Fudging Numbers

It all seems so systematic, arranged, and orderly.  Sixty seconds make a minute, 60 minutes make an hour, 24 hours make a day, and one day equals one complete rotation of the planet earth. Roughly every 30 days the moon orbits the earth – which is one month.  Then every 12 months the earth orbits the sun – which is one year. So far so good…right?

Oldish German calendar.

Image via sciencesource.com

But here’s where the nice and neat order of it all breaks down.  For if you try to measure one of earth’s orbits of the sun in days it’s not so divinely tidy.  For it takes 365 days plus an inconvenient 6 hours to fully complete the cycle. Nonetheless, we don’t let these inconvenient 6 hours hamper our perfection.

We’re humans, after all.  We innovate, invent, and make the world in our image.  So when the numbers don’t jive, we do what must be done.  We fudge them. We create an off balance account, we concoct a new theory, we contrive negative interest rate policy…and we invent a leap year.

This coming Monday is the day the books must be reckoned.  Peering into our off balance account we find 24 accrued hours that must be tallied up and rectified. Consequently, we must have a day of correction for the disorder of the last four years.  We must resynchronize the calendar year with the astronomical year.  Moreover, we must reground our measuring system with its baseline – its reference point.

Did you really think we’d let you get away with that calendar-fudging, oh Julius? February 29? Seriously?

Photo credit: MGM/Turner Ent.

Without this resynchronization, what’s a year really measuring?  Perhaps, the calendar wouldn’t get too off kilter for a decade or two.  But in just 28-years the calendar would be off by an entire week.  Not long after that, the calendar would be debased to nothing more than etched lines inside a cave dwellers grotto.

Helicopter Drops

So goes the dollar – or any paper money – when it’s not backed by gold or some other commodity that can’t be created at will.  For without a stable base to hold its supply in check, what’s a dollar anyway?

It’s abstract, indefinite, and arbitrary.  It can be created out of thin air at the whims of the Federal Reserve.  A pocket full of dollars one day and you can buy the things you want and need.  On the next day these same dollars can revert to their intrinsic value…fire tinder or toilet paper.

Gold to paper currency conversion once limited the Federal Reserve’s money creation games.  But that was before the U.S. severed the dollar’s relationship to gold and commenced the dollar reserve standard.  Prior to 1971, a foreign bank could exchange $35 with the U.S. Treasury for an ounce of gold.  After that, when foreign banks handed the U.S. Treasury $35, they received $35 in exchange.

Nixon announces that he will “temporarily” default on the convertibility of the dollar into gold. One cannot show this video often enough, because it is such an excellent example of a government official lying as soon as he opens his mouth, with every single sentence he utters. It also betrays a frightening degree of economic ignorance.

The gold default and the debtberg… Nixon has really shown those speculators what’s what! – click to enlarge.

Unlike gold, which has no debt obligation or counterparty risk, dollars can expire worthless when their promissory obligation is defaulted on.  Alternatively, they can be inflated to nothing when a desperate Federal Reserve moves to dropping suitcases of money from helicopters over major urban centers.

If this helicopter drop concept is new to you let me assure you that it is no joke.  In fact, this is what former Federal Reserve Chairman, Ben S, Bernanke, said the Fed would do in a time of financial crisis.  He laid it out very clearly in his November 21, 2002 speech, Deflation: Making Sure “It” Doesn’t Happen Here. Then as Federal Reserve Governor (now former Chairman), Bernanke had the following to say…

“The U.S. Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.  By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. Government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the price in dollars of those goods and services.”

Later in this same speech, Bernanke made reference to a “helicopter drop,” alluding to a central banker hovering in a helicopter – dropping suitcases full of money to individuals.

Prosperity through the printing press – a proven concept since John Law!

Cartoon by Gary Varvel

Day of Reckoning Imminent

Unfortunately, that day is approaching.  For without the anchor of a gold standard, financial imbalances and debt creation will continue to grow to commanding heights.  Inflation, resulting in an implied default, will likely be more politically expedient than an outright default.

In the meantime, even if the dollar isn’t worthless – yet – its incessant variability is an incessant problem.  How does one save, invest, and accumulate wealth when the dollar’s monetary base is continuously inflated?

When a carpenter measures the length of a cabinet as being 3 feet, he’s certain that the length measured as 3 feet will always be 3 feet.  No more.  No less.  To the contrary, when a shopkeeper prices a 24-ounce loaf of bread at $3.93, he’s not certain that the value of one loaf of bread will always be equal to $3.93.  In fact, in 1971 – the year the dollar’s last tie with gold was severed – he would’ve valued three 20-ounce loaves of bread equal to $0.89.

Has the usefulness of a loaf of bread, on a per ounce basis, really changed 1006 percent?  Has its quality somehow become 1006 percent better? Of course not.  Rather, the baseline used to measure the value of a loaf of bread has been twisted and contorted like a politician’s spine.  The quantity of dollars in existence has increased.  Accordingly, the unit value of the dollar has decreased.

Broad true US money supply TMS-2 – the era of Bernanke and Yellen has seen the amount of money in the economy rise be nearly 125%. Let’s call it “the courage to print” – click to enlarge.

Indeed, prices of individual goods and services will fluctuate to account for natural changes in supply and demand.  But when money is anchored to a stable reference point, like during the classical gold standard of the 19th century, overall prices will by and large be stable.

With respect to recording the passage of time, leap year’s necessary, vital, and appropriate, for preserving the calendar year’s conformity with its baseline.  So, too, today’s money needs a stable base to derive its meaning and value from.

Without such a reference point, we’ll just continue to spin out of orbit.  Money will continue to accrue more zeros at the end of everything it measures.  Yet what good’s a $100 dollar bill if it only buys you what a $1 dollar bill did before?

So enjoy Monday’s imminent day of reckoning.  The time was there all along…it just needed to be reconciled.  Alas, we have a startling suspicion that reckoning the distortions of the dollar reserve standard will not be so amiable.  Though it’s necessary, all the same.

Helicopter Ben: He sure earned his nickname. The bill for all the fun is yet to be presented in full, but presented it will be.

Illustration via forbes.com

Charts by: St. Louis Federal Reserve Research

Chart and image captions by PT

M N. Gordon is the editor and publisher of the Economic Prism.

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