Dollars exist, but in what form; who created them, and how?
The uninformed may respond that dollars are pieces of green paper printed by the U.S. Treasury.
That answer would be incorrect on every level.
Those green pieces of paper are not dollars. Rather they are bearer titles to dollars. They are official recognition that the bearer owns a dollar.
These are not dollars. They are bearer titles to dollars
A house title is not a house. It is official recognition that the named person owns a particular house.
A car title is not a car, It is official recognition that the named person holds a certain car.
Dollars exist only as bookkeeping notations. They have no physical form.
You cannot see, feel, hear, touch, smell, or taste dollars.
The Treasury does not literally print dollars. It just prints titles to dollars, which exist as numbers in bank accounts.
All dollars are created from thin air by marking up accounts. Banks do it every minute of every day.
Consider the following scenario:
1. You go to a store, make a $10 purchase, and pay with your credit card.
Because you have a contract with the credit card company, you essentially have signed a loan document (the credit card receipt) saying you owe the credit card company $10.
That loan document, and all dollar-denominated loan documents, are titles to dollars.
A dollar bill is a bearer check signed by the Secretary of the Treasury.
So, your use of a credit card makes dollars.
(The green dollar bill in your wallet is a loan document. It signifies debt. It is a federal reserve note. “Bill” and “note” are words denoting debts.)
2. The credit card company sends instructions (not dollars) to the store’s bank, telling it to increase the balance in its checking account.
When the bank obeys those instructions, new dollars are created. These instructions are in the form of a check or wire transfer.
Simultaneously, the balance in the credit card company’s checking account is reduced, which destroys dollars.
At this stage, your purchase has caused the creation of ten dollars, a few cents of which go to various governments’ banks for sales taxes.
This bearer check is identical to a dollar bill, with one exception. The full faith and credit of the U.S. government backs a dollar bill. The full faith and credit of the writer backs the check.
3. Instructions among the several banks pass through the Federal Reserve, while the credit card company sends you a ten-dollar invoice.
To pay the invoice, you instruct your bankto send instructions to the credit card company’s bank, telling it to increase the balance in the credit card company’s checking account.
Those instructions are cleared through the Federal Reserve, and when your bank receives them, it reduces the balance in your checking account and destroys dollars.
Your one-time use of your credit card creates and destroys dollars.
At no time are physical dollars exchanged for there are no physical dollars.
All dollars are nothing more than numbers on financial institutions’ books.
Not being physical, dollars cannot be “sent.” Instead, instructionsin the form of checks or wires are sent to banks.
The banks are instructed to create and destroy dollars by changing the numbers in bank accounts.
What if that $10 purchase were made in cash rather than by credit card? Cash, i.e., dollar bills, are bearer titles to dollars. “Bearer” title means whoever has the title in their possession owns the dollars, which are numbers on the Treasury’s books.
All money represents a debt of the issuer, which among other things, owes the user full faith and credit.
You accept dollar bills in exchange for goods and services because you trust the full faith and credit of the federal government.
The U.S. federal government has all the tools it needs to control the value of the U.S. dollar.
You can have it all. We all can have it all. Nothing prevents it other than our own ignorance.
How is your imagination? Imagine a world in which:
We have no poverty
We have is no violent crime
We all can afford the best health care
We all can afford as much, and as fine an education as we wish
There is no air, water, or land pollution, nor shortages of pure water
Global warming does not exist
Our entire infrastructure is kept current
Our government is run to benefit all of us, not just the very rich
We actually do have the power to create this paradise on earth. We can have it all.
Background: The Problem Begins With Poverty
Money is not the root of all evil. Lack of money is.
Have you noticed that street crime — robbery, burglary, assault, murder, rape, shoplifting, drug-pushing — is most prevalent in impoverished neighborhoods? Of course, you have.
Before becoming a resident of Florida this year, I lived 60+ years north of Chicago, in what locally is known as “The North Shore.” It includes mostly upscale, “bedroom” communities, one of which is Wilmette, Illinois, where I lived.
Wilmette home prices are not only among the most expensive in Illinois, but Wilmette real estate also consistently ranks among the most expensive in America.
