First, assuming you're talking about the US, your bank accounts are insured by the FDIC, and the FDIC is not part of or formally backed by the US government. There are lots of people who believe that if the FDIC were in danger of bankruptcy, the US government would step in to support it — as it did with Fannie Mae and Freddie Mac — but until the government actually promises to do that, you can't call it a "vote of confidence".
Second, the US government's dollar position is short, not long — its dollar-denominated debts are greater than its dollar-denominated assets. In financial terms, a short position is a way to bet against the value of the underlying commodity. The US government is currently about $7 million million dollars "short".
An illustration may help to clarify. Suppose you are a private in the Zimbabwean military in September 2007. Suppose your monthly pay is about US$180, but you are paid in Zimbabwean dollars, so your pay packet is actually Z$5.4 million for the month. The Zimbabwean dollar has been hyperinflating, and you expect it to continue to lose value. You don't currently need to pay any expenses. Consider the following options:
A. Keep the Z$5.4 million in cash.
B. Immediately buy other commodities with it; for example, buy 300 kilograms of rice and store it in Tupperware in the pantry.
C. Immediately buy other commodities with it, and also borrow an additional Z$10 million some poor sucker is willing to lend you at an extortionate 20% APR, and use that to buy rice too.
Option "A" is maintaining a "long" position in the Zimbabwean dollar. This amounts to a bet that the Z$ will retain its value. If you had taken this option, you would have lost 90% of your salary within a few weeks.
Option "B" is maintaining no position in the Zimbabwean dollar. It doesn't matter what the Zimbabwean dollar does thereafter; you still have the same amount of rice. (Practically speaking, in situations like this, there tend to be price controls on most things you can buy with the collapsing currency.)
Option "C" is maintaining a "short" position in the Zimbabwean dollar. If you had somehow found such a sucker, then within a few weeks, you could have paid them back by selling off a tiny percentage of the rice you bought, as the Zimbabwean dollar continued to inflate.
This is the position the US government has taken relative to the US dollar.
There are, of course, other reasons to take long or short positions on commodities other than speculation on their future value.
Third, even if we accept the premise that the implicit guarantee of the US government to keep the FDIC afloat amounts to "the US government is willing to insure my bank accounts", that is simply a further short position. FDIC insurance is for dollar-denominated accounts up to a fixed dollar limit. Whoever is on the hook to underwrite that insurance in the end, they'll have an easier time paying out their claims if the US dollar loses value. If your bank account has $78000 in it and the currency loses ¾ of its value (which happened here in 2001), the FDIC bailout only has to come up with the current equivalent of $19500 to pay you back.
Fourth, the government is not "more than people". It's just people.
Thanks for the great explanation on the US government's dollar position. I also thought about my comment some more later, and realized that inflation really devalues the FDIC's deposit insurance.
I'll take issue with the government being "just people," but that's just a nit in a great post.
First, assuming you're talking about the US, your bank accounts are insured by the FDIC, and the FDIC is not part of or formally backed by the US government. There are lots of people who believe that if the FDIC were in danger of bankruptcy, the US government would step in to support it — as it did with Fannie Mae and Freddie Mac — but until the government actually promises to do that, you can't call it a "vote of confidence".
Second, the US government's dollar position is short, not long — its dollar-denominated debts are greater than its dollar-denominated assets. In financial terms, a short position is a way to bet against the value of the underlying commodity. The US government is currently about $7 million million dollars "short".
An illustration may help to clarify. Suppose you are a private in the Zimbabwean military in September 2007. Suppose your monthly pay is about US$180, but you are paid in Zimbabwean dollars, so your pay packet is actually Z$5.4 million for the month. The Zimbabwean dollar has been hyperinflating, and you expect it to continue to lose value. You don't currently need to pay any expenses. Consider the following options:
A. Keep the Z$5.4 million in cash.
B. Immediately buy other commodities with it; for example, buy 300 kilograms of rice and store it in Tupperware in the pantry.
C. Immediately buy other commodities with it, and also borrow an additional Z$10 million some poor sucker is willing to lend you at an extortionate 20% APR, and use that to buy rice too.
Option "A" is maintaining a "long" position in the Zimbabwean dollar. This amounts to a bet that the Z$ will retain its value. If you had taken this option, you would have lost 90% of your salary within a few weeks.
Option "B" is maintaining no position in the Zimbabwean dollar. It doesn't matter what the Zimbabwean dollar does thereafter; you still have the same amount of rice. (Practically speaking, in situations like this, there tend to be price controls on most things you can buy with the collapsing currency.)
Option "C" is maintaining a "short" position in the Zimbabwean dollar. If you had somehow found such a sucker, then within a few weeks, you could have paid them back by selling off a tiny percentage of the rice you bought, as the Zimbabwean dollar continued to inflate.
This is the position the US government has taken relative to the US dollar.
There are, of course, other reasons to take long or short positions on commodities other than speculation on their future value.
Third, even if we accept the premise that the implicit guarantee of the US government to keep the FDIC afloat amounts to "the US government is willing to insure my bank accounts", that is simply a further short position. FDIC insurance is for dollar-denominated accounts up to a fixed dollar limit. Whoever is on the hook to underwrite that insurance in the end, they'll have an easier time paying out their claims if the US dollar loses value. If your bank account has $78000 in it and the currency loses ¾ of its value (which happened here in 2001), the FDIC bailout only has to come up with the current equivalent of $19500 to pay you back.
Fourth, the government is not "more than people". It's just people.