Is money not worth what the market says it is, in a free market? If so, when money is “created” by a governnment, can this be anything but inflationary? Money was already there. It had a value, which meant that you could buy x, y and z with some quantity of it.
Bundles of freshly minted bills arrive in a bank. They are now more eager to make loans, since they now have more money. Since they are more willing to make loans, they offer discounts, which puts more money in circulation. Since people can get money more easily, they are willing to pay more for what they want, which in turn causes merchants to raise their prices.
How could this happen if money were never created? I don’t think it could.
I don’t think there is ever any advantage to the expansion of money supply. What we want to grow are goods and services, at the same prices. This is true wealth.
Who benefits from inflation? Bankers? If the economy is growing–which is normally, effectively, to say inflation is growing at x rate–if you can loan money at x+20%, then even though the value of the dollar is decreasing, your actual purchasing power is increasing faster than that.
The foregoing may or may not be right. I need to read more, and ponder more. This is at least a two cigar problem, once I have more data.
3 replies on “Money”
You're hitting on all the right ideas and they are conflicting with the conventional wisdom and thought of modern society, the prevailing attitudes that we are bombarded with wherever we look. I was at the same point a year ago when I started to question in earnest why we were all in this big financial mess.
In addition to a "store of value," money provides the valuable function of a "medium of exchange." You're right, the most important thing to look at is the relative purchasing power of money. How much of a certain item can you purchase with a certain amount of money?
When looking at this subject you look at the interaction of supply and demand of that certain item. But also, equally important, is looking at the interaction of supply and demand of money.
You know that if the supply of your item increases than the price decreases. If the supply decreases than the price increases. Also, if the demand of the item increases the price increases and a decrease in demand leads to a decrease in price.
But, all other factors remaining the same, the supply and demand of your medium of exchange, money, will also affect the price of your item. If there is an increase in the supply of money but the amount of your item remains the same, that item will exchange for a larger amount of money. If there is less money, there will be more of the item for each unit of money.
Imagine a fixed money supply that interacts with the supply and demand interactions of all products in the economy. Those interactions will affect the availability of money in the system. A change in money supply will affect the price of everything in the system.
Who benefits when there is inflation (increase in the money supply)? Answer: those who borrow money. Why? Because as money is added to the system the value of each individual dollar is less so it becomes easier for the borrower to pay back the original debt.
Who are the biggest debtors? Governments and those that take big risks.
People in government are in it for the power. They want to tell people what to do and how to do it. They might have good intentions and they might be good people but, ultimately, they want to be in charge. Spending money is a huge manifestation of that power. Spending more than you have is an increase of this power and is made easier because inflation of the money supply makes it easier to pay back debts over time.
Who suffers the most because of inflationary policies? The average person who saves money and keeps it in the bank. The purchasing power of their money is stolen over time. It is a silent form of taxation as government dilutes the value of future dollars to pay for present spending. The average person bears the brunt and then is blamed for "hoarding" or not spending enough as a consumer to spur the economy.
That makes sense. What seems to follow from that is that we have created a system in which those who borrow mostest, firstest, get "ahead" the quickest, as this is the way to game the system. Since large financial institutions can borrow the most, they win, as does government.
As you say, this creates a situation in which actual capital accumulation in the form of savings is discouraged, and a race is started, which amounts to a Ponzi scheme. Those in first win, those in late lose, as in the California housing bubble.
Exactly…..
The banking lobby convinced Congress to form the Federal Reserve in 1913. Then it was official and it had government backing to be the lender of last resort for member banks and was sanctioned to create money to further its monetary policy goals. The banks got to privatize profits and socialize losses.
The government got their credit card to increase spending and to make it easier to pay off debt over time. I'm sure extra campaign contributions to politicians didn't hurt either.
For additional support, you had Keynsian economists that advocated government involvement in the economy including fiscal stimulus packages. Politicians get the public intellectual validation to do the things that they want to do. The economists get recognition, job appointments, and positions of influence.
It's a three way symbiotic relationship where the players get the main things that they want. And it's been happening for a long, long time. It's something that the Democrats and the Republicans have done. I used to believe in the Republicans, that they believed in limited government.Unfortunately, the last decade proved that the Republicans have strayed and are almost as fiscally bad as the Democrats.
For our country's sake, I hope that fiscal responsibility and fairness will return and that both parties are involved.
Reality though — I don't have that much faith…..
We are the best at this game of manipulating the economy and the politicians and the bankers will continue to play and profit until they are forced to change.
Look at Greece….a relatively hard currency, which they cannot devalue, has forced them to deal with the shenanigans of the past ten years. Sound money keeps people honest.