Our Collapsing Economy and Currency

By: Paul Craig Roberts| December 1, 2012 | 

Is the “fiscal cliff” real or just another hoax? The answer is that the fiscal cliff is real, but it is a result, not a cause. The hoax is the way the fiscal cliff is being used.

The fiscal cliff is the result of the inability to close the federal budget deficit. The budget deficit cannot be closed because large numbers of US middle class jobs and the GDP and tax base associated with them have been moved offshore, thus reducing federal revenues. The fiscal cliff cannot be closed because of the unfunded liabilities of eleven years of US-initiated wars against a half dozen Muslim countries--wars that have benefited only the profits of the military/security complex and the territorial ambitions of Israel. The budget deficit cannot be closed, because economic policy is focused only on saving banks that wrongful financial deregulation allowed to speculate, to merge, and to become too big to fail, thus requiring public subsidies that vastly dwarf the totality of US welfare spending.

The hoax is the propaganda that the fiscal cliff can be avoided by reneging on promised Social Security and Medicare benefits that people have paid for with the payroll tax and by cutting back all aspects of the social safety net from food stamps to unemployment benefits to Medicaid, to housing subsidies. The right-wing has been trying to get rid of the social safety net ever since Franklin D. Roosevelt constructed it, out of fear or compassion or both, during the Great Depression.

Washington’s response to the fiscal cliff is austerity: spending cuts and tax increases. The Republicans say they will vote for the Democrats’ tax increases if the Democrats vote for the Republican’s assault on the social safety net. What bipartisan compromise means is a double-barreled dose of austerity.

Ever since John Maynard Keynes, economists have understood that tax increases and spending cuts suppress, not stimulate, economic activity. This is especially the case in an economy such as the American one, which is driven by consumer spending. When spending declines, so does the economy. When the economy declines, the budget deficit rises.

This is especially the case when an economy is weak and already in decline. A declining economy means less sales, less employment, less tax revenues. This works against the effort to close the federal budget deficit with austerity measures. Instead of strengthening the economy, the austerity measures weaken it further. To cut unemployment benefits and food stamps when unemployment is high or rising would be to provoke social and political instability.

Some economists, such as Robert Barro at Harvard University, claim that stimulative measures, the opposite of austerity, don’t work, because consumers anticipate the higher taxes that will be needed to cover the budget deficit and, therefore, reduce their spending and increase their saving in order to be able to pay the anticipated higher taxes.

In other words, the Keynesian effort to stimulate spending causes consumers to reduce their spending. I don’t know of any empirical evidence for this claim.

Regardless, the situation on the ground at the present time is that for the majority of people, incomes are stretched to the limit and beyond. Many cannot pay their bills, their mortgages, their car payments, their student loans. They are drowning in debt, and there is nothing that they can cut back in order to save money with which to pay higher taxes.

Many commentators are complaining that Congress will refuse to face the difficult issues and kick the can down the road, leaving the fiscal cliff looming. This would probably be the best outcome. As the fiscal cliff is a result, not a cause, to focus on the fiscal cliff is to focus on the symptoms rather than the disease.

The US economy has two serious diseases, and neither one is too much welfare spending.

One disease is the offshoring of US middle class jobs, both manufacturing jobs and professional service jobs such as engineering, research, design, and information technology, jobs that formerly were filled by US university graduates, but which today are sent abroad or are filled by foreigners brought in on H-1B work visas at two-thirds of the salary.

The other disease is the deregulation, especially the financial deregulation, that caused the ongoing financial crisis and created banks too big to fail, which has prevented capitalism from working and closing down insolvent corporations.

The Federal Reserve’s policy is focused on saving the banks, not on saving the economy. The Federal Reserve is purchasing not only new Treasury bonds issued to finance the more than one trillion dollar annual federal deficit but also the banks’ underwater financial instruments, taking them off the banks’ books and putting them on the Federal Reserve’s books.

