I had been wondering if there is anything to the warnings I have been hearing about the imminent collapse of the U.S. economy. There is a book that allegedly explains it and what you can do to protect yourself and family. I found out the book is written by a man who worked as a Wall Street manager and was charged and fined by the SEC for profiting from misleading information given to investors. Since I feel morally constrained from financially supporting those who financially abuse others, I decided to do my own research. What I found is not comforting. On the other hand, I am not an economist. So my conclusions and explanations may not be entirely correct. If any Daily Kos readers have better info, I would appreciate any comments.
I found there are opposing opinions about how the U.S. economy should operate. On one extreme we have those who favor laissez faire, a system in which the owners of capital make all the decisions without government control or oversight. On the other extreme are those who think perpetual non-stop economic growth is not only possible but also desirable and that the government needs to make and follow policies that will bring about unending growth. At the same time as the economy is growing they believe that social-safety net programs that will fix every one's problems should be expanded.
Laissez faire vs. the Welfare State
Those with a laissez faire, every-citizen-for-himself philosophy don't believe the government has the responsibility for providing for American citizens who are in financial need. Then there are the Welfare State promoters who believe the government should spend whatever it takes to provide for the poor. Laissez faire advocates favor a smaller weaker central government that would lack the power and authority to protect every one's opportunities to experience their individual inalienable rights, including the right to benefit from the Common Good. On the other hand, those who favor an expanded welfare state don't seem to care where the money to do that will come from. Ending deficit spending, paying off the national debt, eliminating wasteful spending, and raising taxes don't seem to be high on their list of priorities. They would like to raise the minimum wage of anyone already fortunate enough to have a job to $15/hour and to provide a free college education to anyone who wants it, compliments of taxpayers.
Economic Goals and Human Rights
Neither laissez faire nor the Welfare State can end the deprivation of those financially needy underemployed, unemployed, and partly employed citizens who are willing and able to perform decent full time work for a healthful living wage. Both extreme approaches to the economy would perpetuate the abuse of involuntary poverty and all the problems that go with that condition. Giving handouts to people who are financially needy is not a humane solution that fulfills the promise of this country to grant every citizen the inalienable right to life, liberty and the pursuit of happiness. Making sure that every citizen has what they need to live a healthful lifestyle is an economic goal that is more supportive of every one's inalienable rights than is the economic goal of perpetual economic expansion.
Perpetual Economic Expansion
It seems to me, based on my research, that perpetual economic growth or expansion is not only unrealistic, but dangerous to the economy. I suspect the current condition of Greece is an example of a failed attempt at perpetual economic growth. To spend more than one has is never risk-free. People think what happened in Greece could not happen here because our economy is bigger, etc. It may take longer, but we are, in my opinion, heading in that direction. All one needs to do is check out the National Debt clock (http://www.usdebtclock.org/). It's not going in a positive direction nor is there any plan to stop the increasing debt. The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg also supports the idea that economic expansion on this planet has reached a limit.
The Gold Standard
Alan Greenspan, an American economist who served as Chairman of the Federal Reserve of the United States from 1987 to 2006, wrote an article, "Gold and Economic Freedom" (http://www.constitution.org/...), in which he seems to favor the Gold Standard. Greenspan also favors laissez faire economics. I found this article a bit alarming but also thought-provoking. The Gold Standard is a system in which a government holds a supply of gold in reserve. The government issues currency, notes, etc. the value of which it guarantees by making the currency etc. redeemable for a specified amount of gold. If the government limits the currency it prints and puts in circulation to the value of gold it holds in reserve, the government is keeping to the gold standard. In other words, under a gold standard, if the government has $14 million worth of gold in the vault, the value of non-gold coins and paper currency in circulation will not exceed a total of $14 million. In that case, all holders of government issued currency could theoretically give the currency back to the government in return for gold.
Gold Standard History
The countries of the world adopted the gold standard in the mid 1800's in order to facilitate trade between countries according to an article by Kathy Amadeo at http://useconomy.about.com/.... In 1861 the first U.S. paper currency was printed. In 1862, probably to help pay for Civil War expense, paper money was declared "legal tender". It was called fiat money or greenbacks because its value was not backed by gold. In 1879, the government resumed paying its debts in gold and redeemed greenbacks for gold.
According to Wikipedia (https://en.wikipedia.org/...)
In 1900 the gold dollar was declared the standard unit of account and a gold reserve for government issued paper notes was established. Greenbacks, silver certificates, and silver dollars continued to be legal tender, all redeemable in gold.[16]
According to Kimberly Amadeo
In 1913, the Federal Reserve was created to stabilize gold and currency values. Before it could get up and running, World War I broke out, and European countries suspended the gold standard so they could print enough money to pay for their military involvement. Unfortunately, printing money created hyperinflation. After the war, countries realized the value of tying their currency to a guaranteed value in gold. For that reason, most countries returned to a modified gold standard.
