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Throughout most of history, money has been a measure of value. Everything sold had value to the buyer, and thus Gross National Product was a decent measure of how much we're getting out the
world. Thus anybody spending money was good because
there must have been an associated buyer and thus some value.
Before August 15, 1971, this held true for
governments as much as anyone, because that money was ultimately
redeemable for something physical ($35 was supposed to get you
one troy ounce of gold). Thus, supply is theoretically finite,
as there is a link to the physical world, which has important
consequences.
First of all, the immediate connection between
fiscal policy and the real world was severed not just for
America, but most the rest of the world as well, since the
dollar functions as the global reserve currency. This is
somewhat analogous to a household switching from cash to credit
card for managing finances - the government, and by extension
the whole economy, gains the ability to use future revenues in
the present. Using a credit card to pay for everything can
actually be beneficial, if you still manage your finances
prudently. By and large, however, Congress has done nothing the
sort for the past 40 years.
The more important consequence, however, is
that, unlike with a credit card, money supply for governments is
theoretically infinite. Does this mean money has no value? Of
course not! If you disagree, go out and see if you have any
trouble giving away your dollars. So where does the value come
from? Money's value comes from people's willingness to accept
it for things they want. So no problem, we all accept dollars,
right?
Well, not really; the catch is in how many dollars we accept for
any given thing. After all, how does a
government manage to pay for anything? Sovereigns
have always been able to mint, and later print, money because of
their ability to collect taxes by punishing those who defy the
sovereign's will, a.k.a. the law. All
throughout history, money has been either made of, or was
redeemable for, something people actually wanted. It still is: the freedom to live as you please.
When we let Nixon sever that last link between money and the
physical world, we went from a physically accountable,
asset-based economy, to a credit-based economy whose only
accountability is in how much the holders of the currency will
stand for. That is to say, we went from a civilized world where
we settle most of our differences based on the transfer of real
world items, to a world where value is based more directly on
one party's ability to impose its will on the counter-party.
There may be ways mitigate some of the problems inherent in fiat
currency. Keeping a balanced budget is one part of the
puzzle. Regardless, though, in a debt-based economy inflation
is a fact of life, which makes cash a sort of hidden tax and investing excess
funds almost mandatory. That is just one factor that has
changed the fundamental nature of
markets in recent decades. My subscription
service combines real-time distribution of old-school
fundamental analysis with an experienced understanding of modern
markets to help individual investors at least stay of
ahead of inflation as well as the new breeds of more aggressive
and sometimes harmful institutional investors.