The Gathering Economic Storm - Pt. 2

If you are economically clueless, you are ripe for a future shock. Here's a quick self-test to check your economic IQ.  True/false? 

1. All modern currencies (like the American "Federal Reserve Note") have intrinsic value. 
2. Federal Reserve Notes, from an accounting standpoint, are assets. 
3. Inflation is created by price increases. 
4. Inflation is unavoidable. 
5. Government is the primary defense against runaway inflation.

If you answered "false" to all of the above, we're on the same page!  If not, here's a quick commentary.

1. Modern currencies are "fiat" currencies and have virtually no intrinsic value.   (I read somewhere that it costs about four cents in material and production costs to produce a Federal Reserve Note, regardless of its denomination.  So, I guess you can say it has some value as a piece or paper.)
2. Federal Reserve Notes are NOTES.  They well fit the description of a liability, according to the definition of the International Accounting Standards Board.  Unfortunately, the only way in which you can receive "payment" for this note is by receiving another Federal Reserve Note.  (The loan will never be repaid with something of value, it will simply be "repaid" with a new note.)   It is true that because these "notes" are legal tender, you can currently buy stuff with them from willing sellers.  But you cannot get intrinsically valuable goods like gold or silver from the government as a "payoff" for your "notes."
3. Inflation is CAUSED by an increase in the supply of money in relation to goods.  When governments expand the money supply, which is facilitated by the acceptance (among the public) and increase (by government sponsored printing presses) of fiat currencies, they cause inflation.  The RESULT is that prices go up.   My first new car cost $2,500 in the late sixties.  Today in 2007, an equivalent vehicle would cost about $25,000.  This metric suggests that there are ten times as many dollars in circulation today as there were in 1967.
   
4. History demonstrates that in periods where money has intrinsic worth, price inflation (and deflation) ebbs and flows according to supply and demand factors that attach to each class of goods.  A relentless and universal increase in prices for all classes of goods and services, our modern experience of inflation, is the norm when fiat currencies proliferate.
   
5. From a historical standpoint, governments have been the primary cause of runaway inflation.  Notably, a number of governments have collapsed from hyper-inflationary forces they themselves unleashed.

If you didn't do too well on the quiz, I'm not trying to make you feel badly.  I would simply suggest you do some study.  If you understand the big picture (the five points above are just the tip of the iceberg!), I think you will conclude that the economic foundations of our culture are NOT SOUND.  Should a global crisis arise, we could easily think that a "whole new approach" to buying and selling is needed.  The solution might be a beast!  Are you ready?