Economic Collapse (Prepping for Tomorrow Book 2) Page 5

  What happens if a government is tempted to print too much money over a short period, thus reducing its value? Prices for goods and services will rise artificially, resulting in hyperinflation. The society will soon lose faith in their currency, and seek out another, more stable form of money. The result is the economic collapse of the formerly stable currency.

  Governments have always been tempted to issue more money because it allows them to finance their expansion and increase their popularity with their constituents. But without money, the world would be reduced to a barter economy, which is not plausible in this hugely populated, interconnected planet. There has to be a happy medium between these two extremes.

  Chapter Five

  Gold, and its role in Economic Theory

  Precious metals like gold and silver seem to serve all the needs of society for establishing a stable medium of exchange. It is a solid unit of account, a durable store of value, and a convenient medium of exchange. They are hard to obtain. There is a finite supply of precious metals in the world. They stand up to time well. They are easily divisible into standardized coins and do not lose value when made into smaller units. In short, their durability, limited supply, high replacement cost, and portability makes all precious metals more attractive as money than other goods.

  Until relatively recently, gold and silver were the main currency people used. However, gold and silver are heavy, and over time, instead of carrying the actual metal around and exchanging it for goods, people found it more convenient to deposit precious metals at banks, which would issue a note evidencing ownership of the gold or silver deposits. The holder of the note could go to the bank and exchange the note for the precious metal it represented.

  Eventually, the paper claim on the precious metal was delinked from the metal. When that link was broken, fiat money was born. Fiat money is materially worthless but has value only because a nation collectively agrees to ascribe a value to it. In short, money works because people believe that it will. As the means of exchange evolved, so did its source—from individuals in barter, to some collective acceptance based upon the promise of governments in more recent times.

  What is the gold standard?

  The gold standard has been recognized as the ultimate backer of a nation's currency. It is a monetary system where a country's currency or paper money has a value directly into a fixed amount of gold using gold certificates like the one in the illustration. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A nation that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency. For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.

  The gold standard is not currently used by any government. Britain stopped using this system by which currency was valued in 1931 and the United States abandoned the system in 1971. Fiat money completely replaced the gold standard. The term fiat money is used to describe a currency that is used because of a government's order, or fiat, that the currency must be accepted as a means of payment.

  There are many advocates for the return to the gold standard in the United States. Other economists claim it would result in an economic disaster that would rival the Great Depression. The biggest positive associated with the return to the gold standard is it would force fiscal discipline upon governments, business, and individuals.

  Considering the nearly $20 trillion debt that has been amassed by the U.S. government, fiscal discipline sounds enticing. The negative side of the coin (pardon the pun), argue some economists, is that the economy will grow at a much slower rate because the money supply will be drastically reduced. As an economy grows, they argue, more wealth is generated. By cutting off the supply of money, a nation would choke off the growth because the money supply could never grow faster than, or greater than, the limited supply of gold. Under our present system, for every dollar a commercial bank has, it can lend out $10 to $15. If these dollars are convertible to gold, the ability to generate wealth and economic growth through borrowing ceases, causing the economy to retract, or collapse.

  What are the odds of a return to the gold standard?

  Not likely, although the rhetoric will ramp up after the 2016 election if a Republican is elected president. Other than the possibility of a commission being established to study the concept, or entertain an open audit of the Federal Reserve, politicians are likely to stay the course because of the potential economic downturn caused by such a change. In the opinion of one economist, the only circumstances under which the U.S. would return to a gold standard is in the event of a major world war, or some other cataclysmic event.

  Must we destroy our society in order to create a new one or start over? Will it take a reset of epic proportions to get it right the next time?

  Chapter Six

  The Great Economists

  The economy has a huge impact on the quality of our lives. An economist is a person who has studied and is well versed in the policies and practices of the field of economics. Not only are these people knowledgeable about the intricacies of economics but they are also the people who create, propose and even implement monetary policies. The sectors where they are generally found include the private and the public sector.

  When it comes to economics and economic theory, a few thinkers dominate the landscape. Coming up with a list of influential economists from the past is easy enough. Here is a list of those we consider the most influential economists of all time, followed by a detailed discussion of three who represent the liberal, conservative, and libertarian point of view politically.

  Karl Marx

  From each according to his abilities, to each according to his needs.

  The philosopher, social scientist, historian and revolutionary, Karl Marx, is without a doubt the most influential socialist thinker to emerge since the nineteenth century. Although he was largely ignored by scholars in his lifetime, his social, economic and political ideas gained rapid acceptance in the socialist movement after his death in 1883. Until quite recently, almost half the population of the world lived under regimes that claim to be Marxist.