Normally, debt monetization of this amount results in rising inflation, but the money that the Federal Reserve is creating in its attempt to manage the public debt and the banks’ private debt is hung up in the banking system as excess reserves and is not finding its way into the economy. The banks are too busted to lend, and consumers are too indebted to borrow.

However, the debt monetization poses a second threat that is capable of biting the US economy and consumer living standards very hard. Foreign central banks, foreign investors in US stocks and financial instruments, and Americans themselves observing the Federal Reserve’s continuous monetization of US debt cannot avoid concern about the dollar’s value as the supply of ever more dollars continues to pour out of the Federal Reserve.

Already there is evidence of central banks and individuals moving out of dollars into gold and silver bullion and into other currencies of countries that are not hemorrhaging debt and money. According to John Williams of Shadowstats.com, the US dollar as a percentage of global holdings of reserve assets has declined from 36.6% in 2006 to 28.7% in 2012. Gold has increased from 10.5% to 12.8% and other foreign currencies except the euro increased from 38.4% to 44.4%.

Russia, China, Brazil, India, and South Africa intend to conduct trade among themselves in their own currencies without use of the dollar as reserve currency. The EU countries conduct their trade with one another in euros, and although not reported in the US media, Asian countries are discussing a new common currency for trade among themselves.

The world is abandoning the use of the dollar to settle international accounts, and the demand for dollars is falling as the Federal Reserve increases the supply of dollars.

This means that the price of the dollar is threatened.

Concern over the dollar means concern over dollar-denominated financial instruments such as stocks and bonds. The Chinese hold some $2 trillion in US financial instruments. The Japanese hold about $1 trillion in US Treasuries. The Saudis and the oil emirates also hold large quantities of US dollar financial instruments. At some point the move away from the dollar also means a move away from US financial instruments. The dumping of US stocks and bonds would destabilize US financial markets and wipe out the remainder of US wealth.

As I have previously written, the Federal Reserve can create new money with which to purchase the dumped financial instruments, thus maintaining their prices. But the Federal Reserve cannot print gold or foreign currencies with which to buy up the dollars that foreigners are paid for their US stocks and bonds. When the dollars in turn are dumped, the exchange value of the dollar will collapse, and US inflation will explode.

The onset of hyperinflation can be as sudden as the collapse of a currency’s exchange value.

The real crisis facing the US is the impending collapse of the US dollar’s foreign exchange value. The US dollar’s value in relation to silver and gold has already collapsed. In the past ten years, gold’s price in US dollars has increased from $250 per ounce to $1,750 per ounce, an increase of $1,500. Silver’s price has risen from $4 per ounce to $34 per ounce. These price rises are not due to a sudden scarcity of gold and silver, but to a flight from the dollar into the two forms of historical money that cannot be created with the printing press.

The price of oil has risen from $20 a barrel ten years ago to as high as $120 per barrel earlier this year and currently $90 a barrel. This price rise has come about despite a weak world economy and without any supply restrictions other than those caused by the attempted US occupation of Iraq, the Western assault on Libya, and the self-harming Western sanctions on Iran, impacts most likely offset by the Saudis, still Washington’s faithful puppet, a country that pumps out its precious life fluid in order to save the West from its own mistakes. The moronic neoconservatives wish to overthrow the Saudi Arabian government, but what more faithful servant has Washington ever had than the Saudi royal house?

What can be done? For a number of years I have pointed out that the problem is the loss of US employment, consumer income, GDP, and tax base to offshoring. The solution is to reverse the outward flow of jobs and to bring them back to the US. This can be done, as Ralph Gomory has made clear, by taxing corporations according to where they add value to their product. If the value is added abroad, corporations would have a high tax rate. If they add value domestically with US labor, they would face a low tax rate. The difference in tax rates can be calculated to offset the benefit of the lower cost of foreign labor.