Wilmette is a decidedly white-collar village, with fully 94.76% of the workforce employed in white-collar jobs, well above the national average. Overall, Wilmette is a village of professionals, managers, and sales and office workers.
Wilmette is home to many people who could be described as “urban sophisticates”. Urban sophisticates are people who are both educated and wealthy, and thus tend to be older, richer, and more established than young professionals.
“Urban sophisticates” is not just about being educated and well-off financially: it is a point of view and state of mind, one that you might call ‘urbaneness’. But such people can and do regularly live in small towns, suburbs and rural areas, as well as in big cities. They read, support the arts and high-end shops, and love travel.
Do you have a 4-year college degree or graduate degree? If so, you may feel right at home in Wilmette. 83.23% of adults here have a 4-year degree or graduate degree, whereas the national average for all cities and towns is just 21.84%.
The per capita income in Wilmette in 2018 was $87,576, which is wealthy relative to Illinois and the nation. This equates to an annual income of $350,304 for a family of four.
Can you visualize Wilmette?
Google “Murder in Wilmette,” and you might possibly find a half dozen references from the past 50 years. Here is what violent crime looks like in Wilmette, in Illinois, and in the whole United States.
Get the picture?
What is the fundamental difference among Wilmette, Illinois, and the U.S., which can account for the massive differences in crime rates, education rates, and home prices?
Money.
No people are born murderers, rapists, robbers, burglars, and attackers. But lacking money, people are far more likely to grow up as street criminals.
And please spare yourself the anecdotes about impoverished kids who ultimately became pillars of society. Yes, there are plenty of them, and somewhere in their lives occurred fortuitous events that led to their achievements.
Perhaps nature provided them with the necessary brains or brawn to succeed, despite the odds. Or some mentors took them under wing and provided them with the leadership to find success.
And yes, there are rich people who commit crimes, though most often of the white-collar variety. Scant exceptions do occur, but the relationship between poverty and crime, especially violent crime, cannot be denied.
I am as opposed to the proliferation of guns as anyone, but I now do not believe guns are an important cause of crime, though they are an important facilitator of crime (and an even more important facilitator of suicide).
I have come to the conclusion that America could enact the most draconian gun laws on the planet, and that would not solve our crime problems.
We are at the stage in which gun ownership is an addiction, similar to alcohol and drug addictions. The time long has passed when we legally could prevent gun ownership and usage, any more than we were able, via laws, to prevent alcohol ownership and usage during Prohibition, or prevent drug ownership and usage during the “War on Drugs.”
We once could have prevented the disease, but now we are too infected for a cure.
We simply cannot stop gun crime by using the brute force of prohibitive laws. That mule will not respond to the stick. At long last, we must learn to use the carrot — the federal government’s infinite ability to create dollars– and thus cure the poverty that is the root cause of violent crime.
Our primary problem is: People who are not impoverished resent the government giving to the poor. It’s a state of mind that each day is fostered by wealthy propaganda.
Additionally:
The U.S. federal government has the financial power to provide a generous form of Social Security to every man, woman, and child in America, instantly eliminating poverty.
The U.S government has the financial power to eliminate not only most federal taxes (including the onerous, regressive FICA tax), but importantly to reduce the need for state and local taxes — those sales and use taxes that disproportionately affect the less wealthy — by simply giving state and local governments money.
The U.S. government has the power to eliminate the financial impoverishment caused by lack of insured health care, simply by providing no-deductible, comprehensive Medicare for All.
The U.S. government has the financial power to provide schooling to all Americans who want it — grades K through advanced education, thereby not only reducing the costs of college, but by reducing the need for local K-12 school taxes.
The U.S. government has the financial power to reduce global warming by supporting not only net-zero energy use and production, but also by supporting carbon-removal technology usage, research, and development
The U.S. government has the financial power to support water recycling and desalination usage, research and development. There is plenty of water on earth, but too little is fresh, drinkable water, and we rapidly are reducing those supplies.
The U.S. government has the financial power to repair and modernize our infrastructure — our roads, bridges, dams, sewers, electric grid, telecommunication, tunnels, transportation, parks, beaches, etc.
Many of the above initiatives are being attempted by elements of local government and the private sector, all of which have limited funds,
But, for the federal government, money is unlimited and free, created at the touch of a computer key.
