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What is a dollar?

Ya gotta love Ron Paul.  Well, maybe not love him, but I at least admire his tenacity and perseverance.  And also his point:

On Tuesday, Kansas City Fed President Thomas Hoenig testified before the House Financial Services domestic monetary affairs committee, which Paul chairs.  (I’m drawing this information from here:  Paul, as was the case when Bernanke testified two weeks ago, is really wanting someone at the Fed to explain to him why the U.S. Dollar is “money.”  (See the testimony of Bernanke in response to Paul’s questioning here: defines money thusly:

mon·ey [muhn-ee]  Show IPAnoun, plural mon·eys, mon·ies, adjective


1.  any circulating medium of exchange, including coins, paper money,  and demand deposits.
3.  gold, silver, or other metal in pieces of convenient formstamped by public authority and issued as a medium of exchange and measure of value.
Apparently, Hoenig had studied the dictionary definition of “money” prior to his testimony, which would have been wise, since he no doubt knew that Paul would question him, and had a template of the questioning from the Bernanke testimony.  Hoenig’s own response to Paul’s question, “What is a dollar and who says it’s money?”:  “Money is a medium of exchange, a means of payment and a store of value and the dollar fits that description.” Good job, Hoenig.  You can read a dictionary. That’s good to know.
But really, who doesn’t know what Paul is driving at?  Certainly the Fed Chair and Hoenig pretend not to.  But I cannot believe that the people put in charge of our central banking and monetary system don’t know precisely what Representative Paul is asking.  Surely we’ve recruited brighter people than that.  Right?
The truth is that they do not want to answer the question, because anyone watching C-Span is going to understand that the Fed’s policies are reprehensible, insane, and devastating to Americans.
Through QE I and QE II, the Fed has engaged in a policy of printing trillions of greenbacks, which they and the Treasury promptly handed over to the largest banks.  Their rationale was that by pouring this money into the economy (called increasing “liquidity”), the banks would be able to lend money at cheap rates of interest to individuals and entrepreneurs, who through their renewed vigorous activities, would stimulate the economy.  Except there were two problems with that.  The first is that consumers entered the financial meltdown in 2008 in hock up to their necks, and they weren’t inclined to go further in debt.  Especially while their homes and businesses were being forced into bankruptcy and foreclosed upon.  The second is that the banks simply did not lend the money.  Hiding behind the hideous excesses they themselves created, the banks pronounced that they would only lend to sterling creditors, and have basically shut down lending entirely.  So all that cash that was handed to them wasn’t “trickled down” to the citizenry.  But it also didn’t just sit static in their accounts, waiting for willing and sterling lenders to show up.
Where did it go?  Into commodities.  Oil, food, basic and precious metals.  (Yes, gold and silver…)  The increasing conversation about “emerging markets” refers, to a large extent, to just that.  That money is going to buy land, ranches, farms, cattle, mining interests, factories producing real and useful products, on and on and on … in those emerging markets, what used to be referred to as the “Third World.”  It is not being invested here.  Let me put this more bluntly.  Our government printed money, which they then handed to the richest 1% of our society, who then took this free “money” and are busy putting it to good use … elsewhere.
Now, from the perspective of the indigenous peoples of those emerging markets, they see a flood of foreign capital into their countries.  Yes, it is creating jobs for them.  Lots of them.  But the investors are not themselves indigenous.  It is, to borrow an American refrain, “foreign money.”  And the benefits are not distributed equitably, just as it wasn’t here.  Yes, a bunch of poor and middle class of those countries are seeing increasing wages and increasing job opportunities, but the profits are being siphoned off into offshore accounts in the Caymans and Seychelles.  Or used to buy up even more land and capital assets, more mines, more cattle.  And because available land is becoming scarcer, it is becoming more expensive.  I spoke with a lady today who had just returned from Peru.  She informed me that in the past few years, her property there had tripled in value.  Because of that, she was able, upon her return to the United States, to pay cash for a new house.
That’s a great deal for the 1%.  But let’s remember where the money came from.  One common refrain in these days is that the money was “created out of thin air.”  But that is not quite true.  The “money” was indeed printed, and that money printed did not come from production.  It was, truly and simply, printed.  Dollars.  And that, my friends, results in inexorable inflation.  When production remains static, but the money supply increases, each dollar printed is worth less.  Each dollar buys less production.  Prices rise on everything.  Wheat, gasoline and tractors all cost more.  Which means that bread costs more, plain and simple.  Thus, inflation caused by the Fed’s easy “money” policies really constitutes a tax on each and every American.  But unlike those in the emerging markets, our wages are not increasing.  In fact, they’re decreasing as measured against inflation, and they have been decreasing like this for forty years.
See, it did not use to be like this.  Prior to 1933, our dollar was pegged to gold.  FDR ended that, and then in 1971, Nixon severed the dollar from the silver standard.  Those metals operated as money (not “money”) reserves because they were produced in known quantities, held in known quantities, and so long as the dollar was understood to be worth 1/35th of an ounce of gold, you knew what that piece of paper in your hand was worth.  If an ounce of gold did not come into the treasury, then 35 greenbacks could not flow out of it.  But now the dollar means whatever the Fed and the markets decide it means.  In concrete terms, it means … nothing.
Note that Hoenig defined the dollar as a “store of value,” and not a “measure” of value.  A measure of value would imply that the “money” would maintain its worth relative to something else of value.  A “store” of value just refers to something that may or may not maintain its value relative to other things of value.  Like gold.  Or bread.
During Bernanke’s testimony, Paul asked him why, if gold is not money, the Fed holds reserves of gold.  Bernanke struggled mightily with that one, and eventually answered, “Tradition.”  Paul jumped on him, and asked him why they did not keep diamonds, instead.  Bernanke could not, or would not, distinguish between gold and diamonds.  But the distinction is easy.  One ounce of gold, of a known level of purity (.999 fine), is worth the same as one ounce of .999 fine gold anywhere else in the world.  Diamonds, however, vary in worth radically.  Two diamonds of exactly one carat each will not be worth the same amount, due to variations in cut, clarity, brightness, color, etc.  For that reason, diamonds cannot be used as money!
So Representative Paul’s question is this:  If the Fed can vary the value of a dollar by simply printing more, why is that money?  It bears no relation to production, it bears no relation to stable and known supplies of any precious metal, it simply is worth whatever the Fed and the markets decide it should be worth.  And what the hell kind of “medium of exchange” is that?
A friend asked tonight what she should do with some cash she has on hand.  Should she put it in her 401k?  Hell no.  I advised her to buy food.  That is the one thing I am rock-solid certain that will not decline in value anytime soon, no matter what the Fed’s policies are.  Unlike the dollar, it won’t devalue while she’s holding it.  Unlike the dollar, she can eat it.  Unlike the dollar, it is worth something real.
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