In light of Ben Bernanke's reluctance to “taper” the buying
of bonds – something he promised he will do by now but then seems to have
changed his mind – it is beginning to look like America is entering a new era
and dragging the world with it. Bernanke is chairman of the central bank in the
world's largest economy whose currency, the dollar, also happens to serve as
the world's reserve currency. Thus, America 's influence is sizable, and
what happens there is bound to become the template that the rest of the world
will want to emulate.
What is happening in America and apparently will
continue to happen for a while longer, is that the central bank maintains the
posture of pawnshop to the nation. Being the bank of last resort, the Fed, as
it is affectionately called, will continue to buy anything that anyone will
convert into a bond. It is the Fed's way to make sure that plenty of cash is
pumped into the financial system, a move that Bernanke sees as necessary to
prevent the economy, whose growth is already anemic, from shrinking even
further.
But all this must have ramifications too difficult to
predict at this time with any certainty. All we can do is remind ourselves of
what money is, and how it came to be. We should then keep our eyes open, and
follow closely the events as they unfold. Maybe it will happen someday that
someone will see a danger gather in the distance, and sound the alarm to tell
the world of a looming disaster before it strikes.
As it happens in all such cases, the danger that may come –
if it comes – will strike the currencies. So we ask: What's the worth of a
currency like say, the dollar for example? Well, it all depends on how much of
it is in circulation, and how much the people that want it clamor to own it.
That is, it all depends on the supply-demand equation. But because a number of
problems have cropped up in the past with printed (or fiat) money, some people
have called for a return to the gold standard. To understand what that is;
indeed to understand what money is, we need to go back to when human beings
started to trade with each other.
As hunters and gatherers, members of the same family or the
same clan or tribe shared everything that the group was able to assemble in a
given day. But there came a time when a group such as that, needed to make
peace or start a cordial relation with other groups and so, to demonstrate
their goodwill, the groups exchanged gifts. That is, if one group had a surplus
of something, it was happy to exchange it for the surplus of another family or
clan or tribe.
When the goods and services that were ready to be exchanged
became more varied, the pleasantries of trading gifts with nearby neighbors
evolved to become the necessity to barter goods and services with people that
came from far away bearing a larger variety of goods or services such as
entertainment and fortune telling. They all assembled in the same marketplace
where they haggled as each individual sought to obtain the most in exchange for
giving away the least. Here, for the first time, the supply-demand equation
played a role in determining the value of the items being traded.
Eventually, the precious metals and other artifacts became
the items that people chose to exchange for goods or services. The trend may
have started when they were exchanging products they gathered from nature, but
the choice turned out to be a useful method when the humans advanced a few more
notches and started to fabricate some products. This was the time when people
who learned to make elaborate products such as shoes, clothes, pottery or
furniture opened their own shops where they made and sold products in exchange
for the precious metals. These people were the tradesmen and the craftsmen that
made the mercantile era.
Up to this point, people were in control of their economic
well being. That is, the harder they worked, the more they produced and the
more they owned of what they could exchange for what they did not have. Then
came the printed money, and the control of one's economic destiny passed to
someone else. It went to those who printed the money and those who were close
to them. Having an easier access to money, these people had a more direct
influence on the economy than the trades and crafts people who produced the goods
and services forming the economy in the first place.
The bankers and the employees of other financial
institutions are now the people in control of the economy, and the ones who
receive the cash that the central banks print and hand to them in exchange for
bonds that may or may not represent the value assigned to them. In fact, the
banks which, in times past, were required by law to have a set reserve in gold,
no longer have this restriction. They borrow as much as they want from the
central bank in exchange for bonds to which they themselves assign a “fair
value” which they say is determined by the supply-demand equation.
The trick, however, is that both the supply and the demand
parts of the equation are set by the people who package and sell the bonds.
They and their colleagues of the same financial institutions buy and sell the
bonds inside a bubble where they often take something worth little, and make it
look attractive enough to soak to the central bank that has become a pawnshop,
in exchange for good money.
Keep your eyes open, my friend for, you may be the first to
see danger gather in the distance, and sound the alarm to wake us up to the
fact that good money may no longer be as good as it looks.