Local Commerce

We all take our economic security for granted. Everyday we write checks, use credit cards, and trade green paper to transact business of every sort. Products are shipped all over the world right into our communities in a marvel of human ingenuity. However, did it ever occur to you what we would do if this whole machinery came to a stop? What if an oil shock or trade embargo severely limited all shipments into and out of our community? What if the power grid went down or a bank holiday was declared, and there was no way to access cash from your banking account?

The fact of the matter is that we as a society are highly vulnerable to an interruption in global commerce. This is particularly true today with most global financial institutions teetering on the brink of bankruptcy. The most pressing concern is perhaps the stability of our monetary system, the Federal Reserve Note (more commonly known as the U.S. dollar). Did you ever stop to consider what the difference is between the little green bills we trade between ourselves each day and monopoly money? Basically, other than the more fancy print and paper, the only difference is one is printed by the U.S. Treasury and accepted for payment of government obligations like taxes. You are not guaranteed anything in exchange for it. Prior to 1933, you could exchange dollar bills for a certain amount of gold. That is not the case any more, and your ability to extract value from it is solely dependent of the perception of value that others hold (something modern economists call "the stickiness of prices"). If everyone in society agreed that they would quadruple prices the next day, there is nothing theoretically stopping the dollar from declining 75% in value overnight, since the dollar has no guaranteed value in terms of real goods.

Because prices are sticky, this is usually not a concern. However, due to excessive amounts of debt created by our government, banks, and consumers over the last decade, we face a unique problem. The debt and future obligations (such as pension and social security payments) have become so large the debt has become mathematically impossible to service by our economy if the dollar retains its current value. This is the heart of the current economic crisis. The central bank of the United States, the Federal Reserve Board (FRB), has taken the only alternative it has to declaring a significant part of our economy bankrupt--it is taking a course of action intended to devalue the dollar. If the dollar, for example, decreases in value by 90%, then the debt obligations decrease in real terms by 90%, allowing the smaller inflation adjusted debt to potentially be serviced by the real economy. The Federal Reserve is accomplishing this by rapidly creating money out of thin air through bailout programs. It can do this because most of the money in bank accounts are not real--they are digital bookkeeping entries. For example, as of the end of 2008 there was only $54 billion in real cash at banks versus $778 billion in deposits in checking accounts (and this does not count savings deposits and other more prevalent forms of money). Since the end of August 2008, the total monetary base of the country has doubled from $847 billion to $1.7 trillion at the end of December as the FRB has continued to add "digidollars" to the national ledger. Never, in the history of the United States of America, have we witnessed anything close to this expansion in the monetary base in a comparable period of time. This is the monetary expansion that is typically reserved for banana republics and failed nation states like Zimbabwe.

Since prices are generally sticky over the short term, the devaluation takes some time to hit the economy; however, when it does, it is likely to lead to brutal inflation the likes of which this nation has not seen in well over a hundred years. If this happens, it will not only destroy the value of people's cash assets, but shall also destroy the value of fixed income investments such as bonds and the pension funds that hold them. Since these are the holders of the debts who mathematically could have never been paid off anyway given the size of the economy, you have to remember that this is, in fact, the end goal of the policy to ultimately insure that the U.S. government does not have to declare bankruptcy itself, at least in the short term (at some point the dollar can get devalued enough that the U.S. becomes de facto bankrupt because no one will accept payment in increasingly worthless dollars, including tens of millions of federal employees).

While I am sure many of you are of the opinion that our government would never allow this to happen, let me ask you this question? Do you really think they are that competent? Our governmental officials are not gods; they are human beings who for years have been trying to buy votes by stretching the economy further than it was meant to handle. Most of these officials do not truly understand the first thing about economics. The global bankers were more than happy to comply as these same policies benefited them the most--they were the ones who were technically allowed under the system to get access to the new money which they actually created via public and private loans (wonder why the first $700 billion went to the bankers with only minor objections from politicians, while Congress refused $30 billion for the auto industry?). Ultimately, all institutions are subject to the laws of mathematics--if you continue to print money, it will become increasingly worthless; and, printing money is the only way for politicians to currently delay impending defaults on the debts of this country. Please look at the example of Zimbabwe to see a first hand example of how this can occur--a more than 80% unemployment rate and a rate of inflation that is in the stratosphere (yes, economists, you can have severe unemployment and severe inflation at the same time, particularly when your only major industry become the government printing press). While things will probably not become nearly as bad in the United States as the structural imbalances are not quite as bad, the same principles are at work in how hyperinflation can result from a monetary and fiscal policy gone haywire.