As all offshored production that is brought to the US to be marketed to Americans counts as imports, relocating the production in the US would decrease the trade deficit, thus strengthening belief in the dollar. The increase in US consumer incomes would raise tax revenues, thus lowering the budget deficit. It is a win-win solution.

The second part to the solution is to end the expensive unfunded wars that have ruined the federal budget for the past 11 years as well as future budgets due to the cost of veterans’ hospital care and benefits. According to ABC World News, “In the decade since the Sept. 11, 2001 terrorist attacks on the World Trade Center, 2,333,972 American military personnel have been deployed to Iraq, Afghanistan or both, as of Aug. 30, 2011 [more than a year ago].” These 2.3 million veterans have rights to various unfunded benefits including life-long health care. Already, according to ABC, 711,986 have used Veterans Administration health care between fiscal year 2002 and the third-quarter of fiscal year 2011. http://abcnews.go.com/Politics/us-veterans-numbers/story?id=14928136#1

The Republicans are determined to continue the gratuitous wars and to make the 99 percent pay for the neoconservatives’ Wars of Hegemony while protecting the 1 percent from tax increases.

The Democrats are little different.

No one in the White House and no more than one dozen members of the 535 member US Congress represents the American people. This is the reason that despite obvious remedies nothing can be done. America is going to crash big time.

And the rest of the world will be thankful. America along with Israel is the world’s most hated country. Don’t expect any foreign bailouts of the failed “superpower.”

The Virtual Recovery

October 29, 2012 | Paul Craig Roberts

Since mid-2009 the US has been enjoying a virtual recovery courtesy of a rigged inflation measure that understates inflation. The financial Presstitutes spoon out the government’s propaganda that prices are rising less than 2%. But anyone who purchases food, fuel, medical care or anything else knows that low inflation is no more real that Saddam Hussein’s weapons of mass destruction or Gadhafi’s alleged attacks on Libyan protesters or Iran’s nuclear weapons. Everything is a lie to serve the power-brokers.

During the Clinton administration, Republican economists pushed through a change in the way the CPI is measured in order to save money by depriving Social Security retirees of their cost-of-living adjustment. Previously, the CPI measured the change in the cost of a constant standard of living. The new measure assumes that consumers adjust to price increases by lowering their standard of living by substituting lower quality, lower priced items. If the price, for example, of New York strip steak goes up, consumers are assumed to substitute the lower quality round steak. In other words, the new measure of inflation keeps inflation down by reflecting a lowered standard of living.

Statistician John Williams (shadowstats.com), who closely follows the collecting and reporting of official US economic statistics, reports that consumer inflation, as measured by the 1990 official government methodology has been running at about 5%. If the 1980 official methodology for measuring the CPI is used, John Williams reports that the current rate of US inflation is about 9%.

The 9% figure is more consistent with people’s experience in grocery stores.

Officially the recession that began in 2007 ended in June 2009 after 18 months, making the Bush Recession the longest recession since World War II. However, John Williams says that the recession has not ended. He says that only the GDP reporting, distorted by an erroneous measurement of inflation, shows a recovery. Other, more reliable measures of economic activity, show no recovery.

Williams reports that the economy began turning down in 2006, falling lower in 2008 and 2009, and bottom-bouncing ever since. Not only is there no sign of any recovery, but “the economic downturn now is intensifying once again.” The absence of an economic recovery “is evident in the [official] reporting of nearly all major economic series. Not one of these series shows a pattern of activity that confirms the recovery [shown] in the GDP series.”

Williams concludes that “the official recovery simply is a statistical illusion created by the government’s use of understated inflation in deflating the GDP.” In other words, the reported gains in GDP are accounted for by price increases, not increases in real output.

The result of the US government’s economic deception is the same as the deception Washington has used to start wars all over the Middle East. The government propaganda produces a make-believe virtual reality that bears no relationship to real reality. In history there have been many governments who have prevailed by deceiving the people, but Washington has moved this success to a new peak. As long as Americans believe anything Washington says, they are doomed.