Will so much federal spending cause inflation? No, as we have demonstrated here, and here,and here, inflation is not caused by federal deficit spending. Inflation is caused by shortages of goods and services, and often can be cured by federal deficit spending to reduce shortages.
Will so much federal spending be a burden on future taxpayers? No, federal taxes do not fund federal spending. The Monetarily Sovereign federal government pays for its spending by creating dollars, ad hoc. The sole purpose of federal spending is to control the economy by taxing what the government wishes to discourage, and by giving tax breaks to what the government wishes to encourage.
(This is different from state and local government taxes which do fund state and local spending.)
Will so much federal spending be socialism? No, socialism is not funding; socialism is control.
Consider Social Security. It spends billions but it is not socialism. It doesn’t control. It merely funds. Similarly, Medicare has very little control over your medical services other than the amounts it funds.
It does not tell you what doctor to see, what hospital to visit or what medicines to take. It does not control what your doctor diagnoses or treats. Medicare does not fund every procedure, but it does not control your financial ability to have the procedure.
Being Monetarily Sovereign, the American federal government has the financial ability to create paradise on earth. We lack only the knowledge and the will to do it.
The populace has been led to believe slogans like “Too good to be true,” and “No such thing as a free lunch,” which replace facts with a world of disinformation and cynicism, making us surrender before we begin.
As for the will, the government is blocked by the very rich, whose “Gap Psychology” goal is to widen the Gap between the rich and the rest. No matter how rich they are, the rich seem always to want to become even richer, and that requires ever-widening the income/wealth/power Gap. — and that requires pushing down those who are not rich.
In Summary:
The more you experience life’s failures, the more you tend to believe cynically, that a perfect world cannot exist, and that attempts to create perfection are fruitless, wasteful, naive, and even harmful. You have grown to expect disappointment.
So, when you are told the U.S. federal government has the infinite power to create U.S. dollars, and do it without adverse side effects, your knee-jerk response is to deride the idea. Thus, the “too good to be true,” and “no such thing as a free lunch” responses.
Yet, when you are told the U.S. government has the infinite power to create laws, and that U.S. dollars are nothing more than legal creations, not physical creations, you may pause that knee-jerk response.
Just as a federal law can say anything the federal government wishes it to say, the U.S. dollar can be anything and worth anything the law says it is, i.e. anything at all.
Throughout American history, federal law has stated that U.S. dollars were worth varying amounts of silver and gold, a process one hopes finally will have ended in the Nixon year 1971. But the U.S. government could pass a new law stating that the U.S. dollar is worth anything at all — a 1-carat diamond, or a pound of salt, or a quart of pure water. The value of the dollar, i.e. inflation, is in the hands of the government.
Beginning in 1971, the government has allowed the U.S. dollar to “float,” i.e. to allow the public to decide the exchange rate (vs. other currencies) of the dollar.
For that reason, there now can be no real answer to the question, “What is a dollar worth?” You can express it only with regard to other currencies, whose worth is equally vague.
Because a dollar is, in reality, a debt owed by the U.S. government, its value, like the value of all debts, is determined by its collateral, and the full faith and credit of the debtor, the U.S government.
Without gold, (or even with gold), the real collateral for the U.S. dollar is the full faith and credit of the U.S. government — not our “spacious skies or amber waves of grain” — just our full faith and credit.
If you were to try to drill down below exchange value to find the “real” value of the U.S. dollar, you would have to determine the “real” value of the full faith and credit of the U.S. government, an impossible task.
All of the above is meant to show you the truly amorphous nature of the U.S. dollar. It is what the government says it is, and it is worth what the government says it is — and there is no limit to the number of dollars the government can create. The dollar is the offspring of the government’s laws.
In short, there is no limit to what the government can spend to purchase paradise.
Working together, we have all the tools we need to create our paradise.
This simple fact makes a mockery of the President’s and Congress’s “struggles” to pass spending legislation, against those who falsely claim the government cannot or should not spend so much money.
In addition to interest rate control, which affects the market demand for money, and Federal Reserve bond purchases and sales, the federal government can revalue or devalue the dollar, at will.
