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January 2009
February 2009

2009-01-14 »

A little secret that will make the world fall apart

I remember one really critical part of the Larry Smith Economics lectures I attended in university. It was the day he told us the secret that, he claimed, if it got out, would make the whole economy grind to a halt. Ironically, the economy is suffering dramatically, but not because the secret got out. In fact, the so-called "economic stimulus" plans being executed and/or proposed aren't really going so well, probably because people don't know this secret.

What's Larry Smith's big secret? Simple: Money is worthless.

Deep down inside, you know this is true. Money isn't good for much unless someone else is willing to take it from you in exchange for something with value. There's a lot of talk about Ponzi schemes lately; but money itself is the biggest Ponzi scheme of all. People invest real work in exchange for "shares" of this "economy" thing, in the hopes that they can someday redeem those shares - plus interest - for something useful.

Most of the time, the valuelessness of money doesn't really matter. As in a Ponzi scheme or a run on the bank, unless everybody tries to cash out at the same time, nobody ever notices that the bank didn't actually still have all the money you gave it in deposits. Conversely, unless everybody tries to actually exchange their money for goods and services all at once, nobody realizes that the economy didn't actually have all the goods and services you thought you could pay for. When people realize it all of a sudden, that's when you get inflation.

But people aren't worrying about inflation right now. They're worrying about deflation. Why? In fact, because the opposite problem has occurred: people were all cashed out, exchanging all their money - more money than they had, ie. credit - for goods and services. And now they've changed their minds. They want their money back so they can keep it and not obtain any goods and services after all.

Because, as it turns out, most of those goods and services that seemed so life-critical yesterday are kind of a waste.

But oh no! My job was producing those useless goods and services! And if people don't buy my useless goods and services, I won't be able to make money, which means I won't be able to buy food, which means I'll starve! PLEASE, SOMEONE, STIMULATE THE ECONOMY SO I DON'T STARVE!

Whoa. Stop. Take a deep breath. Think about what you just said.

You just said that if people like you don't keep producing stuff nobody really needs, then there won't be enough food.

Well, who the heck decided that "food" is in the category of "stuff nobody really needs?" Doesn't it make more sense that if people stop producing stuff nobody really needs, then there will be more time and effort available to produce stuff that people do need - like food and shelter?

It does make sense. Sadly, things aren't so simple.

The fact is, people use money as a placeholder - one that determines what people get to work on. The people who produce the food - even though there's more than enough food for everyone - won't give it to you unless you have money. And if you can't find something important to do, you can't make money, even if there is nothing important to do.

The depressing thing about the great depression of the 1930s, as well as the current potential one, is that there may simply be not enough important things to do to keep everyone busy.

It's hard to imagine a realistic solution to this problem.

I mean, we can't just give people food for free.

That would be ridiculous.


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