It is easy to see why there is no economic recovery and cannot be an economic recovery. Look at the chart below (courtesy of John Williams, shadowstats.com).



Real median household income at the end of 2011 is back where it was in 1967-68. Moreover, Williams has deflated household income to get its real value by using the official inflation measure, which substantially understates inflation. If Williams had used the 1990 or 1980 official government methodology for calculating the consumer price index, the real median incomes of households would show a larger decline.

Moreover, the low 2011 real median household income is the summation, in most cases, of two household earners, whereas in 1967-68 one earner could produce the same real income. As Nobel economist Gary Becker, my former colleague as Business Week columnist, pointed out, when both husband and wife have to work in order to maintain the same purchasing power, household income from the wife’s in-kind household services is eliminated. Therefore, the monetary measure of the dual household income overstates income, because it is not adjusted for the lost benefits formerly provided by the wife who at home managed the household.

Americans are far more oppressed by the power brokers in Washington than statistics display. Moreover, the young are born into the oppressive, exploitative American system and do not know any different. They are fed by the Presstitute media with endless propaganda about how fortunate they are and how indispensable their wonderful country is. Americans are kept in a constant state of amusement, and many never grasp the loss of their civil liberties, job and career opportunities, and respect that the US won during the decades-long cold war with Soviet Communism.

On September 13, Federal Reserve Chairman Ben “Helicopter” Bernanke announced Quantitative Easing 3. Bernanke said that the recovery is weak and needs more Fed stimulus. He said the Fed will purchase $40 billion of mortgage bonds per month in order to drive interest rates further below the rate of inflation and help to sell more houses.

But how do you sell houses to households who are getting by with 1967-68 levels of real income and who have absolutely no job security? Their company can be taken over and offshored tomorrow or they can be replaced by foreign workers on H-1B visas. Housing prices have dropped, but not to 1967-68 levels.

Bernanke’s announcement that the Fed’s purchase of mortgage bonds is to spur housing and the economy is disinformation. Bernanke is purchasing the bonds in order to boost the values of the derivatives and debt instruments in the banks’ portfolios. Lower interest rates raise the value of the debt instruments on the banks’ balance sheets. By depriving American savers of a real interest rate on their savings, Bernanke makes the busted banks look solvent.

This is what is happening in “freedom and democracy” America. The vast majority of Americans, especially the retired, are forced to consume their savings and draw down their capital because they can get no real interest on their savings. The beneficiaries are the banksters, who can borrow at near zero interest rates, charge consumers 16% on their credit cards, and use the Federal Reserve’s largess to speculate on interest rate swaps and credit default swaps. The American taxpayers hold the bag for the banksters’ uncovered gambles.

Would you not gamble if the American taxpayers had to cover your bets, but your winnings were yours alone?

The future of the American political order is in doubt. The Bush and Obama regimes have so badly abused the Constitution and statutory law, that the America that Ronald Reagan left to us no longer exists. America is on the path to collapse or tyranny.

Suppose that a miracle produces an economic recovery. What becomes of the enormous excess bank reserves that the Federal Reserve has provided the banks?

If these bank reserves are used for expanding loans, the money supply will outstrip the production of goods and services, and inflation will rise.

If the Fed tries to take the excess reserves out of the banking system by selling bonds, interest rates will rise, thus destroying the wealth of bond holders and draining liquidity from the stock market. In other words, another depression that wipes out the remaining American wealth.

The Federal Reserve’s announcement of QE3 shows that the Fed will continue to create new money in order to protect the values of the insolvent banks’ questionable assets. The Federal Reserve represents the banksters, not the American public. Like every other American government institution, the Federal Reserve is far removed from concerns about American citizens.

In my opinion, the Federal Reserve’s purchase of bonds in order to drive down interest rates has produced a bond market bubble that is larger than the real estate and derivative bubbles. Economically, it is nonsensical for a bond to carry a negative real interest rate, especially when the government issuing the bond is running large budget deficits that it seems unable to reduce and when the central bank is monetizing the debt.

