THE BLOG
11/28/2011 11:48 am ET Updated Jan 28, 2012

It's the Currency, Stupid

Money is a product of the imagination. Certainly, it can feel that way today as the numbers discussed in Congress reach astronomical highs and the digits in our own online bank accounts dwindle and disappear before our eyes. But, let's look at it another way.

Before your shirt existed, someone had the idea to make it. And before you were wearing it, you had the idea to buy it. And when you did, you exchanged money for it, money you made doing whatever it is you do to make money. In essence the money changed hands because you valued that shirt and the shirt maker valued your money. You made a deal. Whether it was in a store or online, you and the shirt maker engaged in one of the oldest activities known to man: commerce.

In that scenario, not only the shirt, but the money, too, started as an idea. The money was "made" when the shirt maker produced the good. His imagination and productivity yielded a return in the form of the dollars you gave him. In a sense, he imagined himself into that money and it became for him a reality. In its purest form, commerce is the product of imagination, enabled by money as a medium of exchange.

Yes, we make money. Why do we make it? In order to engage in commerce, which is essential to civilization. Sometimes the commerce is born of a need and sometimes of a want, but unless we're bartering we must have money to transact the deal.

In order for money to work, it has to have meaning. The shirt maker accepts money because he knows the value it holds. It has meaning for him. It also has meaning for his wife who uses the money to feed the family. If a customer wanted to exchange pebbles for a shirt, it would be up to the shirt maker whether or not he accepted the deal (maybe he likes pebbles) but ultimately it wouldn't make his wife very happy because she can't use pebbles at the market. At the market, the pebbles are meaningless. And so everyone's happier and wealthier when we agree to a common form of money... with meaning. When we imagine money, it is this money we call to mind.

Imagining money is a good and healthy thing. It stimulates productivity, feeds dreams and gives man a sense of purpose. But there's a difference between imagining money and imaginary money, which is what we have today.

Imaginary money is backed by nothing. It appears out of thin air and disappears without a trace. This kind of money can facilitate commerce between men of good faith for a while, until those men begin to lose faith in it. When that happens, a chain reaction starts that ripples through the economy and far beyond. Trust is eroded, which leads to insecurity, which leads to fear, which leads to hording, which leads to an imbalance in resources, which leads to an imbalance in power, which leads to misguided efforts to right wrongs, which leads to quick fix solutions, which mend things temporarily today at the expense of tomorrow.

And this is where we find ourselves today as demonstrations continue in Liberty Plaza and around the world. Protestors point to the economy without understanding the currency. We have been given imaginary money and we have lost faith - in our ability as individuals to make enough to live on, and our ability as a nation to make enough to pay debts. As money gets abstracted into a concept, it requires theories and strategies to manage. This is better left to the experts and so we cede power over our own resources, our own imagination.

We deal with the results of our unconscious degeneration daily, without ever tracing the root cause back to the currency - not the coins and bills, but the mechanism, the way the currency works (or doesn't). Healthcare, education, the environment and of course, the economy... all of these areas of lack are by-products of a deficiency in the mechanism of the currency.

How did we get to this point? By ignoring the natural order of things.

The natural order of things requires money, as a medium of exchange, to first be created or saved then spent or exchanged. When a nation - in order to support its grandiose plans - departs from this mode of operation, and drifts toward the unnatural model of spend first pay later, it must borrow money. Sure, everyone can agree that waiting to have wealth on hand to pay for things is better, but it's a long, slow process for which today's politicians have no patience.

Loans (generally from other nations) can be transformed instantly to a note that is bearing interest and backed by taxes. A dollar is born, not from existing wealth, but from credit. Politicians love this kind of money because it gives them the ability to play the role of Robin Hood, giving away money freely.

This money, fiat money, is a loan, a debt and is backed not by a commodity or store of value but by the ability and will of the citizens to pay for all those grandiose plans some time in the future. The problem with this money is manifesting around the world: the future is here and the debt is too big. Citizens revolt and start to default. Now, this money that was created out of thin air returns to air. It disappears revealing its essential emptiness: imaginary money.

An old parable is applicable to describe this timeless human weakness for immediate gratification and the inability to consider the future in the present moment (temperance): "the fathers eat unripe sour grapes and the teeth of the children are stumped."

So the next time a politician promises to fix the economy, fight inflation and clean up Wall Street, tell him he needs to find a more imaginative solution. Tell him: "It's not the economy, stupid. It's the currency."