We created a Monetarily Sovereign federal government and gave it all the power it needs to make America a paradise on earth. It is not constrained by money. It has infinite money and infinite control over the value of its money.
Our world is constrained only by our intellect, our imagination, our will, and our honesty.Barring a meteor strike or the sun failing us, we always will have exactly the world we create for ourselves — exactly the world we deserve.
Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps: Ten Steps To Prosperity:
You may know this, although the vast majority of Americans — including the media writers, politicians and economists — don’t: Money does not exist in any material form.
Money is nothing more than an electronic notation in an electronic balance sheet. You cannot see, touch, taste, smell, or hear money.
That dollar bill in your wallet is a title to a dollar, telling the world that you own a dollar. Just as a car title is not a car, and a house title is not a house, a dollar bill is not a dollar.
Because the U.S. dollar has no physical existence, the U.S. government has the unlimited ability to create infinite dollars at the touch of a computer key.
Within the past twelve months, the government has demonstrated this infinite ability by creating, from thin air, something like SIX TRILLION stimulus dollars, without collecting a single extra dollar in taxes.
The fact that dollars are mere balance sheet numbers makes the following article seem somewhat less shocking than it otherwise would.
On March 11, Beeple, a computer science graduate whose real name is Mike Winkelmann, auctioned a piece of crypto art at Christie’s for US$69 million.
The winning bidder is now named in a digital record that confers ownership. This record, called a nonfungible token, or NFT, is stored in a shared global database.
This database is decentralized using blockchain, so that no single individual or company controls the database.
But “ownership” of crypto art confers no actual rights, other than being able to say that you own the work. You don’t own the copyright, you don’t get a physical print, and anyone can look at the image on the web.
There is merely a record in a public database saying that you own the work – really, it says you own the work at a specific URL.
So why would anyone buy crypto art – let alone spend millions on what’s essentially a link to a JPEG file?
It’s a difficult question, only for those who believe money is a physical thing.
But because money has no physical existence, might just as well ask, “Why would anyone give someone a beautiful, physical automobile, containing 10,000 physical parts, in exchange for numbers in a balance sheet?
Before we try to answer both questions, let’s look a bit further at the article:
Some people buy art for their homes, hoping to incorporate it into their living spaces for pleasure and inspiration.
But art also plays many important social roles. The art in your home communicates your interests and tastes. Artworks can spark conversation, whether they’re in museums or homes.
People form communities around their passion for the arts, whether it’s through museums and galleries, or magazines and websites. Buying work supports the artists and the arts.
“Seeing” the Mona Lisa
Let me tell you three short stories about money, value, and art.
Story #1. Have you been to the Louvre and seen the famous Mona Lisa?
It’s a surprisingly small portrait, and your view is limited by the fact that a rail protects it from a close approach.
Further, most of the time, it is surrounded by a dense crowd of viewers, each of whom is able to spend only a few seconds to look at what arguably is the most famous painting in the world.
In the unlikely event this painting ever were sold, the cost would be in the trillions of euros.
Yet, you could purchase a very good lithographed copy for a few dollars, and you could hang it in your home, and enjoy it for hours on end.
Center diamond: 3 carats. Each side diamond: 2 carats
So why would anyone spend millions, billions, or trillions of dollars to own something they could have for next to nothing?
Story #2. Years ago, I bought for my wife (now deceased) a ring, from a cousin (also now deceased) who was a wholesale diamond merchant. He sold to retailers, who sold to the public, so his own buying price was quite low.
The ring had a magnificent center diamond weighing 3 carats, with a diamond on both sides, each weighing 2 carats.
As I recall, the “family” price to me was about $7,000. I since have sold that ring for many times that amount.
But, I could have purchased an essentially identical piece of jewelry, made from cubic zirconia, for about $750, give or take.
Without a jeweler’s loop, no one (but my wife) would have been the wiser.
So why would a fool (me) spend so much on essentially nothing?
Perhaps the most visible form of art collecting today, and the one that drives so much public discussion about art, is the art purchased for millions of dollars – the pieces by Picasso and Damien Hirst traded by the ultrawealthy.
Why were those pieces of are exchanged for so much money?
Finally, I think many people buy art strictly as an investment, hoping that it will appreciate in value.