  More commonly remembered as a revolutionary advocate of communism, Marx was in fact also a classical economist. His theories essentially predicted that capitalism would lead to fluctuations and economic crises. Marx went on to publish The Communist Manifesto, having a huge influence on the communist movement of the twentieth century, and profoundly shaping the political landscape. Had communism not been brushed aside by capitalism, Marx' contribution to economic development may be more widely acknowledged today.

  Milton Friedman

  Underlying most arguments against the free market is a lack of belief in freedom itself.

  If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand.

  Milton Friedman, an avid supporter, and proponent of free markets, was educated at Rutgers University, the University of Chicago and Columbia University. Awarded the 1976 Nobel Prize in Economics, he is most notable for his work on consumption analysis, monetary history and theory, and stabilization policy.

  Friedman is associated principally with two big ideas which have inspired economists in the modern era. One is an uncompromising restatement and development of Adam Smith's views on the merits of free markets. He made the case for floating exchange rates - a process where a country's currency value is set by the foreign exchange market (FOREX) through the supply and demand for that particular currency in relation to other nations' currencies.

  His other significant contribution, the quantity theory of money which linked the money supply to inflation, was embraced in the 1980s by Western governments. It has moved back to center stage in the recent economic crisis as central banks have fought recession and the risks of deflation using aggressive monetary policy, minimal interest rates, and expanding money supply via quan
titative easing.

  John Maynard Keynes

  Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.

  British economist and author, John Maynard Keynes argued against the long-held view that free markets would automatically provide full employment, spearheading a revolution in economic thinking. He proposed that state intervention is required during boom and bust cycles of the economy, a policy adopted by most western economies during the 1930s.

  Keynes was one of the most groundbreaking economists of his day. He created many of the new ideas that went on to become accepted after the Great Depression. Many national governments began to follow certain macroeconomic statistics more closely, including interest rates and employment because of Keynes' academic efforts.

  Although this went out of fashion by the 1980s, the world has seen a return to Keynesian policy during the recent global economic crisis following the bank failures of 2008, notably in the US where the administration, in conjunction with the Federal Reserve, increased fiscal stimulus in an attempt to combat the recession.

  The liberal economic theory known as Keynesian economics was set forth by Keynes in his Treatise—General Theory of Employment, Interest and Money which intended to provide a theoretical basis for government full-employment policies.

  While some economists argue that full employment can be restored if wages are allowed to fall to lower levels, Keynesians maintain that employers will not employ workers to produce goods that cannot be sold. Because they believe unemployment results from an insufficient demand for goods and services, Keynesianism is considered a demand-side theory that focuses on short-run economic fluctuations.

  Keynes argued that investment, which responds to variations in the interest rate and expectations about the future, is the dynamic factor determining the level of economic activity. He also maintained that deliberate government action could foster full employment. Keynesian economists claim that the government can directly influence the demand for goods and services by altering tax policies and public expenditures.

  One more quote from Keynes, as it relates directly to the topic of economic collapse:

  There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

  Friedrich Hayek

  'Emergencies' have always been the pretext on which the safeguards of individual liberty have been eroded.

  Born in Austria in 1899, Friedrich Hayek was a noted social theorist and political philosopher of the twentieth century. According to the official Nobel Prize website, Hayek won the Nobel Prize in Economics in 1974 for his pioneering work in the theory of money and economic fluctuations and his penetrating analysis of the interdependence of economic, social and institutional phenomena.

  His major work was titled The Road to Serfdom, in which he warns of the danger of tyranny that inevitably results from government control of economic decision-making through central planning. He further argues that the abandonment of individualism inevitably leads to a loss of freedom, the creation of an oppressive society, the tyranny of a dictator, and the serfdom of the individual. Significantly, Hayek challenged the general view among western academics that fascism and National Socialism, which prevailed in Germany under Hitler, was a capitalist reaction against socialism. He argued that fascism, National Socialism and socialism had common roots in central economic planning and empowering the state over the individual.

  Hayek is considered the leading libertarian oriented economist. Those that have followed his theories include Milton Friedman, Walter E. Williams, Thomas Sowell, and Art Laffer.

  Adam Smith

  It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.

  People who intend only to seek their own benefit are led by an invisible hand to serve the public interest which was no part of their intention.

