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Post details: What is the value of Value?

What is the value of Value?

In the golden days of yore, economy was a much simpler fare than it is today. Shoemaker made a pair of shoes, took them to a local marketplace and obtained five loaves of bread from the baker, according to the agreed upon exchange rate reflecting the amount of effort necessary to produce the respective goods. To protect bakers from a potentially lethal overabundance of shoes, coins were later introduced in lieu of specific goods and the baker would just receive two pieces of silver from the shoemaker which he could exchange (at a later time) for vegetables, clothes, woods or any other non-footwear. Note that there was absolutely no inflation in that system. If the baker decided to use his 2 pieces of silver in 5 years, he'd still get the same amount of goods, as the intrinsic value of silver (or gold) does not decrease significantly over time.

Now imagine that there was a lazy and incompetent baker whose pastry was snubbed even by the toughest and least discerning pigs. His loaves of bread were stale, revolting and unsuitable for consumption. Even the king himself would be loathe to buy his products. Why would anyone in their right mind swap anything of value for something that is essentially worthless? But the crooked baker figured a way to get by. He ingratiated himself with the King's treasurer and asked him to reduce the silver content in his coins and from the spare silver mint a couple of extra coins that he could get for his bread. That was the day inflation - which is what debasing currency really is - was born. Those who cannot produce value have strong incentives to blur it. That's the only way how a wider economy can accommodate poor workmanship.

Needless to say that inflation invites fraud. What intelligent warm blooded mammal can withstand the allure of easy money? Inflation inevitably leads to overconsumption and shortly afterwards to overextension. At first, it feels like having discovered perpetual motion, but in the long term the resulting Ponzi scheme always crashes. It is not a coincidence that Roman Empire started to crumble when its rulers resorted to tinkering with the content of precious metals in their coins. Once the flow of gold (backing the value of their currency) from new provinces ceased and Romans still needed funds to support their enormous military apparatus they had no choice but start inflating. Little did they know that whittling down the silver content in Denarius would go hand in hand with the gradual decline and eventual demise of their whole Empire.

In modern days, we don't have to debase our currency by changing its metal composition. We use paper money that can be easily printed and even more easily electronically generated. Central banks have replaced the King's treasurer, but they still have plenty of unproductive bakers to cater to. Just think of all the gravy sloshing in political campaigns. Where does it come from and what value does it produce or represent? How about legions of redundant bureaucrats, corrupt public officials or failed businesses in permanent need of bailouts. Would James Cayne, Chuck Prince or Dick Fuld walk away with hundreds of millions of dollars for driving their companies into ground? Neither of them would make it in the market where they would have to show that their yearly labor is indeed worth a billion loaves of bread.

Our central bank, The Federal Reserve, would make you believe that it is fighting inflation, while it is in fact creating it. When the Fed officials crow that their target inflation is 2%, they are essentially admitting that we need to print extra 2% every year to support various parasitic industries. It is not a coincidence that since 1913, the year the Fed was created, the dollar has lost 95% of its purchasing power. Over the course of several generations your personal wealth would get wiped out by actions of this unelected cabal of dollar murderists. Of course the central bankers will tell you that you are not supposed to use money as a store of value. You are supposed to hand all your savings over to a casino - uhmm I mean the stock market - that has been rather conveniently operated by the friendly Wall Street shamans.

Yep, the same shamans that developed the little drinking problem that resulted in the credit hangover of the century. And we still need to print dollars with a vehemence of a spastic dog trying to scram from a slippery patch of ice just to stay afloat. Last month, the Fed Chairman Ben Bernanke strongly hinted that Quantitative Easing #2 (a fancy name for debasing the currency) is coming to a bank near you and markets reacted accordingly. Dollar tanked, commodities soared.

Ostentatiously, the purpose of this operation is to save the Main Street and stimulate jobs, but closer inspection reveals gaping cracks in this theory. What bank would lend to new businesses when they will be paid by worthless pieces of paper years later? What business would have the courage to hire new employees when the surging commodity prices - reacting to rapidly declining dollar - would eat most of the profits. What entrepreneur would be able to prepare any long term planning when the future currency value is essentially arbitrary? Once the money starts stretching wildly there is no way of telling what raw materials or labor would or should cost. And how about all the capital misallocated and idling in the successfully blown gold bubble? Not to mention that the current artificially low interest rates also hinder the formation of new capital which - in its most organic form - comes from people's savings. No capital, no jobs - it is very simple.

Whether Bernanke cares about this or not, his tormented tango with the US taxpayers is but a colossal wealth transfer from the responsible to the irresponsible. An unexpected pot of gold at the end of livid rainbow. And if you wonder who that pot of gold goes to - all you have to do is look at the size of Wall Street bonuses or at the most recent reading of income inequality stats.

There are two ways in which man can steal from other man. Either he steals the actual physical coins, or he steals their underlying value. Using the so called "elastic currency" (a term invoked quite often in years preceding the creation of the Federal Reserve) is like having a bony hand of the Central Bank planted permanently in your pocket, not knowing when it will pinch. Does the Fed ever think about the retirees who have lived within their means so they could save enough for decent retirement only to see their nest egg scrambled by the bank's panicky machinations. Probably not. Maybe they should put a little warning on the Federal Reserve Note: "second hand inflation can be hazardous to your financial health".

Cheap money is like a drug and our economy got a serious case of alcohol poisoning during the first decade of the new millenium. A life style change and a careful diet would be advisable in that situation. But Dr. Bernanke has no idea what the diet should be so he takes the easy way out: more free drinks on the house - at least for the big banks. He does not seem to understand that this is a structural problem. When a long distance runner breaks his leg, surgery is the proper solution, not pouring power drinks down the runner's throat, let alone with the help of a funnel. I hope when his big QE party is over, he'll look carefully through his mail. Perhaps he'll find in it a little postcard from a long lost friend.

Dear Ben,

I am not sure what was president Obama thinking when he reappointed you as the Fed Chairman despite the fact that you were sleeping at the wheel for most part of the housing and credit bubble. I don't care what voodoo magic you used. But, please, stop using me as a cheap mop for every spill and stinking puddle your banking buddies made on the floor. If they messed up, let them eat some crow. That should teach them what their core business should be. To prudently lend to selected businesses while making sure that they have enough capital reserves to cover the potential losses.

Thank you in advance,

the Increasingly Duller Dollar


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