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Are We Out of the Bretton Woods Yet?

Here’s a quick primer on what the budget debate involves:

The Federal Accumulated debt (what we owe everyone) has exceeded 14 trillion dollars. That means that we can’t pay it back, but worse, we can scarcely pay the interest to all of our creditors, who include foreign countries, organizations and individuals, such as whoever buys treasury bills. The Democrats have taken the attitude, “Since we can’t hope to pay any of this back, let’s just print more money, and as long as we are going down the toilet, let’s go out with a loud flush.” The Republicans have taken the attitude, “Bernanke has already printed 600 billion dollars to accommodate your spending binge, the dollar has, predictably lost value, and as long as we are going down the toilet, let’s not plug up the plumbing.”
If we were a household we would be people who have run up their credit card debt, and can no longer pay the principal. We are paying the interest. So why can’t we just print more money? Here’s why: The United States stopped being a country with its dollar backed by gold, and became a corporation with each and every dollar representing a share of the company. This officially happened back during the Nixon administration when the president more or less indicated, “the hell with Bretton-Woods, we’re off the gold standard.” Bretton-Woods was put in place to help stabilize Europe after World War II. We guaranteed to Europe that they would be able to always get a certain amount of gold in exchange for a dollar. Long after Europe needed stabilizing, the French opportunistically started calling in American Gold in exchange for dollars, using the guarantees set forth by the Bretton-Woods treaty. They retrieved tons of Gold during a time when the price of gold was soaring and they were getting it at bargain prices. Nixon basically said, “Enough of this, we’re off the gold standard.” He told the European investors to basically go French themselves. A pall of silence was instantly cast across Europe and all of the investors in France immediately began to Alouette themselves.
The reason you can’t just print money is this: An American dollar is like a share in a company. If a company offers a million shares at ten dollars per share, and I buy one share, and you have one share, we each own a very small portion of that company, one-one millionth. Now, if the company says, “You know, we could use some more money, let’s just print another million shares and sell them at the current price of ten dollars.” What has just happened to you and I ? Well, we got screwed: Instead of owning one-one millionth, we now only own exactly half of that. That’s what all of the investors throughout the world are thinking when Bernanke goes and prints money. “Quantitative easing” he calls it. While it might be fine to print more shares when there is an incredible demand for your stock, and the printing of more shares is appropriately adjusted into the value, it is not good to do so when the demand is down and you are only doing it because you need money. This is what the Obama administration is doing. They need money to support their binging. They argue that a weakened dollar will invite more foreign purchases. While that might possibly have been true if Europe and Asia were experiencing a robust economy with substantial growth, that simply is not the case right now.
So the Democrats have thrown a tantrum because the credit cards are going to be ripped up.
“You can’t keep charging! There is no green money to pay the bill with!” the voice of reason says.
“Of course there’s money!” they proudly reply. “And plenty of it! I can just take this other card to that machine over there and get plenty of money out of it to go pay the bill!”

Copyright April 10th, 2011 by Earnest Publications


 




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