Unfortunately, the global economy works in a fairly odd manner. In fact, the world’s largest economy, the United States, operates as if it was designed by the con-man Charles Ponzi himself. In case you didn’t know, the Ponzi scheme is named after Charles Ponzi. A Ponzi scheme is a type of investment fraud where investors are paid from the contributions of new investors. Usually in a Ponzi scheme investors are promised high returns with little risk. Ponzi schemes constantly require new flows of money to survive due to their being little or no legitimate money being earned. The world economy seems to work the same way as a Ponzi scheme.
How the World Economy’s Ponzi scheme Works
Here’s how the world economy’s Ponzi scheme works. Since the United States’ (US) currency is no longer backed by gold, the American government is able to print as much money as they want. When the US government’s treasury department needs or wants money, they borrow money from America’s central bank, the federal reserve. The federal reserve then prints the currency, gives it to the Department of Treasury, and receives an IOU from the Department of Treasury. The IOU’s are sold to investors in the form of government bonds. These investors may take the form of individuals, pension funds, or countries. With the money provided from the loans or government bonds the US pays its bills and obligations. Approximately, the first three minutes of the below video provides a more illustrative representation of this global Ponzi scheme.
This system seems a lot like a Ponzi scheme because it leads to the enormously good question (and I’m not being sarcastic this time, this really is a good question): if the US government uses a loan to pay all of its bills where does the money come from to pay off the loan they just took out and the interest associated with it? Well, unfortunately, the very smart people (and I am being sarcastic this time) running the government decided that it would be a good idea to pay that loan off by taking out an even bigger loan. In other words, the US government is caught in a cycle of taking out loans. This is part of the reason why the US government’s debt continues to increase.
Many of the dollars that the US government borrows from the federal reserve are either given to other countries to pay off debt or are traded to other countries for goods. These other countries don’t use the American dollars they receive to invest in their own country because this would cause their own currencies to rise in value and make it harder for them to sale their products. Instead, these countries use American dollars to buy more US government bonds. Meaning these countries take the dollars they get from the US and invest them back into America because US bonds are supposed to be a safe investment.
We Can’t Fix the Economy with Gold
It seems like the answer to this Ponzi scheme-like world economy is to go back to the gold standard (backing the US dollar with gold). It may seem like this because backing the US dollar with gold would ensure that the US cannot take out bigger loans just to payback the interest and principal on its other loans. In other words, backing the US dollar with gold would prevent the US from falling into a seemingly endless cycle of taking out loans. This makes backing the US dollar with gold seem like a good idea, but it’s not that simple.
While the US government was on the gold standard, economic crises were exacerbated. For instance, the great depression was worsened by the gold standard due to the US government being unable to expand the money supply. Usually, governments expand the money supply in times of economic crisis in order to increase demand of goods and services.
However, it’s hard to expand the money supply when a currency is backed by gold. This is were fiat money comes into play. Fiat money is not backed by any physical commodity but is instead a government issued currency. With fiat money governments are able to expand the money supply a lot easier which means they’re more easily and quickly able to respond to economic crises.
The problem the US is currently in (a perpetual cycle of taking out loans) likely came from the American government expanding the money supply when there was no crisis or the American government decided to print money to fund unnecessary or unwise activities, such as wars. This creates money management problems that could possibly lead to being unable to pay off national debt. Not to mention that increasing the money supply when there is no crisis could create an even bigger crisis down the line.
If countries move back to the gold standard then it would be tougher for the American economy to get through economic crises. This means that the answer to solving this problem is not backing the US dollar with gold. Instead, a more appropriate answer is for the United States to change to having good money management.
How to Fix the World’s Economic Problems
What is truly needed is more education, understanding, and public awareness on economics and monetary policy. This must be combined with the government expanding the money supply during times of crisis and shrinking the money supply during boom periods. The US economy is probably too far gone into its Ponzi scheme-like economic structure to make this adjustment now. As a result, what we need to do is to start things over economically. This may include governments forgiving the debt of other governments. We must also truly follow economic theory by actually shrinking the money supply when the economy is expanding and doing the inverse when the economy is in crisis.
Having good money management is more easily said than done because politicians and government officials seem to not have much of a problem when it comes to printing more money and giving it to businesses but seem to have a serious problem with increasing taxes and shrinking the money supply when it needs to be increased. It’s also important to note here that if politicians print money and give it to businesses during crises then they should probably increase taxes on those same businesses during boom periods.
It’s hard to say how it can be ensured that if the economy is reset that governments would truly follow the tenets of mainstream economic theories and shrink the money supply when it needs to be decreased. Perhaps politicians shouldn’t be in charge of taxes or maybe it should be required that when taxes are decreased they must be raised in the future. What I know is that something must be done about the global economy’s Ponzi scheme-like structure, and the answer is not basing the American dollar on gold.