As a child I used to enjoy the odd game of “Monopoly” with my siblings. Not the best preparation for a Muslim perhaps, particularly as any real “monopoly” is clearly forbidden in Islamic law, but instructive in many interesting elements of success within the capitalist dream. Simply put, the game focuses upon circling the board as quickly as your dice will allow, collecting us much property as your funds allow, then squeeze out your opponents by building high rent earning houses and hotels on said property. As you pass the start point (Go) you collect $200 (obviously the US version of the game) thereby mirroring the regular feature of collecting a salary/wage in real life. Someone acts as the “Bank” and dispenses the brightly coloured yet rather flimsy monopoly money notes which are used for buying property, houses, paying rent, etc. One does gain an appreciation of the value of money of sorts, yet I still think it a bit sad that the winner effectively forces the losers into penniless poverty!
Dominating the financial news this past week in the US has been the debate between Republicans and Democrats over whether the US debt ceiling should be raised. The US for many years has operated a very large budget deficit which has led to the worlds largest debt position – now rapidly approaching $15 trillion. This is not the full extent of the problem however, as the US has many more trillions in yet to be funded or fully budgeted future obligations such as Forces pensions, Medicare and so on. The debate about the debt ceiling is about authorising the American government to continue with is high spending and high deficits. When the conversation gets into discussing trillions of dollars – a bit like the concept of Monopoly money – it can be difficult to get a real feeling for the full extent of the problem. What is a trillion dollars or 100 trillion dollars?
To answer this reasonable question let us turn to a simple analysis presented on the following blog accessible here which has attempted to put the key figures of the US economy down to the level of a US family. Here’s the picture – US key economic points quoted per American family:
$50,000: Yearly Income
$74,591: Yearly Expenses
$(24,591): Yearly Deficit
$(295,632): Short-term revolving debt at artificially low rates (like credit card debt but charged at 3%)
$(2,372,632): Promises to pay which haven’t been funded yet
$1,292: Republican friends suggested budget cuts
$137: Democrat friends suggested budget cuts
(the last 2 numbers represent what the Republicans and Democrats have proposed to solve the problem).
Multiply the above numbers by 47,620,000 (households) and you get the full fiscal picture for the United States Government in 2010:
$2.4 Trillion: Revenue
$3.6 Trillion: Budget
$(1.2) Trillion: Deficit
$(14.1) Trillion: Debt
$(113) Trillion: Unfunded Liabilities (Social Security, Medicare, Medicaid)
$0.0615 Trillion ($61.5 Billion): Republican proposed budget cuts
$0.0065 Trillion ($6.5 Billion): Democrat proposed budget cuts
For the “at the family” level this is nothing short of a disaster. Effective insolvency. Bankruptcy. Unsustainable. Yet this is the reality of the US economy. How can this continue?
To continue my Monopoly analogy the US has some very strong “Get out of Jail Free” cards. Where any sane bank would refuse a family from maintaining $300,000 in short term debt with a fairly low income and high spending (not to mention the enormous future liabilities) the US is the world’s largest economy, biggest buyers (importers) and their credit has been seen as rock solid. If you can ride out the storm and come back stronger with a growing economy, creditors will give you leeway when times are tough. The other key to this discussion is the US$’s defacto position as the world currency since Bretton Woods in 1944 when the US came out of the second world war as the main superpower and financial guardian. Bretton Woods brought a form of stability by pegging the US$ to gold at a rate of 35$ per ounce of gold. All other world currencies fell into line and committed to fixed exchange rates against the $ and therefore against gold. Yet when European powers noticed in the mid and late 1960’s that the US was printing more dollars than they had in reserve they started to redeem dollars for gold. The US in response unilaterally took the $ off the gold standard and free floating paper money now rules. The key for this is that government central banks can control money supply without recourse to holding gold or in fact any real asset.
And my how they have used that facility. Current Federal Reserve chairman Ben Bernanke has gained the notorious nickname of “Helicopter Ben” for stating that in the event of crisis all one needs to do is print more money – drop it from the skies if necessary – to get the economy moving again. Only this time it hasn’t worked. The US economy is in the doldrums. Unemployment is more than 9% and continues to rise, growth is anaemic at best and likely to start dropping again, and consumer confidence continues to plummet.
The housing market has not recovered and banks are not lending. Against this backdrop Obama is trying to force through a new debt ceiling (the limit to which the US government can spend money). This rather flexible “ceiling” has been raised 33 times since it first was raised over the US$ 1 Trillion level in September 1981 (and is now at $14.3 Trillion). If foreign powers don’t fund the deficit there is little option but for the US to print more money.
Of course this money printing is not open to the average family – unless one wants to frequent the real prison following charges of counterfeiting. But it brings into sharp focus why the authorities who continue to debauch the world’s currencies continue to get away with it. The man in the street suffers from the inevitable inflation in food, energy and other prices and eventually the collapse of the currency. When the confidence in the currency dies – when money dies – it is not a pretty sight. Money supply induced hyperinflation is a serious nightmare. In Monopoly the money is very flimsy and quite transparent but at least there is a limit to it. Perhaps we should reserve the Community Chest card which forms the title of this article for the Bernanke’s of this world.
Jamal Harwood is a regular contributor to New Civilisation. He is a lecturer in Finance, and a member of the UK Executive Committee of Hizb ut-Tahrir Britain. Hizb ut-Tahrir Britain has produced a new report which will be available soon setting out the 10 most common arguments against the Gold standard and how the Islamic State will implement a new Gold/Silver standard.