The Emperor's Clothes

By Paul Hein.
 
Exclusive to STR
 
Having, by sheer good fortune, escaped any formal training in economics, I often feel like the little boy who observed that the emperor wasn’t wearing any clothes. “Shush,” I’m told. “You don’t know anything about it. It’s too complicated for you to understand.”
 
Well, maybe so. Despite that, however, some of the things that we’re being told about the current financial situation simply don’t make sense to me, and I don’t see how they would become any more believable if I had a PhD in economics.
 
For instance: the bank bailouts. The banks are the source--and the only source--of our money, or what passes for it. You don’t need a university degree to know that. Just read some of the publications of the Federal Reserve itself, and you’ll learn how banks create money by making loans.
 
Uncle Sam is probably the world’s biggest borrower. So explain, please, how an organization that has no money (but, indeed, owes trillions) can “bail out” those institutions that, with the stroke of a pen, create money? If there were a drought, would you take what little water you could obtain and pour it down the well?
 
Well, the bailouts are a fact of life, so there must have been a reason for them, even if it makes no sense. I’m not privy to what that reason could be, but I suspect it had to do with psychology, which, after all, is an essential component of government and banking. The Fed itself admits that what makes its money acceptable is the confidence that people place in it; and the government taxes what you earn, reinforcing the idea that the money is scarce and valuable, instead of available in unlimited “amounts” with a few keystrokes of a computer. If the banks created billions of dollars in loans that were not repaid, and continued doing business as usual, it might wake up even the ever-somnolent man on the street to the realization that he was a fool to repay his loan. So the creditor had to appear to “fail,” only to be rescued by the debtor. If the public accepts that, as it apparently did, the bank/government axis knows it can get away with anything—even convincing it that money is scarce, and banks can run out of it.
 
There’s a possibility, hopefully remote, that the economic insanity of the rulers was intended to make things worse, but that suggests that the government thrives on “crises,” real or created, and you surely can’t believe that!
 
Like the boy gawking at the emperor, I’m staring with some amazement at an article from one of the larger brokerage houses, which I read on the Internet. It says that government defaults are “inevitable.” I suppose by “default” is meant inability to pay bills, perhaps even bankruptcy, although that word wasn’t used.
 
But doesn’t Uncle own the printing press? I know that the printing of currency is done at the behest of the Federal Reserve, but, gosh, in an emergency, couldn’t the government go ahead and print some on its own authority? After all, it created the Fed, and even though it couldn’t finance its programs without it, the Fed, in turn, wouldn’t be collecting hundreds of billions in interest without Uncle. Détente, in other words. If you had the press that printed what people accepted for money, what would you do if you found yourself in financial straits? It’s a no-brainer, isn’t it?
 
But such an elementary, little-boy-emperor, explanation isn’t offered by the brokerage. Rather, it suggests that the government might ease its financial problems by paying its debts with a devalued currency.
 
Whoa! Isn’t that’s what the government has been doing for the last 30 or 40 years? And not only the government, but every other borrower? When was the last time a creditor received a dollar in repayment that had as much buying power as the dollar he loaned?
 
Back in 1980 the government bailed our Chrysler—the first time. One of the justifications for its action was that Chrysler was simply too big to fail. Are we to believe that the U.S. government isn’t? Thousands of workers would be without jobs were the auto manufacturer to go under, we were told. That just couldn’t be allowed to happen. But we’re hearing growing numbers of pundits warning us that Uncle Sam could go belly up. If the U.S. isn’t “too big to fail,” what is?
 
I don’t get it. As I said, I’m not trained in economics, so maybe that’s why I don’t understand. To me it’s like putting out a fire by pouring gasoline on it. When the government’s policies restore productivity and profitability to our economy, I will be the first to stand and applaud. Until then, it still looks to me like the emperor’s not wearing any clothes.
 

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