  Adam Smith was an economist and philosopher who wrote what is considered the bible of capitalism, The Wealth of Nations, in which he provides the first detailed analysis of a free market economy. This extensive treatise has formed the basis for the free market, capitalist economic systems employed around the globe.

  While his exact date of birth isn't known, Adam Smith's baptism was recorded on June 5, 1723, in Kirkcaldy, Scotland. He attended the Burgh School, where he studied Latin, mathematics, history and writing. Smith entered the University of Glasgow when he was 14 and in 1740 went to Oxford.

  In 1748, Adam Smith began giving a series of public lectures at the University of Edinburgh. Through these lectures, in 1750, he met and became lifelong friends with Scottish philosopher and economist David Hume. This relationship led to Smith's appointment to the Glasgow University faculty in 1751.

  In 1759 Smith published The Theory of Moral Sentiments, a book whose main contention is that human morality depends on sympathy between the individual and other members of society. On the heels of the book, he became the tutor of the future Duke of Buccleuch (1763–1766) and traveled with him to France, where Smith met with other eminent thinkers of his day, such as Benjamin Franklin and French economist Turgot.

  Adam Smith's The Wealth of Nations

  In 1776, after toiling for nine years, Smith published An Inquiry into the Nature and Causes of the Wealth of Nations (usually shortened to The Wealth of Nations), which is considered the first work dedicated to the study of politically-driven economies. Economics of the time were dominated by the idea that a country's wealth was best measured by its store of gold and silver. Smith proposed that a nation's wealth should be judged not only by this metric but by the total of its production and commerce—today known as gross domestic product (GDP). He also explored theories of the division of labor, an idea dating back to Plato, through which specialization would lead to a qualitative increase in productivity.

  Smith's ideas are a reflection on economics in light of the beginning of the Industrial Revolution, and he states that free-market economies (i.e., capitalist ones) are the most productive and beneficial to their societies. He goes on to argue for an economic system based on individual self-interest led by an invisible hand, which would achieve the greatest good for all.

  Smith argued for free trade, market competition, and the morality of private enterprise. He saw government's role in a society as to establish laws and instill justice, as well as provide for a nation's security, education and basic infrastructure.

  In time, The Wealth of Nations won Smith a far-reaching reputation, and the treatise, considered a foundational work of classical economics, is one of the most influential books ever written. We have provided a synopsis of this important thesis in Appendix C, A Condensed Version of The Wealth of Nations.

  The theory of Supply-Side Economics

  In essence, supply-side economics proposes that production or supply is the key to economic prosperity and that consumption or demand is merely a secondary consequence.

  Supply-side economics found its roots in the economic theories of Adam Smith and one of our Founding Fathers, Alexander Hamilton. But it is better known to some as Reaganomics or the trickle-down policy espoused by 40th U.S. President Ronald Reagan. He popularized the controversial idea that greater tax cuts for investors and entrepreneurs provide incentives to save and invest, and produce economic benefits that trickle down into the overall economy.

  Like most economic theories, supply-side economics tries to explain both economic phenomena and offer policy suggestions for stable economic growth. In general, the supply-side theory has three pillars: tax policy, regulatory policy and monetary policy.

  However, the single idea behind all three pillars is that production (i.e. the "supply" of goods and services) is most important in determining economic growth. The
supply-side theory is typically held in stark contrast to Keynesian theory which, among other things, includes the idea that demand can falter, If a lagging consumer demand drags the economy into recession, the government should intervene with fiscal and monetary stimuli.

  The supply-demand dichotomy is the single biggest distinction. A pure Keynesian economist believes that consumers and their demand for goods and services are key economic drivers while a supply-sider believes that producers and their willingness to create products and services set the pace of economic growth.

  The Argument That Supply Creates Its Own Demand

  Economists continually study the supply and demand curves. Smith would argue that aggregate demand and aggregate supply intersect to determine overall output and price levels. Thus, Reagan and others adopt the supply-side premise that an increase in supply (i.e. production of goods and services) will increase production and lower prices.

  Supply-side economists go further and claim that demand is largely irrelevant. The theory holds that over-production and under-production are not sustainable phenomena. Supply-siders argue that when companies temporarily over-produce, excess inventory will be created, prices will subsequently fall, and consumers will increase their purchases to offset the excess supply.

  This essentially amounts to the belief in a mainly vertical supply curve. With an increase in demand, prices rise, but output doesn't change much. Under such a dynamic where the supply curve remains vertical, the only thing that increases production and therefore economic growth is increased production in the delivery of goods and services.