Happy Birthday, Greenbacks
From the page: “Last Monday was the fortieth birthday of the United States dollar as a fiat currency–that is, a currency backed not by a precious metal, or something solid like it, but by the promissory authority of a government. On August 15, 1971, President Nixon, after a secret meeting at Camp David with his economic advisers, closed the gold window and effectively ended the gold standard. Henceforth, the Federal Reserve would no longer exchange other central banks’ dollars, or anyone’s, for gold at a fixed price. Instead, it could print as much money as it felt it needed to.
Forty, as anyone who has turned it can attest, is, at best, an occasion for ambivalence and, at worst, a bracing peek over the top of the hill. For its four-decade birthday, last week, Paper Dollar, Jr., was confettied with grim statistics and hooted anew by goldbugs and critics of the Fed. The slide show of P.D., Jr.,’s life, to be sure, features some ugly bits–inflation, recession, rising unemployment, harmful speculations, ballooning debt. The regime of which the dollar is the centerpiece, in its role as the world’s reserve currency, is now teetering. It is a shadow of itself. Stooped and arthritic, it smells of mothballs and can no longer afford its beloved Swiss chocolates. It keeps forgetting our names and getting lost on the way home. Still, the average life expectancy for a fiat currency is twenty-seven years; so, by that measure, the greenback has had a good run. Speech! Speech!
The equity indices had celebrated the week or so leading up to the anniversary by going totally bonkers, veering down and then back up, then taking a breath before ending last week with another dizzying collapse. The causes for major market moves are always difficult to isolate. Certainly, the recent downgrade of the United States’ debt by Standard & Poor’s was a catalyst, but so was an array of bad news and bad feeling having to do with the European debt crisis, weakening economic data here and abroad, and the subsequent likelihood of recession. By Friday, treasuries and gold were both at record highs, meaning that the market was simultaneously betting on deflation and inflation–both on the disease and on the consequence of its antidote.
One fear, it was said, was that a big European bank might go under, with Lehman-calibre consequences. Rumors coursed through the market that it was insolvent. Broadly speaking, insolvency occurs when your liabilities exceed your assets–when you can’t pay your debts. For a while now, amid the shell-game maneuverings of finance ministers, banking chiefs, and regulators, cynics of a certain stripe have been grumbling that this or that entity is effectively insolvent, be it a megabank in America or in France, or an entire nation: Greece, Ireland, Italy.
The big debate, or one of many, in the meltdown of 2008 was whether banks were facing a crisis of liquidity or of solvency. Were they temporarily squeezed, or totally broke? The U.S. government, arbitrarily or not, made its rulings in individual cases (Lehman: broke; Merrill Lynch: squeezed) and acted accordingly. To the extent that solvency is subjective, the government was the beholder whose eyes mattered. And, for the most part, it preferred to see solvency, so it treated the patient for illiquidity, prescribing, in effect, massive doses of its paper dollars.
Eight years ago, in the early days of the last bubble, Lawrence Cunningham, a law professor at George Washington University, published a paper entitled ‘Semiotics, Hermeneutics and Cash: An Essay on the True and Fair View,’ in which he compared different countries’ accounting procedures and parsed the slipperiness of solvency. ‘The balance sheet, like most things, apparently, is a culturally conditioned construct,’ he said last week. ‘What’s ‘true and fair’ is a culturally contingent idea.’
Advocates for the return of the gold standard like to treat the balance sheet of the United States, in the words of the commentator James Grant, as though it were a ‘junk-bond prospectus.’ In their accounting, the U.S. itself is, in its way, insolvent. To make way for this idea, Cunningham offered up a revision of insolvency, one suitable, perhaps, for this age of the aging paper buck. ‘No doubt the government has it in its power to tax its citizens’ income and asset base as much as necessary,’ he said. ‘It has a mass of capital at its disposal.’ That is, we have the ability to pay our debts, as gigantic as they may seem. What we lack, apparently, is the will to do so. Cunningham added, ‘Maybe what we need is a definition of solvency that takes into account will as well as ability…..”