If you look at the reasons people buy art, only one of them – buying art for your home – has to do with the physical work.
Every other reason for buying art that I listed could apply to crypto art.
You can build your own virtual gallery online and share it with other people online. You can convey your tastes and interests through your virtual gallery and support artists by buying their work.
You can participate in a community: Some crypto artists, who have felt excluded by the mainstream art world, say they have found more support in the crypto community and can now earn a living making art.
While Beeple’s big sale made headlines, most crypto art sales are much more affordable, in the tens or hundreds of dollars. This supports a much larger community than just a select few artists. And some resale values have gone up.
Aside from the visual pleasure of physical objects, nearly all the value art offers is, in some way, a social construct. This does not mean that art is interchangeable, or that the historical significance and technical skill of a Rembrandt is imaginary.
It means that the value we place on these attributes is a choice.
Story #3. It’s not really a story, but a common observation: Millionaires and billionaires love to see their names on things: Hospitals, schools, libraries, sports’ centers, etc. So they give away millions or billions of dollars, just to see what they could have seen for a few dollars or nothing: Their names.
What do they get for their money? Nothing physical.
They could have contributed without insisting that their name be engraved somewhere. They received the same benefit as did the person who bought the crypto art, and the same benefit I received for buying three transparent stones my wife could wear.
And that is the not-so-secret of the balance sheet notation we call “money.” Those arbitrary, non-physical, made-from-thin air dollars have enough value to be traded for . . . traded for what? A couple of transparent stones? A picture?
They all are valuable because we social animals choose to deem them valuable.
You might respond that scarcity is what makes them valuable. But plenty of things are scarce and not valuable. I paint, but my paintings are not valuable, though they are just as scarce as the Mona Lisa.
You might say beauty or artistic talent makes them valuable. But before artists become famous, their paintings are just as beautiful and require just as much talent, but are valued much less.
When someone pays $90 million for a metal balloon animal made by Jeff Koons, it’s hard to believe that the work has that much “intrinsic” value.
Even if the materials and craftsmanship are quite good, surely some of those millions are simply buying the right to say “I bought a Koons. And I spent a lot of money on it.” If you just want an artfully made metal balloon animal, there are cheaper ways to get one.
Conversely, the conceptual art tradition has long separated the object itself from the value of the work. Maurizio Cattelan sold a banana taped to a wall for six figures, twice; the value of the work was not in the banana or in the duct tape, nor in the way that the two were attached, but in the story and drama around the work.
Again, the buyers weren’t really buying a banana, they were buying the right to say they “owned” this artwork.
Depending on your point of view, crypto art could be the ultimate manifestation of conceptual art’s separation of the work of art from any physical object. It is pure conceptual abstraction, applied to ownership.
On the other hand, crypto art could be seen as reducing art to the purest form of buying and selling for conspicuous consumption.
In Victor Pelevin’s satirical novel “Homo Zapiens,” the main character visits an art exhibition where only the names and sale prices of the works are shown. When he says he doesn’t understand – where are the paintings themselves? – it becomes clear that this isn’t the point. Buying and selling is more important than the art.
This story was satire. But crypto art takes this one step further. If the point of ownership is to be able to say you own the work, why bother with anything but a receipt?
The reason art, or anything else — cars, houses, jewelry, etc. — has value is not just its intrinsic value. For most of us, there are cheaper forms of transportation, cheaper forms of shelter, and cheaper stones than what we paid. A scratched and dented car has the same transportation value as does a shiny, untainted car.
We are social animals. These things have value because other people think they have value, and they are willing to exchange other things they think have value to get them.
And that is why money has value.
Money has value because the world thinks it has value. Remember, money has no physical existence. It is just a bookkeeping notation. And that same notation might appear in several places.
It might appear on your bank’s computer, on your computer, or on dozens of other computers. No matter how many computers it appears in, it still is the same money. It still has the same value.
It still seems hard to get used to the idea of spending money for nothing tangible.
Would anyone pay money for NFTs that say they “own” the Brooklyn Bridge or the whole of the Earth or the concept of love? People can create all the NFTs they want about anything, over and over again. I could make my own NFT claiming that I own the Mona Lisa, and record it to the blockchain, and no one could stop me.
