In a couple of days the United States government will have to make one of the most interesting decisions in its history on how it manages its economy. The US Government will either run out of money or it will have to raise its debt ceiling. In all honesty, whether it is now or after a “default”, the US Government will raise its debt ceiling. Regardless of all the posturing, the reality of running the United States requires vast amounts of money and its citizenry will demand a raise in the debt ceiling no matter the political stripe.
However, this really is an interesting problem. Raising the debt ceiling is effectively the right of the United States government to print more dollar bills (loans will come from investors, other governments etc, but it is still money that didn’t exist in the economy in the first place). The point then is “what is the actual value of the US dollar?”
In any other economy, if a country decided to print more money or borrow such a large sum and inject it into the system, the currency would be devalued. However, smart money says that as soon as the debt ceiling is raised the US dollar will remain at its current levels relative to the Canadian dollar or the UK pound, maybe even increase. That seems to go against the reality of how we think of currency valuation… or does it? It all comes down to the fact that almost all currencies are now “virtual” and certainly subject to market sentiment and subjective and “perceived value”.
I think we all like to believe that there are rules for all things. After all we’d like to think that the economy is as solid as the fundamental laws of physics. But what if that is not the case? Let me give you an example of perceived value. If you bought a piece of art for a million dollars, the value is based on the subjective value that you and the rest of society puts into it and the value the seller is willing to part with it. There is no hard and fast rule for that piece of art to be worth a million dollars. In order for the art to be valued at a million dollars then enough of us have to believe that it is worth a million dollars. It is why an artist who is living fetches less value than an artist who is dead. The art hasn’t changed, just our perception of its value.
The same goes true for the house you likely own or mortgage. The value of the house is not the cost of materials, the piece of land or anything like that. The value of the house is based on what someone is willing to pay for it and the price at which the seller or builder is prepared to sell. It is entirely subjective and perceived value and can be applied to every object around you.
Crazily enough, the rest of our economies all work that way too, simply because, no matter what economists write, publish and espouse, money markets, like all markets are based on sentiment, emotions, reactions and, well, humans. In this sense, I could argue that the US dollar, and every currency that we put so much faith in is actually as much a virtual currency as Empire Avenue Eaves. The US dollar is worth X against another currency and buys you Y because enough people believe that it does, we have faith in the economic system backing up that green piece of paper with some deliverable good that we then personally see as having value.
Well, isn’t that similar to Empire Avenue Eaves? In Empire Avenue, the Eaves are backed by your online social value, your social networks, your online social activity. That currency then can be traded for other things in our economy which bring value to you, whether it is a connection with another person, a position on a leaderboard and more visibility or potentially buying traffic to what you do and say.
Now there’s an interesting phenomenon happening at the same time in this real-world crisis that has been brewing. If you take my fundamental assertion that value is subjective and perceived, and that currency and the money markets are just as subjective as all other markets, then let me argue that the greatest danger the US Government runs is not the danger of devaluing the US dollar and is not even the trillions in debt — after all, if the whole thing is virtual and perceived then you could argue that debt is also perceived, subjective and hence in turn virtual. If the US economy stays relatively strong then everyone believes that US going into more debt is not that big a deal, eventually the US will pay back or claw its way back from the debt. At least that *was* the sentiment.
The real danger that the US Government is running is that all this political posturing is shaking the world’s fundamental belief in the strength of the government, its military and its treasury. Once that belief goes then the social currency, the social capital and the social belief in and of the very US economic system is put at stake and we run the risk of a true devaluation of the US dollar. Most of us would like to think that our economies are not founded upon the idea of subjective valuations and emotional human assumptions, but I would argue, that unlike the laws of physics, the laws of economics are inherently, well, social. All currencies are in fact virtual, social and all very real.