These days credit has a real attitude problem. It’s been spitting in the face of capital like it owns the place. Not only does credit disrespect capital, it tries to imitate it. I don’t need any more inferior substitutes in my life (attention Microsoft). Credit, please stop masquerading as capital.

Maybe if we re-introduced credit and capital the two could make amends:

Capital, credit…credit, capital. You two remind me so much of each other. I really wanted both of you to get a fresh start. Capital and I go way back to the days of washing cars at the dealership. I met credit about a year ago once I was having liquidity problems. Well, let’s just call a spade a spade: I couldn’t pay my bills. I’m going to order up some crab cakes at the bar, you two should get reacquainted.

What constitutes “capital” in today’s world is pretty iffy. Capital, you might say, has developed a serious identity crisis. Any money will do, really; even the sleazy dollar bills with George Washington mustaches. Where have our standards gone? Anything’s capital these days.

But who orchestrates the “credit as capital” façade? And better yet, who perpetuates it with such aggression and persistence?

The Federal Reserve banking system is a network of 12 regional banks with 25 branches spread across the country. The Fed is one of the institutions infusing “capital” into faltering companies like insurance giant American International Group (AIG) and auto manufacturer General Motors (GM). But the Fed can only make loans. Historically they only made loans to banks. Once the embers of the financial crisis set the economy ablaze in 2008 the Fed began making loans to private businesses as well. These loans, like any other, have a contractual obligation to be paid back with interest. Meet credit.

Before infusion into the largest insurer in the world (AIG) and providing “liquidity” for U.S. auto manufacturers, capital kicked things off by bailing out the investment bank Bear Stearns. All of these private institutions had “capital problems.” I can relate. Those are cash flow quandaries. More money goes out then comes in and assets owned hemorrhage their value; not unlike the real estate and stocks much of the world has been holding. Most people don’t get a capital infusion, though. They’re stuck with taking pay cuts if they’re lucky enough to remain employed. Or worse they’re let go as companies “cut the fat.” Yeah, we all could use a little capital. Meet credit again. Only this time it’s been dubbed “capital.”

There are very important differences between credit and capital. The “capital” being thrown around by the Treasury and the Feds really isn’t capital at all. It’s money but that’s about the only common thread it has to genuine capital. I’d like them to call it what it is.

Real capital comes from savings. A person or a government lives within their means, pays their expenses, burns through some money just for fun, and has some cash left over. The remaining sums are called savings. Savings then can be invested, stuffed in a mattress, or used as canvases to turn Andrew Jackson’s sideburns into a chin strap beard. Meet capital.

Side note disclaimer: SwiftEconomics.com does not endorse or promote any currency defacing. The punishment for such an offense could be a fine as much as $100 and up to 6 months in jail. Make sure to factor that into your eye patch and missing teeth drawing cost/benefit analyses.

The pools of “capital” used by government to save teetering private firms are actually pools of debt. They don’t call it that, though. It’s always referred to as capital. The money is borrowed from other countries, borrowed from ourselves, and printed based on nothing.

These pools of credit are not free and clear. Money as credit must be paid back eventually. The repayment plan will be in the form of higher taxes and/or a failed currency. In fact, the dollar standard across the world may be doomed to fail. World currencies are pegged to the U.S. dollar. In 1971 the United States promised the world they would never devalue their currency on a whim. This occurred at the Bretton Woods conference between the world’s industrial nations kicking around ideas for a new monetary system. Instead of foreign currencies pegging to gold, the U.S. would peg to gold and everyone would peg to the dollar.

Well, the money supply has increased by over 300% since the summer. New money creation decreases the value of money already in circulation. 300% is an unprecedented increase in the U.S. monetary base and many fear it will drive the final stake through the dollar’s heart. There may not be enough gold in Fort Knox or financial brainiacs in Washington to save the U.S. dollar now. The U.S. dollar is funny money.

Had you invested all your money into gold exactly one year ago, you would have the same amount of money today. Even in a recession you wouldn’t have lost any money. Had you invested all your money into gold exactly five years ago, you would have experienced a 142% gain in your money, or 28.42% annually. Gold is a hedge against the dollar. That is, when investors fear that inflation is on the rise, they’ll get out of dollars and into gold thinking it will sustain its value better. Gold is also a safe play for investors fearing the stock market.

Had you invested all your money into the S&P 500 exactly one year ago, you would have lost 41.77% of your money through the recession. Had you invested all of your money into the S&P 500 exactly five years ago, you would have lost 29.53% of your money.

Funny money is upon us. Some Austrian economists and others understood this long before a year ago. They pulled their money out of stocks and real estate and put it into gold. As long as the money supply is increasing at a frantic rate, the U.S. government continues to borrow money from other countries, and deficit spending is in the trillions, the dollar will continue to decline. Likewise, gold will continue to outperform stocks and real estate.

The funny money game is orchestrated and perpetuated by the Treasury, Federal Reserve, and U.S. government. It’s a game that will end; either by the government and the Federal Reserve stopping the above actions in time or the dollar collapsing. I don’t find the gamble they’re taking all that funny.