What Happened to Our Economy?
by Robert Roy Pool
When I was a college senior a friend of mine developed the theory that all economic events – all events, really – were controlled by a computer in the center of the Earth operated by the Exxon Corporation. Of course, she was not serious. She understood that her theory was just a silly placeholder for a far more sophisticated understanding of the world’s most complex system. But her theory did serve to stop all intelligent discussion of economic issues and redirect the conversation to topics of more interest to college seniors, topics like romance and social life. So it was a perfectly good theory. It served its purpose.
The global economy is the most complex system ever engineered by human beings, and no one – not a single human being on this planet – understands it completely. Even Paul Volcker and Alan Greenspan, both former Chairmen of the Federal Reserve, have confessed that they were surprised by what they have seen during this credit collapse. If these two men don’t totally understand what’s happening and why, it is safe to assume that no one does. Except for the processes that take place inside our bodies, the economy is the most complex system we human beings interact with.
Most of us do our best to avoid thinking about the unseen influences that combine to produce, say, the price of gasoline. When prices rise suddenly and unexpectedly, even the smartest and best educated people tend to blame “greedy oil companies,” or “Arabs,” or “hedge fund speculators,” who are always presumed to be operating behind the scenes, conspiring to steal our money. Because these simplistic explanations are easy to understand – however wrong – they satisfy our human need for simplicity and order. Economic issues lend themselves to paranoid interpretations, and to oversimplification.
But now it is 2009 and the “unseen hand of the market” has slipped badly, throwing our economy into a vicious deflationary spiral. More people lost more wealth last year than any previous year in human history. The same thing may happen again this year. How and why did this calamity occur? While no one knows everything about how this came about, the broad outlines of the story are now clearly visible.
Too Much Money 
The problem began with too much money. It is difficult to imagine how too much money can result in an economic crisis. As individuals, it seems we never have enough. But too much money sloshing around in the global economic system can produce disastrous consequences. The current crisis originated in 2003 when the global system suddenly found itself awash with too many dollars.
Root Causes of the Root Cause
We could examine numerous contributing factors that led to this condition, but the underlying root cause was the end of fixed currency exchange rates (Let’s blame Richard Nixon! He’s dead and he can’t defend himself!). This, combined with the end of the “gold standard” – twin decisions made by Richard Nixon and his Treasury Secretary, John Connally in 1971 – 
created a global economy in which currency values were allowed to fluctuate in response to supply and demand, like other goods. Floating exchange rates, in turn, made it easier for the Federal Reserve and other central banks to create “fiat” money at will, just by adding entries on their balance sheets and using these credits to buy treasury bonds in the open market, thereby putting more money, or liquidity, into the system at no cost to taxpayers or anyone else.