The bubble has been protected by the euro “crisis,” which possibly is more of a virtual crisis than a real one. The euro crisis has caused money to seek refuge in dollars, thus supporting the dollar’s value even while the Federal Reserve prints money with which to purchase the never-ending flow of the governments’ bonds to finance trillion dollar plus annual budget deficits–about 5 times the “Reagan deficits” that Wall Street alleged would wreck the US economy.

Indeed, the US dollar’s exchange value is itself a bubble waiting to pop. The sharp rise in the dollar price of gold and silver since 2003 indicates a flight from the US dollar. (The chart is courtesy of John Williams, shadowstats.com.)

The bond market bubble will pop if the dollar bubble pops. The Federal Reserve can sustain the bond market bubble by purchasing bonds, and there are no limits on the Federal Reserve’s ability to purchase bonds. However, the endless monetization of debt, even if the new money is stuck in the banks and does not find its way into the economy, can spook foreign holders of dollar-denominated assets.

Foreign central banks can decide that they want to hold fewer dollars and more precious metals as their reserves. Other countries, sensing the US dollar’s demise,



are organizing to conduct their trade without the use of the world’s reserve currency. Brazil, Russia, India, China, and South Africa intend to conduct their trade with one another in their own currencies. China and Japan have also negotiated to settle their trade balances with one another in their own currencies.

These agreements substantially reduce the use of the US dollar in international trade and, thus, the demand for dollars. When demand falls, so does price, unless the supply shrinks. But the Federal Reserve has announced, essentially, unlimited supply of US dollars. So we are faced with a paradox. The US dollar is supposed to remain valuable despite its enormous increase in supply

In addition, China, America’s largest creditor and in the past a reliable purchaser of US Treasury bonds, holds some two trillion in dollar-denominated assets, primarily Treasury bonds. How is Washington treating its largest foreign creditor? Not with appreciation or deference. Washington is surrounding China with naval and air bases, interfering in China’s disputes with other countries, and bringing contrived actions against China in the World Trade Organization. Washington claims that US corporations are deserting the US not because of the lower cost of labor in China, but because of Chinese “subsidies” to the relocated US firms.

In my April 30 column, “Brewing a Conflict with China,” I wrote that Washington would like to substitute a cold war with China for the hot wars in the Middle East. The problem with the hot wars is the loss of superpower face from Washington’s inability to prevail after eleven years, and although the hot wars are profitable for the military/security complex, the wars don’t generate the level of profits that would flow from a high-tech arms race with China. Moreover, Washington believes that diverting Chinese investment from the economy into a military buildup would slow the rate at which the Chinese economy is overtaking the US economy.

What if instead of taking the bait from Washington, China targets Washington’s Archilles heel–the dollar’s role as reserve currency–and decides it is cheaper to dump one trillion dollars of US Treasury debt on the bond market than to commit to a 30 year arms race? To keep the price of Treasuries from collapsing, the Federal Reserve could print the money to buy the bonds. But if China then dumps the printed one trillion dollars in the foreign exchange markets, Washington cannot print euros, British pounds, Russian rubles, Swiss francs, and other currencies in order to buy up the dollars.

Frantic, Washington would try to arrange currency swaps with foreign countries in order to acquire the foreign exchange with which to buy up the dollars that, otherwise, will drive down the dollar exchange rate and destroy the Federal Reserve’s control over interest rates.

But if the Chinese don’t want the dollars, will other countries want to swap their currencies for the abandoned US dollar?

Some of Washington’s puppet states will comply, but the wider world will rejoice in the termination of Washington’s financial hegemony and refuse the offer.

Sooner or later the dollar will collapse from Washington’s abuse of the dollar’s role as reserve currency, and the dollar will lose its “safe haven” status. US inflation will rise, and US political stability, along with America’s hegemonic power, will wane.

