I’m no economist but I do find physics interesting. Laws of physics are immutable, generally speaking. One of those laws is that neither energy nor matter can be destroyed or created–just transferred.
A truly stable economy should work the same way, in my estimation. The economic law of "supply and demand" is pretty similar to that physical law I mentioned above, when you think about it.
The economic law of "supply and demand" says that prices are determined based on those to things, supply and demand. High supply means low prices (to make sure you sell as many as you can) and low supply means high prices (to make sure you make as much money as you can). Demand works similarly but is inverted, with high demand making prices high and low demand making them low. In short, if you create more supply, the price goes down.
When it comes to money, the physical laws should apply here, too. After all, paper money used to represent gold. When new deposits of gold were found, the value of all gold would drop. However, back in 1913, the Federal Reserve Act was passed and our current system of banking was created. Any kind of precious metals were cast aside and money stopped being based on the value of gold and started being based on the "good credit of the United States of America."
In other words, the US dollar came to represent the productivity of the American economy.
Now, you can’t just create money any more than you can just create matter or energy. The latter can’t be done because the universe won’t let us. However, because the concepts of money and economy are entirely man-made, the universe has no such regulations over our monetary system.
As a result, new money can be, and often is, injected into our economy. This money is either effectively created from nothing (lended/borrowed) or is literally newly created money (when banks or the USG borrow from the Fed). Either way, the result is inflation and, finally, a weak dollar.
And when the US dollar starts getting compared to the Canadian dollar (as it has been for about a year now), you know things are bad.
This morning on Democracy Now, Dennis Kucinich reminded us that our entire financial system is based on debt. The below is an excerpt that comes from a transcript (here: www.democracynow.org/…s_congress ) of an interview Dem Representative Dennis Kucinich gave to Amy Goodman this morning:
AMY GOODMAN: The issue of corporate compensation? According to the Institute for Policy Studies, chief executives of large US companies made an average of $10.5 million last year, 344 times the pay of the average worker.
REP. DENNIS KUCINICH: Well, this is really a fundamental issue in our society. Again, itâ€™s all about how the wealth accelerates to the top and how work is not respected or rewarded for its own intrinsic value. Weâ€™ve really moved, you know. Weâ€™ve made a transition in our economy from industrial capitalism to finance capitalism. And with this debt-based economy that we have, where we keepâ€”this public and private debt keeps exploding, as it has underâ€”as it did under Alan Greenspan, quadrupling in a period of twenty years, we see ourselves in a position where the debt just keeps building and building and building, and weâ€™re calling that economic progress. It is not.
We need to challenge again the underlying assumptions about a debt-based economy, about whether or not we should revisit the 1913 Federal Reserve Act, which has an unfortunately privatized monetary system and created a system which includes banks having the ability to create money almost out of thin air with a fractional reserve. We have to look at the implications of that, maybe put the Federal Reserve under the Treasury and have the Treasury really be responsive to the interests of the American people and keeping the economy going.
Yep, the Federal Reserve is a private entity. We don’t vote for anyone who runs it, though we do vote for the guy who appoints the guy who runs it (aka, the president appoints the Fed Chairman). But considering how much control the Fed has over our lives and our money, it seems like we should have a bit more control over them. I really wish Kucinich had a real chance of ever winning the White House. I think it’s his honesty that prohibits this.
Wow, just read that the bill didn’t pass in the House. Kucinich got his way and Wall Street is totally panicking. Looks like that chant I heard down on Wall Street last Thursday was right: "You break it! You bought it!"
Dig that CRAZY irony!!