According to Amadeo, "Once the Great Depression hit with full force, countries once again had to abandon the gold standard." According to her, countries were on a "modified" gold standard after World War I. So it was a modified gold standard that was abandoned, not a true gold standard. If there were a true gold standard and countries had stuck with it, the people would probably not have lost faith in financial institutions and consequently not withdrawn their gold from the banks. The banks would not have failed and the great depression of 1932 would not have occurred.
According to Greenspan, prior to World War I, when the U.S. banking system as well as most of the world's banking systems were based on gold, banks would occasionally lend out as much money as their gold reserves could support. At that point, interest rates on borrowing would rise sharply, new credit would become unavailable, and the country's economy would temporarily decline. These recessions were short and mild compared to the 1932 depression.
According to Greenspan, when the U.S. economy mildly contracted in 1927 the Federal Reserve printed more money with the idea of preventing possible shortages of loanable money. The more money banks have to loan the lower are the interest rates they charge for loans. Higher interest rates tend to discourage consumer purchases and business expansion. This is true of the British banking system as well. In 1927, the Bank of England was reluctant to raise interest rates even though their supply of gold was insufficient to support business expansion. The Federal Reserve decided to flood American banks with its created reserves of paper currency in order to lower American interest rates to a level comparable with British bank rates. This plan did succeed in stopping the flow of gold from Britain to the United States. But it certainly was not in keeping to a gold standard. If the Bank of England had raised interest rates in 1927, that would have been consistent with a monetary standard. Had they done so, the Federal Reserve might not have flooded American banks with paper money that was not backed by gold. Had that not happened, the excess credit would not have resulted in a speculative buying spree on Wall Street as well as the subsequent withdrawal of confidence in the economy and the collapse of world economies.
I don't tend to agree with people like Alan Greenspan, but on this point I can see his reasoning. Some would say if England had not been on a gold standard, its abandonment of the standard in 1931 would not have resulted in the failure of banks all over the world. But England was on a "modified" gold standard after World War I, and it would seem to me that England and the U.S. both abandoned even that modified standard in 1927. The Great Depression was more a result of not adhering to the Gold Standard to begin with, rather than a result of abandoning it.
Inflation
What has happened to the Gold Standard since the Great Depression? According to www.history.com, " On June 5, 1933, the United States went off the gold standard, a monetary system in which currency is backed by gold, when Congress enacted a joint resolution nullifying the right of creditors to demand payment in gold." (http://www.history.com/...)
The value of a gold standard is suggested by the following quote from Wikipedia (https://en.wikipedia.org/...).
Long-term price stability has been described as the great virtue of the gold standard.[54] The gold standard makes it difficult for governments to inflate prices through expanding the money supply. Under the gold standard, significant inflation is rare, and hyperinflation is essentially impossible because the money supply can only grow at the rate that the gold supply increases. High inflation under a gold standard is seen only when warfare destroys a large part of an economy, reducing the production of goods, or when a major new gold source becomes available.[55]
In 1973 the U.S. Government "decoupled the value of the dollar from gold altogether" (Kimberly Amadeo).
So the United States no longer even tries to adhere to a gold standard. Is that a problem ? According to Greenspan
The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise.
The above was written in 1966. Prices have definitely risen since then. Personal income? For many of us, not as much. As Greenspan puts it, "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."
Inflation and Human Rights
In terms of abuse and human rights, why is this significant? If one accepts the premise that every one possesses the same inalienable rights to life, liberty and the pursuit of happiness and that the opportunity to be healthy is necessary to life and happiness, then one understands that the cost of living a healthful lifestyle is significant. Inflation or hyperinflation can negatively affect the ability of some people, particularly those on fixed incomes, to afford to live healthfully. Inflation doesn't just negatively affect one's ability to buy luxury items. It also makes quality food, decent housing, etc. less affordable.
Return to the Gold Standard?
These days no countries back their total money supply with gold. If the United States were to revert to the gold standard in isolation, other countries with American currency could demand American gold in return for American paper currency. There may be more paper currency in the possession of other countries than the U.S. government has in reserve supplies of gold. According to Sunshine Profits (ww.sunshineprofits.com/gold-silver/free-alerts/fort-knox-gold/), as of December, 2012 there was $240.8 billion worth of gold in Fort Knox. This is a mere fraction of the foreign debt owed by the United States. There is also the question of whether there is any actual gold in Fort Knox.
A return to the gold standard does not seem to be a practical solution to the problems of deficit spending and inflation.
Fortunately, one on-line author has written a book (http://www.energybackedmoney.com/) that presents a viable "plan for the US Dollar to become a representative currency backed by electricity in units of kilowatt-hours (kWh)."
I favor some sort of standard that would prevent government from creating debt, deficit spending, wasteful spending, and economic disparity. The ultimate measure of any economic reform is how well it ensures every citizen's opportunity to actually experience their rights to life, liberty, and the pursuit of happiness. That measure will involve the cost of those products and services which are needed to live a healthful lifestyle. Those things include nutritional supplements, quality food, decent housing, energy supply, health care, running or walking shoes, therapeutic devices, therapeutic healing, rehab, etc. These things need to be as affordable as possible. Any economic reform that does not achieve this is not a reform worth supporting.