The rest of the world will sigh with relief. And China will have defeated the superpower without an arms race or firing a shot.

More Ways for the Banks to Screw Us

Goodbye Paper Money: 

Does It Mean More Ways for the Banks to Screw Us?

By Scott Thill, AlterNet
April 7, 2010

Currency has come a long way in the past few thousand years of human existence. Ancient Turkey started using hybrid silver and gold coins around 640 B.C. and the Chinese started passing paper around 800 A.D. But it wasn't until the middle of the 20th century that Diners Club finally invented credit cards, or that electronic transfer payment systems like PayPal threw dirt on the century's grave in the late '90s. And now that the 21st century has fully arrived on the heels of both a harrowing terrorist attack targeting finance nerve centers in New York City and an economic depression downsizing everything from global bank accounts to job prospects, it is high time we rethought how we should pay and get paid to live and die.

Despite the deep thoughts and deeper concerns, it's not hard to see that our digital age perhaps deserves a fully digital currency, compliant across real and virtual geographies. In fact, we're pretty much already there, without admitting it.

"Nowadays, when the Federal Reserve prints money, it doesn't mint a new penny or dollar," Mikka Pineda, research analyst at famed economist Nouriel Roubini's think-tank Roubini Global Economics, explained to AlterNet. "It just changes numbers in bank accounts. Individuals can do this too, provided they have electronic access to their accounts. They can transfer money from one account to another, accept deposits and pay bills online."

With one major difference: Unlike the Fed, individuals actually have to back up their virtual ones and zeroes with so-called real money, in the form of deposits. So-called, because what they're really putting into their accounts, at least in America, are dollars, which are merely material symbols of real value made of paper. Or checks, which are even more hyperreal, given that they are just more paper signifying other paper that symbolizes real value. The spiral of economic signification is dizzying, especially when you start factoring in inscrutable fees, levies and other mostly invisible transactions that banks and other parasites attach to the light-speed movement of our money.

The dizziness increases when you factor in recent news from the Fed, whose controversial chairman Ben Bernanke argued in a February speech that America's central bank should no longer have to adhere to a fractional standard. In other words, its currently feverish ex nihilo money creation, more commonly known by the hilarious nomenclature "quantitative easing," finally wouldn't have to be supported by any minimum reserve requirements. That would, wrote Raw Story's Stephen Webster, make "free-floating, infinitely self-replicating capital a pervasive reality." A bottomless ATM machine, altogether unmoored from material value, or reality itself.

Keeping It Hyperreal

It's a logical endgame for such an illogical system of finance still dependent on currency paradigms created during the rise and fall of Jesus Christ, who stars in both America's money and motto, "In God We Trust." Indeed, our fiat currency, and those like the suspicious Fed entrusted with greasing its wheels, is nothing other than that trust made manifest. Paper money, silver and copper coins, bars of gold, whatever. The only thing that has any real value are the goods being exchanged, and the promises we make to each other to live by a set of rules governing our interactions. Pure digital currency is just that ages-old relationship rendered in bits and gigs, rather than dollars and cents.

"There's nothing shocking or strange about a purely digital currency," explained Jonathon Keats, the conceptual artist and Wired contributor who created the First Bank of Antimatter last year in San Francisco. "It's just a logical technological upgrade on old-fashioned paper money."

Keats' economic thought experiment was illuminating, especially for those who think a paper slip actually worth mere pennies nevertheless equals 100 cents. After the global village's inextricably leveraged game of finance and faith imploded in 2007, monstrously birthing our still-ongoing Great Recession, Keats decided it made just as much sense to peg global currencies to antimatter positrons. If we're going to nuke our collective economic and political integrity with arbitrary currencies and rapacious deregulation, we might as well truly nuke ourselves, so to speak. The idea was challenging and, of course, impossible, but it cleverly exposed the stress fractures in our current system, which is obviously overdue, given recently terrible events, for a serious technological upgrade.
"In the 18th century, when the American colonies started printing cash, ink on paper was the state-of-the-art, the most advanced medium for communicating information," Keats told AlterNet. "Since an economy is just a communications network by which a society trades wants and needs, the most efficient system of information storage and transfer ought to serve that society most effectively. Hence, bits."

