[photo caption/credit: Over-Confidence is Self-Delusional (courtesy Google Images)]
“confidence: . full trust; belief in the powers, trustworthiness, or reliability of a person or thing: We have every confidence in their ability to succeed. belief in oneself and one’s powers or abilities; self-confidence; self-reliance; assurance:”
If you’ve followed the news about the economy for even a brief amount of time, you’ve almost certainly read article after article where someone in a position of authority talks about the need to “maintain public confidence”.
Strangely, they never seem to say exactly what that “confidence” should be in. Is it confidence in our leaders? Confidence in our public-school-educated children as the “future of our country”? Confidence in what?
Nevertheless, it appears to be economic gospel that, no matter what, in order to protect the economy, we absolutely must maintain public confidence!–in . . . something . . . .
OK. Sounds great. Let’s all agree to maintain public confidence. But, we’re still left to wonder “confidence in what”? What, exactly, is it that we must have confidence in in order to sustain our economy?
That question has faintly bothered me for years. I didn’t face it directly and I didn’t find an answer–at least not until a few days ago, when answer became almost laughably obvious. Once I saw that answer, I nearly giggled about my own inability to see the obvious for so long.
In order for you to see what we must have confidence in if the economy is to be sustained, answer a question: What kind of monetary system to we have?
That’s an overly-broad question. There might be six or ten plausible answers. But virtually everyone who’s read about economics for long knows and will agree that we have a “debt-based” monetary system.
Get it? Now do you see?
Well, if we have a “debt-based” monetary system, all of our currency and financial affairs are based on paper and digital debt-instruments (like stocks, bonds, Federal Reserve Notes, bank accounts, pension funds, etc.). We treat these debt-instruments as forms of wealth and even money–but, in fact, they are nothing more than promises to pay.
For a debt-based monetary system (and associated economy) to function, the people of that system must believe that the “promises to pay” (that are memorialized with their paper debt-instruments) will be kept.
For a debt-based monetary system and economy to be sustained, the public must have confidence that all of those promises to pay will be kept and all of the “debts” will be paid.
That’s it. Get it?
The mysterious “confidence” that must be maintained for our economy to prosper is confidence that the debts will all be paid.
I don’t mind accepting a perfectly worthless piece of paper (debt-instrument) in return for my work or private property, so long as I am confident that that paper-debt instrument will one day be redeemed and paid in full. So long as you, I and all of our friends and neighbors remain confident that a $100 Federal Reserve Note (debt-instrument) will certainly be paid in full by providing me with a full 100-dollars’ worth of goods and services, the debt-based monetary system can continue to function.
The value of our paper debt-instruments is directly dependent on the public’s confidence that the underlying debts can and will be paid. I will accept your IOU for $1,000 if I have confidence that you can and will repay your debt. If I don’t have that confidence, I will not accept your IOU.
If people lose confidence that a $10,000 bond (paper debt-instrument; promise to pay) will provide them with the “promised” $10,000 in goods and services, the value of that bond will drop from $10,000 to, what? $9,000? $5,000? $50? (Ask Enron how low your stock can go if investors lose confidence.)
If enough people lose confidence in the idea that all of our debt-instruments will be redeemed and paid in full, the whole monetary system and economy will flush right down the pipe.
Now, tell me this: What is the probability that the $18 trillion National Debt will be paid in full?
Not so good, hmm?
After all, there are about 320 million people in this country and if we divide the National Debt by the population, each American’s “fair share” of the National Debt is about $55,000.
Written by Alfred Adask
Full report at Adask’s Law
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