Even though the CDC announced in the waning days of February 2020 that “the risk of getting COVID-19 is still low”, the thirty “Blue Chip” stocks of the Dow Industrial Average fell more than 30% from March 4 to March 23. The Dow had already dropped 14% in February before regaining 70% of the loss in a market trading several billion shares in just four days. When the Bears took control, they were announcing their judgment that the immediate future for such companies as Walt Disney, Walmart, and Microsoft was dim.
Historically, human beings have evaluated the worthiness of a good or service by how much they are willing to give up to acquire it. Before money was invented, people would barter to arrive at a “price” that both agreed was equitable. For example, a farmer may have exchanged forty bushels of corn for a plow, establishing a price for each side of the trade.
People are in some respects miserly: the most common speech sound in the English language is the Schwa, or the “uh” sound in “duh”. The Schwa is loved because it requires only a puff of air to produce. Likewise, it is understandable that people also love carrying around money as a store of value. However, the store-of-value function of money is not inevitable.
One of the most contentious issues between Thomas Jefferson and Alexander Hamilton—Washington’s Secretary of State and Secretary of the Treasury, respectively—was the creation of a national bank. It took Hamilton more than a century to win, as the Federal Reserve was created in 1913. But even that was not enough to debase the dollar. There remained two more events to render the store-of-value function of the dollar moot. The first was the product of a carnival barker named John Maynard Keynes, who posited that politicians could spend willy-nilly without tanking the economy. The second, and perhaps more damaging, was Nixon’s closure of the gold window in 1971, ending the convertibility of the dollar into gold.
If you had invested $1.00 in the S&P 500 index in 1971, it would have grown to $167 this year, in nominal terms. But inflation accounts for $142 leaving the inflation-adjusted return at $25. Normally, the way the Federal Reserve expanded the money supply was to add surplus to banks, which would in turn offer loans to companies, that would put this money in banks, which would increase those banks reserves…into eternity. But times have changed. Connected elites now use the faux cash to buy back stocks and pay dividends, making as much as $30 trillion in price gains—otherwise known as a bubble. This has had the effect of nullifying the market’s ability to reliably predict the future course of the economy.
If that were not enough, one other element accounts for the death of the store-of-value function of money: Say’s Law, or “Supply creates its own demand”. If you want to get something of value, you must give something of value. But, according to Modern Monetary Theory, participants in a barter need not bring something of value to the bargaining table. All they need is faux cash, making a muddle of the information inherent in every price. And there is the rub.
When the government becomes the source of all you need to know, it won’t feel like utopia. After the fall of the Soviet Union, I remember reading an essay in The Economist recounting how Russian women would routinely have a net carryall at the ready lest they miss the arrival of “new” goods at the GUM. It didn’t matter what the goods were because their goal was to find something tradable, as her rubles were of no value. The citizens of the first-in-space Soviet Union had regressed to barter, and the only access the politburo had to sound money was to sell natural resources, as only thrill-seekers were clamoring for a Lada.