But since our digital currency, just like the various historical currencies it could eventually replace, is based on trust and faith rather than actual material value, which itself is resolutely fluid given who is buying and selling what in any given transaction, it's just as vulnerable to the type of impenetrable corruption that has sunk us in the worst depression since the '30s. Transparency and regulation is key to any currency transformation. But given the way we've utterly failed at both with our current fiat currency, prospects aren't good for a clean break from our fractured financial past.

"Problems arise when the information is manipulated, as happened in colonial America shortly after Ben Franklin and his fellow printers started inking lucre on paper. They took all sorts of precautions against personal fraud -- threats to punish counterfeiters with death were typeset on each and every shilling note -- but they didn't consider the catastrophic effects of inflation when the government issued more and more cash to pay off larger and larger debts. The same thing is happening today with quantitative easing, and I suspect there would be a similar risk with any central authority issuing state-of-the-art digital cash."

"Digital currencies are fiat currencies too," Pineda cautioned. "They are not backed by hard assets but rather trust that $1 is worth $1. Even if the world moved on to some global, digital currency unbound from the financial woes of any sovereign state, somebody still has to control the supply of money to determine, for example, how many Twinkies $1 can buy nationally on average."
Fine. But who? Some players are starting to emerge.

Trust, But Verify

"This is the highest-potential business I’ve ever seen in my career," eBay CEO John Donahoe gushed, according to Wired's Daniel Roth. That was in 2008, after e-commerce visionary PayPal, which eBay acquired in 2002, launched a presentation to explore the possibilities of, "a true digital currency that could be used on any Web site," Roth wrote, "that enabled money to move as easily as email."

For more than a decade, PayPal had acted as a digital middleman for international online buyers and sellers exchanging goods on the online auction site, gaining ground on the conventional banks, which levied unnecessary but nevertheless escalating finance charges, that customers wanted to deal with less and less. After the recent econopocalypse, trust and faith in the banks is in shorter supply than ever, to say nothing of their overlords at the Federal Reserve Bank, whose itinerant secrecy was recently crippled after the U.S. Court of Appeals in Manhattan ruled that it had to open its books and finger the lenders that would have collapsed were it not for its bailout from thin air. In that duration, however, PayPal's reputation and users have only increased, as has its services. Although it originally functioned "pretty much as an online credit card company," Roth wrote, it has since expanded its operations, urged on by its users, which in fact encouraged eBay's 2002 acquisition. Now it is opensourcing its code to developers and seeing how far it can push the digital finance envelope.

Can it push it far enough? If it doesn't, someone else will, because the current system is full of holes.

"Much more honest and democratic, perhaps," Keats told AlterNet, "would be a free market of free markets, in which everybody started issuing bits, each person disseminating his or her own digital cash based on what he or she owned or could make. Many competing currencies: This is what happened to a somewhat lesser degree with banks in the 19th century, each issuing its own legal tender. Back then, the obvious problem was geographic: A New Yorker couldn't be sure whether a bank as far away as South Carolina was legitimate. But the same technologies that make a currency of bits feasible also make physical distance trivial. Via the internet, one could assess the worthiness of other people's bits, and decide how highly to appraise them relative to one's own. Just imagine: Integrity would take on value."

Such a scenario would be a digital upgrade of our earliest economic arrangement, known as the barter system, which is actually gaining in popularity in America. International barter sites like U-Exchange are reporting skyrocketing traffic, while eBay and Craigslist.org are fearlessly charting the path forward. For now, the latter lean, like all of us, on the foundation of fiat currency; that is, we still expect to get paid, usually via PayPal, in dollars and cents. But what if we could just get paid in things we need, or want, from those sites? Instead of punching in bids for baby clothes, what if we all could offer individual goods or services? What if the seller could post his or her wants or needs, rather than a minimum reserve bid? Wouldn't things move much smoother? The jury is out, ironically enough, because of technology. Or lack thereof.

