The Cross of Paper: The Downfall of the U.S. Economy

 

By Peter Van Schaik

 

     During the worst of the recent recession, when the entire economic system of the United States, and nearly the entire globe, seemed ready to implode, many fingers were pointed at many different causes of the financial debacle. Some maintained it was the greedy speculators on Wall Street; others blamed the housing bubble. Many blamed the high cost of energy and some blamed Capitalism itself, claiming it was broken, in complete disarray, and only massive intervention by the Federal Government could save us from the Capitalist Scourge.

     While all these reasons may have played a role in our financial problems, they have one thing in common: They are all symptoms of a much deeper and more pervasive problem.

     The primary problem isn’t all that esoteric. In fact, it is about as simple as it could possibly be. The primary problem, the main malfunction, in our economic system is simply this: Too many people confuse money and financial instruments with real wealth.

     The mercantilists of old thought a nation’s wealth consisted of its stash of gold and silver. Today the neo-mercantilists, thinking they are a bit more sophisticated than their naïve brethren of yesteryear, believe a nation’s wealth is the pile of paper investments which can be created with the tap of a few computer keys. The belief today is a nation gains wealth by creating and trading stocks, bonds, derivatives, credit default swaps, and securitized debt. The belief today is a nation gains wealth by simply bidding up the price of existing homes. That belief is fundamentally and fatally flawed.

     Adam Smith tried to warn us of the dangers of mercantilism over two hundred years ago. In Wealth of Nations Smith wrote

 

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. This maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce. (Book IV, Chapter VIII)

 

 

Yes, the mercantilists may have had it wrong in the 1700’s but we’ve taken the absurd notion of what constitutes a nation’s wealth one giant step further than in Smith’s day. It’s not even the production of real goods which is considered the ultimate end in the modern economy. Instead the ultimate end is considered to be the production of the piles of paper which we are convinced is real wealth.

 

     Smith believed a nation’s true wealth consisted of the goods and services available for consumption by the citizens of all economic classes and the means of the production of those goods and services. That’s why in Wealth of Nations he also wrote, "...the wealth of a country consists, not in its gold and silver only, but in its lands, houses, and consumable goods of all different kinds." (Book IV, Chapter 1) Adam Smith would instinctively know a nation’s real wealth could not possibly be paper money and paper financial instruments.

 

     Money never has been and never will be real wealth. At best money can represent real wealth but it will never be real wealth. We can take our money down to the local market and purchase real wealth. We can take our real wealth down to the market and purchase money. But money is not the real wealth of any economic system and for an economy to truly flourish in the 21st century that fact has to be accepted and believed.

     The same can be said for the myriad forms of paper investments. They are not wealth. At best they can represent real wealth but at their worst they bring about a severe misallocation of an economy’s resources, taking them out of production of goods and services and diverting them to non-productive endeavors.

     Throughout the 1980’s and 1990’s, before the largest financial bubble ever known burst, more and more of our resources were being used to produce financial instruments. More and more of our resources were being used to bid up the price of the financial instruments. And more and more people deluded themselves into the erroneous belief that the nation was actually gaining wealth.

     For a generation some of our brightest minds have been flocking to Wall Street to create and trade paper instead of flocking to Main Street to create the real goods and services which we consume everyday to enhance and enrich our lives. For a generation some of our brightest minds have been flocking to Wall Street to create the illusion of wealth while we’ve allowed more and more of our real wealth to be produced overseas and we’ve traded our factories and other productive facilities to foot the bill.

     In his speech at the Democratic National Convention in Chicago in 1896, William Jennings Bryan famously declared, “You shall not crucify mankind upon a cross of gold.” Instead, as the 21st century has started to unfold, we’ve nearly crucified mankind on a cross of paper.

 

Copyright 2009 – Peter Van Schaik