Is the American Economy Really About to Crash?

There is some talk around the internet that we are heading for an economic crash in 2015, despite the government saying that the economy is recovering. Are these dire predictions based in reality? Many of these financial wizards are claiming that the dollar has no worth because it is not backed by gold. Is this true? Does the American dollar need to be backed by gold, or is this a common misunderstanding of the nature of money and currency.

Is the American Economy Really About to Crash

If deep thought is given to the matter, it becomes clear that money functions as a medium that represents the energy of humans. What do I mean by that? All of human effort, ingenuity, creativity and labor that goes into making something useful or providing someone with a service can be given a monetary value and be exchanged for some other item or service. We as humans have set up a world where we exist by exchanging our energies: we place a value on what we do, we translate our expenditure of energy into currency, and we use it to get the services and items that we need. The currency itself does not need to be valuable, it needs to be measurable. That is to say, that it needs to be in units. We can take something malleable like metal and make it into little disks and count them — so many disks for this, so many disks for that, or we can have paper with numbers written on it.

Currency does not need to be valuable: it needs to be something that ordinary people cannot make themselves. If everyone were forging currency it would defeat the system of energy exchange. Gold and silver were the perfect medium for currency before the age of advanced technology. Precious metals were deep in the earth, or floating down rivers, and not easy to obtain. They could be minted into identifiable coins and put into circulation. The more rare metals were more valuable than the more common metals.

Many people have difficulty in seeing that gold’s value is that it is a perfect electrical conductor so that energy is not lost when it moves through gold , and it can be used in making jewelry and statues. It is valuable because all of us agree that it is valuable and we give it a price per ounce. It is not especially useful, and so in that sense, it is not valuable.

Many of us are stuck in the idea that if we exert our energy in hard labor of one sort or another, we should be rewarded with gold, and that our paper currency should be a promissory note for gold or silver.

The problem is that money does not represent quantities of gold — it represents the expenditure of human energy, and as the population of the planet grows — the currency needs to grow with it. The more people that there are manufacturing goods of all kinds, and providing services of all types, the more need there is for currency to represent the energy that is being expended. There is a fairly limited amount of gold on the planet in comparison to the population, and it is not being mined at a rate that keeps up with population growth, which means that if it were tied to the dollar, the value of the gold, and the dollar would have to keep continuously going down.

It is like having a pie. The more people who want a slice of the pie, the smaller the slices get. As the population grows — there needs to be more pies. The number of pies needs to increase with the number of people. If there are 7 Billion people on the planet, then there needs to be that number multiplied by an average annual income for everyone in dollars in circulation. Why dollars? Because it is the Reserve Currency of planet earth, which means that international trade is performed to a large extent in dollars.

Also, what economists look at is the total amount of services and goods created by America, or any country, in one year. There are figures for what Americans create at home, and what Americans get from providing goods and services outside the country. This massive annual total effort is what is behind our currency, and what backs it. What we need to consider is whether it changes from year to year, and how much, and why. This is referred to as GNP and GDP in the financial world.

It is fairly obvious that if the collective effort of the American people is growing from year to year, that is better than having the collective expenditure of energy shrink from year to year. So, it is the number of actively working people, and the number of  jobs , that backs the American economy. We hear this all the time. We hear that the job market is growing, and that jobs are being added. The economy is driven by the total income of the country growing year after year.

If the Baby Boom generation is the largest demographic group in the country, and was the largest group in the workforce, is the birth rate keeping up with the approaching death and retirement rate that will take these people out of the work force, and possibly decrease the annual output of the economy? People worry that social security payments will become a burden on younger workers, but it will be a bigger issue than that. A recession seems inevitable as the GNP and GDP of America goes down because the elderly leave the workforce.

So, we know from past experience that what definitely crashes an economy is a lack of confidence in the economy, and large numbers of people taking their money out of the banks. It is called a “run on the banks.” If people become fearful, and do the things that fearful people do — such as to stop spending and start hoarding currency and gold, then an economic crash is inevitable. Money needs to be kept in circulation to keep the economy healthy.

Strategies to keep an economy healthy include: creating a general mood of confidence from the media; encouraging people to spend; aiming for full employment of all who can be employed; redistributing wealth through the IRS so that more people have more money to spend; and creating government jobs that get more people working. The current plan to raise the minimum wage if it were accepted would be another shot in the arm for the economy.