"People still barter for goods in some parts of Africa," said Pineda. "But a purely digital currency is many decades away from adoption as long as the digital divide remains. Developing countries in Africa, Asia, Latin America and more lack the infrastructure to depend completely on electronic transactions, let alone currency transactions. "

Of course, that could change as well, once the rest of the planet catches up to our new century's wireless broadband benchmark. And given what happened to Zimbabwe's disastrously devalued dollar, the barter system isn't looking as crappy as before. In fact, it's the system most used by Zimbabwe when dealing with its chief trading partner China, whose extensive investment in U.S. Treasuries has also empowered decades of gluttonous American consumption. For victors and victims of fiat currencies, the barter system is still an excellent fallback, if you still need to do biz in rapidly changing times.

Wake Up and Smell the Money

But the barter system only really works for those with material goods desired by an increasingly fickle market, which will get even more fickle as climate change takes hold this century and drastically shrinks what's left of the planet's easily obtainable natural resources, from oil to water to arable land and beyond. To chart a path forward into a truly democratic digital future, those having to live on the margins of the international market need something for when they have nothing to give but their own labor. And since some worry that the dollar could be next in line for a bout of hyperinflation, there's little comfort in the thought of exchanging that labor, which is more or less a universal currency, for a piece of paper that could be less than the labor is worth. If you thought underwater mortgages were bad, underwater labor is even worse. Let's just hope we don't have to go there.

We won't, if dogged financial regulation once again rears its lovely head. That could correct serious imbalances in our currently compromised economic system, and perhaps short-circuit the need for a purely digital currency.

"Electronic finance won't spread the wealth, unless the institutions, such as a bank or an online global clearinghouse, that hold -- or, in the case of digital money, record -- your money for you redistribute that wealth," Pineda explained. "Why can't we do away with banks or clearinghouses? If we decentralized our money holdings there would be no overseer to regulate the transactions between people and make sure everyone's being honest."

But that is obviously not happening now, and given the trillions in bailouts of so-called too-big-to-fail banks, it won't be happening anytime soon either. The United States used to have a series of checks and balances on banks, insurance companies and other hyperreal value peddlers, such as the Glass-Steagall Act. In fact, banks and other clearinghouses are mostly epicenters of financial corruption, rather than its sworn enemy. They're easily as if not more corrupt than the worst of us, and can hardly be called upon to honestly value, much less capably redistribute, the wealth of nations. As for the nations themselves? Should we go there either?

Here's what's obvious: The current system of finance is broken beyond repair, and needs to be rebuilt from the ground up. Literally: We need to reconnect our hyperreal financial stratagems to the Earth spinning beneath our feet, rather than hand them off as playthings of algorithm-addicted monoliths like Goldman Sachs and more. And while some nations like Venezuela, Cuba and more have begun to counter that crime by creating their own regional currencies, and other organizations like the International Monetary Fund are openly lobbying for a global currency, it has become clear that currency as we knew it could soon change forever. The question left to answer is what exactly it will change into as the 21st century unfolds.

While digital currency is just as prone to corruption and manipulation as any other fiat system, it is at least honest. By stripping away the paper dollars and precious metal coins, digital currency could unplugs us all from the hallucination that our papers and coins are worth more than yours. Digital currency could perhaps check speculation and predation, all while putting old-world currency's material resources to better use. And sure, it will be a serious headache. But you don't get the baby unless you take the pain of birth or surgery. And given all the pain we have inflicted lately, in the name of our antiquated money system, perhaps it's time we started making a new life in a still-new century, before the dollar becomes a stillborn reminder of what we can do when we're at our worst.