"A Little Bit Goofy, That's OK"

Economic and Financial laws have no heroes or villains.

During World War II, Nazi Germany should have had hyper-inflation, except Hitler ordered everyone to have only so much free cash on the pain of death. All the extra money was put into banks, and the banks converted the money into war bonds, whether the people liked it or not. In other countries it might have failed, but the 1940's Germans obeyed Nazis. No extra money found its way into the economy causing inflation.

Move forward to 1956. Hitler has been dead 11 years, and Germany was no longer occupied by the Allies, but she was broke. Some finance minister hits upon a brilliant idea to honor those war bonds. The Allies didn't care if those bonds were tainted by Hitler because they were more worried about communists and desperately needed Germany.

So the miracle of Germany's reconstruction was financed by Hitler? Not quite. Germany still had no real wealth, Germans just had something they trusted to transfer their productivity into which is all money is. Because they believed in the currency and had worked for it once; they now built homes with it, and these homes then became real wealth to start an economic boom.

In the case of another nation, the U.S., there was no money to speak of in the beginning and huge war debt. But in 1791, Alexander Hamilton took worthless Revolutionary War debt owed the people and transferred it into new United States' bonds, which were then given back to the owners to honor the debt. Same debt, new paper. The bonds weren't gold, but no matter because the full faith and credit of the United States was behind the bonds, and the people trusted this.

The bonds could now act as currency which people accepted because they felt the United States would honor their worth by protecting their value and paying the interest owed on them. The government could also sell bonds to foreigners for gold, which the new government could use until the economy started humming again. ( In 1791, you still needed gold to settle all monetary accounts eventually and pay interest).

In both cases, the countries were desperately short of a medium of exchange. But by inventing a post to hang a hat on, both countries could compensate industrious people for work in something in which they believed with paper money and that work led to the creation of real capital for wealth and expansion.

In this vain, today's problem for the United States is not the national debt. We have always had a debt currency, and the total national debt is the currency. Again to put it simplistically, those bonds in the 1791 acted as cash, but they were also the national debt. Our actual problem now is our yearly borrowing.

You can't sustain a 1.6 trillion dollar yearly deficit because it dilutes the currency and plays havoc with the consistent and predictable parts of the economy. From wages, to prices, to product demand, to true interest rates and worst of all; acceptance of our dollars as the reserve currency, all these are turned on their heads.

In the same light, a little borrowing is fine because with a debt currency, and with the world's reserve currency, it puts a small controlled amount of extra money into the economy for expansion and prevents deflation, especially overseas which hurts our exports.

Or as a friend of mine, a wonderful World War II veteran used to say, “A little bit goofy, that's OK; a lot goofy, that's no good.”

By

Jeffrey Ruzicka

Jeffrey Ruzicka is a retired executive of a small company that specializes in industrial water treatment. He is lives happily with his wife in Western Pennsylvania. He is a contributing writer to FinancialJobsBank, FinancialJobsBankBlog and Nexxt