money is one of these necessary fictions that allows commerce to occur.

In the 20th century (1972) the US realized that it could no longer back money by gold or any other thing because the economy could change faster than the reference commodity could be obtained. Hence the governments of the world created money out of nothing but the full faith and credit of the issuing government. Fiat money was created.  

This kind of system is like the body that creates just enough blood to keep all of the cells alive and prospering. The human body has many such systems that all work in equilibrium until something fails and the person dies.

The economy of a nation has the identical characteristics as the body and money is just one of many fictitious systems that allow it to "live". I conclude that fiat money is necessary and will not be replaced by reference to any other commodity.

So what is the problem today?

Simply stated, it is management of the currency. Will the government be able to back off from its welfare promises without collapsing the value of the dollar?

The good news is that only about 11 trillion dollars out of the 21 trillion dollar national debt is owed to entities other than the fed. The federal reserve already returns the interest on its debt to the US treasury so the US held debt costs the US nothing. This US debt can be used to reduce the money supply by quantitative tightening as it was intended to do. The US will almost certainly not default on its debt unless it takes on more debt to pay for US pensions and medical care.

The other over 200 trillion of welfare promises is another story because the US GDP is about 20 trillion dollars. Many of these promises cannot be paid. Since the United States is a federation of states it is fair to divide the promises into federal promises and promises by other entities. As long as the federal government does not bail out the states it is in a better condition to manage its debt.

The federal promises are for federal pensions, social security and Medicare. It appears that the the federal government might try to push the Medicare promises off to the sates. This would probably mean that states would cut benefits due to their lack of ability to pay. The federal pension and Social Security might be payable, I don't know. I think that congress could make cuts in benefits if the going got rough.

The problem with the states is another story. The states are simply hoping the the US government will bail them out. I hope that this does not happen. But politics being what it is, often corrupt, there is a possibility of bail out. I will assume that cooler heads remain in charge.

My guess is that the US government is going to let the states handle their own financial mismanagement like they are currently doing with the territory of Puerto Rico. Similarly I expect the states to let the localities like counties and cities solve their own problems if they can. 

California has allowed all localities to participate in the CalPers pension system, which at this point is seriously underfunded. States like Kentucky and Illinois are in even worse condition. States are currently not allowed to go bankrupt. Hence it is unclear how the default on pensions promised by the states will be handled.

These states might try to increase taxes, which are already very high, and hope that people don't leave the state. I have heard that the wealthy are leaving Illinois at the rate of one every four minutes. If the state drives away the wealth producers, then state collapse is certain. and the federal government will have to figure out what to do without giving them  a bailout.

My conclusion is that all other things remaining constant, that the US will deal with its unpayable promises by reneging on them over a long period of time.

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All other things might not remain unchanged because  many of the nations in the world are issuing a lot of debt.

I am less sanguine about China's ability to pay off its debt because it has overbuilt in every real estate and manufacturing sector with no feedback from the free market.  A China collapse might accelerate the debt problem resolution in the United States and elsewhere.

In the worst case, the debt resolution might be a world war like what happened in the 20th century. World wars one and two destroyed much of the world's wealth and wealth inequality. War is the ultimate economic reset if the world does not get completely destroyed.

I am resigned to die if there is a nuclear conflict. I cannot protect myself from this type of war.
    
Last updated May 18, 2018
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