Is Our Monetary System Near A Singularity?

By Julian Burke in Economy on January 9th, 2010 / One Comment

Singularity is described as the point when otherwise continuous mathematical progression becomes infinite. This would indicate that all continuous extrapolation breaks down beyond this point. Some feel that technology could become so productive that a singularity or period of extremely rapid growth could occur.

Singularity indicates that technical advances have interfered with economic growth. There is speculation that economic growth rates could exceed current understanding. Dr. Hanson, an economist at George Mason University, views two periods of steady economic growth based on the invention of agriculture and the Industrial Revolution. Dr. Hanson feels that another period of singularity will appear in 2075.

The Money Expansion
In economics, inflation refers to the continued increase of price levels in terms of money units. The rate of inflation is usually represented as an annual percentage of the growth of an expansive index of money values. As the price of the dollar increases, its purchasing power decreases. Inflation is a result of money expansion from the printing of currency, low reserve requirements, and the Federal Reserve’s open market operations. An example of hyperinflation is the money expansion of Zimbabwe and 1920s Germany.

There is unease about inflation as an approaching trend in the United States due to large fiscal deficits. The concern is that increased liquidity created due to money expansion is chasing assets. Assets such as oil and base metal commodities have the potential to become inflationary. The recent trend of conversion from dollar to a metal commodity such as gold is pushing the value of the dollar downwards. The current relationship between the dollar’s value and the price of commodities appears to be in opposition. This means that as the dollar sinks, the price of commodities such as gold and oil increase.

An increase in currency doesn’t amount to higher prices in the immediate future, but the connection between money expansion and inflation is usually a consistent one. The financial crisis that occurred in the U.S. in September of 2008 caused the White House, Congress and the Federal Reserve to respond with a number of measures. One of these actions was the decision to expand the money supply. In the past, money expansion and inflation have been reliable measures to raise revenues without taxation.

During the era of the gold standard, governments tried tempering precious metals with base metals to create alloys so that the money supply could be expanded. This tactic was intended as only a temporary solution. However, when citizens learned that the coinage was impure, they were outraged and usually responded violently.

More Paper Money
The ability to print paper money has allowed governments to print currency or extend credit as needed. According to the Federal Reserve’s monetary base statistics, 2008 represented a year when more money was in circulation than at any other point in United States history. Government has played a role in diverting these funds into the economy. A possible outcome of these government actions is that there will be increased money for fewer goods; resulting in inflation.

The United States government is certain that prior to business inflation, the excess liquidity can be decreased by removing the currency from circulation. However, if history serves as any lesson, this may be challenging because removing liquidity requires high interest rates or credit restrictions. Neither is a realistic option. First of all, politicians consider credit to be the livelihood of the economy.

Secondly, if the Federal Reserve is reluctant to increase interest rates substantially during prosperous times, it is unlikely they will in the current economic situation. The Federal Reserve has reportedly increased the monetary base from $850 billion to $1.7 trillion in three months. Normally, inflation would dramatically increase. The bank’s demand for liquidity has thus far stifled inflation from spiraling out of control.

More Government Borrowing
In recent years government borrowing has multiplied considerably to fund the wars in Iraq and Afghanistan and pay for economic stimulus expenditures. In 2008, the interest on United States debt was at $452 billion. In a November 2009 interview with Bloomberg News, Warren Buffet mentioned government expenditures were at 185% of receipts. In the interview, he contends that there would be no way to bridge the gap (even in the event of an economic recovery) without changes in outlays and taxation. Business investment could be impacted by tax increases intended to alleviate the deficit.

There is evidence that fiscal concerns may not be getting adequate attention, since the House of Representatives raised the debt limit using the Gephardt rule to avoid a roll-call vote. Despite this inattentiveness, Americans are well aware of the rising debt. A poll from an August Financial Times article indicates that Americans are more concerned about reducing the deficit than reviving the economy. Ever increasing debt is bound to complicate matters for legislators as they evaluate additional economic steps.

Tax increases aren’t the only concern for Americans to fret about. Issues such as the rising debt ceiling and the ownership of American’s debt require attention. Americans are worried about the percentage of U.S. debt that is owned by other countries. Foreign-owned American debt has grown to 25 percent, with Japan and China holding 47 percent of U.S. Treasury securities. To make matters worse, there is conjecture that foreign investors are hesitant to invest in U.S. securities while indications that borrowing could be pending in the future.

Even though more currency can be produced as needed, inflation prevents it from fully contributing to economic growth. The belief that the removal of excess liquidity can be reduced so easily by removing the currency from circulation may be inaccurate. High interest rates or credit restrictions are required which could create a bottleneck of limits to the dollar’s ability to participate in the economy.

The Singularity Is Near
Singularity is represented in the current economy because past relationships with banking institutions have failed, and a new economic system of hyperinflation and frantic assumption is the replacement. For every dollar, there is an increase in debt. Soon, the amount of debt per dollar will go beyond comprehension, making it impossible for the United States to truly pay off debt from the productive segment of the economy.

Singularity exists in the U.S. monetary system because funds have been privatized by the banks. There is no assurance that a monetary system that saddles citizens with such insurmountable debt will ever exercise restraint. Thomas Jefferson believed that if the American people allow private banks to control the U.S. currency, initially by inflation and next deflation; the rapid growth of banks will deprive people of property.

While money is created in the form of loans which are advanced by private banking institutions, banks have the capacity to create principal; but not the interest to service the loans that they make. To locate the interest, new loans are created expanding the money supply. This in effect causes inflation which decreases the value of money. It is no coincidence that the Federal Reserve is one of the banks in question.

The current U.S. monetary system is creating a singularity in using hyperinflation as the vehicle. The steady growth of prices build expectations and banking institutions and accelerates, then feeds upon itself and the money being printed until prices are multiplying frequently. Next, hyperinflation implodes, leading to singularity. Amounts of money beyond comprehension are lost and then replaced with potentially more stable means of trade than currency.

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One Response to “Is Our Monetary System Near A Singularity?”

  1. Ariel Says:

    An amazing summary of the historical downfall of our economy tied to the dollar, thank you. I would love for you to elaborate on your closing statement: “Amounts of money beyond comprehension are lost and then replaced with potentially more stable means of trade than currency.” What are you inferring or predicting are the potentially more stable means of trade?

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