While we should all hope that this does not happen, there is plenty of historical precedents to give us reason to prepare for the contingency of we must do if it does. That is one of the main goals of Arm in Arm. If dollars become increasingly worthless, in order for businesses to survive we must find an alternate exchange system to rapidly be put in place so that the machinery of our economy continues to function. Bartering would certainly be one way of coping with this situation; however, bartering is a very cumbersome method of trade, particularly in this country where we have not had much experience in this practice which is much more common in other parts of the world. Co-ordination of local markets and trade posts if the dollar collapses would go a long way towards facilitating this process. Moreover, efforts should be made to create alternative local currencies to transact larger transactions where bartering is more cumbersome. Local script based on common hard assets such as gold or silver (traditionally used a money due to portability and durability) or a local coupon exchange system run by local businesses are examples of things that we can do to lessen our dependence on the dollar. However, since setting up trusted intermediaries of exchange are mandatory in implementing a local currency system, it makes sense to build this infrastructure as soon as possible so that we do not have to improvise in the midst of collapse. If we are really lucky, we might not even have to use this system, but we should not bet on that. Remember, if your community is prepared for an eventuality, it does not have to fear it. Fear is what happens when one is taken by surprise and is left few options. We should never leave ourselves in that position, to the extent possible.

In the event of a dollar collapse, or other disruptions to the economy, we must also prepare for the potential transition from a global to a local economy. The United States has benefited greatly since the end of World War II from possessing the world's reserve currency. This has allowed us to purchase goods from around the world more cheaply than would be otherwise possible. If the actions of the Federal Reserve in diluting our currency destroy that reserve status, we are unlikely to benefit from cheap Chinese goods coming from overseas. Indeed, if such a shock resulted in the price of oil skyrocketing, even commerce across the country could be in jeopardy. Large factories who depend on global demand to maintain economies of scale, would likely have to close. The end result would be that local communities would be forced to provide much of what they once purchased externally themselves.

While this transition from a global to local economy would temporarily result in a lower standard of living, it does not have to result in abject poverty and starvation. Particularly in the Inland Northwest, we are well suited for this transition with a relatively low population density and a relatively resource rich environment. The key is to be able to weather the initial transition by having a plan in place to convert people from employees of multinational corporations to local sole proprietors utilizing whatever skills they have to participate in meeting the most pressing needs of local citizens. In order to perpetuate the functioning of free commerce, it makes sense for us to determine in our local communities what skills and resources we have, and what we are likely to need. That way we can look to acquire the equipment and skillsets we need as a community while the economy is still somewhat stable and potentially also coordinate trade routes with other localities to supply key goods and services. There is no reason for anyone to go without food or a job in a severe depression (at least outside of a severely urban setting), if we take it upon ourselves to appropriately prepare to recreate our local economy once the necessity arises. Again, we should view this as a contingency plan and hope we never have to use it; however, we can sleep better at night knowing we have a Plan B.

Finally, we believe that it is of the utmost importance that we work to maintain individual property rights. In the midst of economic turmoil it can be quite tempting for societies to resort to taking resources under duress from those that have them and transferring them to those that do not. We must not forget the experience of the Great Depression where draconian and confiscatory income tax rate hikes by both Herbert Hoover and Franklin D. Roosevelt brought economic activity to a halt. While voluntary charity is a practice society should value highly, forced charity is in fact nothing more than theft. We must remember, only a productive society can provide for a community's needs and there is no incentive to be productive if a person's right to property is not protected. By appropriately organizing for the establishment of free trade in the midst of hardship, we can preserve private property rights and at the same time build a community that has the economic resources to provide individually for each member through the engine of commerce. By doing so we also strengthen the bonds between members of the community rather than pitting one group against another in a grab bag for each other's goods. It is our belief that these principles should be maintained both in periods of prosperity as well as times of scarcity. We must always remember that it is the right of property that ultimately drives economic growth and progress.