But I think this misses the point.
In crypto art, there is an implicit contract that what you’re buying is unique. The artist makes only one of these tokens, and the one right you get when you buy crypto art is to say that you own that work.
Actually, the more important right is to say that you can afford to own the work.
As an investment, crypto-art just seems inconceivable to me that the higher prices reflect true value, in the sense of these works having higher resale value in the long term. As in the traditional art world, there are a lot more works being sold than could ever possibly be considered significant in a generation’s time.
And, in the crypto world, we’re seeing highly volatile prices, a sudden frenzy of interest, and huge sums being paid for things that seem, on the surface, not to have the slightest bit of value at all, such as the $2.5 million bid to “own” Jack Dorsey’s first tweetor even the $1,000 bid on a photo of a cease-and-desist letter about NFTs.
Much of this energy seems to be driven by price speculation. It’s also worth noting that the winner of the Beeple auction seems to be heavily invested in the success of crypto art. The cryptocurrencies that drive crypto art are often considered highly speculative.
Yes, there could be a tulip-bulb bubble at work here. And, where there is no intrinsic value, the possibility of a bubble increases.
But what backs the full faith and credit of the U.S. government. No, not the “amber waves of grain,” or the “purple mountain majesties,” or the “enameled plain.” No creditor can acquire those.
The value of the Mona Lisa, the diamond ring, a mansion, a Rolls Royce car, the full faith and credit of the U.S. government, and the value of the U.S. dollar itself, all are backed by the same thing: Society’s belief that they have value.
Do you believe the dollar, that whispy, non-physical number in a bookkeeping record has value? If so, you are part of the billions of people who also think it has value.
Your dog doesn’t value a dollar. A fish doesn’t value a dollar. Tribes in the Amazon jungle don’t value the dollar.
But billions of people do, simply because other billions of people do.That is how value is determined.
When people claim that the federal government or some agency of the federal government (Social Security, Medicare et al) is in danger of running short of dollars, the ignorance is manifest. How can a government run short of something it creates by waving a magic wand (in the form of a computer key)?
Soon, President Biden will tell us he has to raise taxes in order to “pay for” the trillions being spent for COVID relief. It is utter nonsense. It is terrible, horrible, damaging Big Lie.
It is a lie that punishes America every day, by preventing us from having Medicare for All, Good Education for All, Good Housing for All, Good Food for All, Good Clothing for All, Good Transportation for All, and every other easily affordable (by the federal government) benefit.
The U.S. government not only has the unlimited ability to create dollars from thin air, but it can give those dollars any value it chooses (i.e. prevent or cure inflation.) The government neither borrows nor levies taxes to obtain dollars. It just waves that magic wand.
What is a dollar worth? Whatever its creator and society says it’s worth.
Hey, 69 million of them are worth the ability to claim you own a link to a JPEG file.
And it cost the federal government absolutely nothing to create those 69 million dollars.
In that same vein, if you send me a thousand dollars, I will send you (electronically, of course) a receipt saying you sent me $1,000. You can print it and hang it proudly in your home.
Giving you that receipt will cost me as much as providing free Medicare for All would cost the U.S. government.
Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:
In one sense, inflations (and hyperinflations) must be complex, not only because so many nations have suffered from them and not known what to do, but because so many events can cause inflations.
But in another sense, many nations have figured out how to prevent and cure inflations, and the causes can be boiled down to just two. This post reveals the two causes of, and the two best cures for, inflation.
Inflation does not exist in a vacuum. It is a change in the relationship between the value of a currency and the average value of goods and services. In short, the value of the currency declines relative to the value of the goods and services.
Classic example of hyperinflation — wheelbarrow of money.
Popular wisdom holds that government deficit spending or “money creation” causes inflation. Many examples of inflation, particularly hyperinflation (an extreme form of inflation) do seem to correspond with money creation.
Weimar Republic (Germany) and Zimbabwe are perhaps the most cited examples.
Yet, in the U.S., the money supply has increased markedly with only moderate inflation.
The following graph shows indexes of three money measures, M1 (green), M2 (red), and M3 (blue), along with the consumer price index measure of inflation (purple). All indexes are based on January 1980 = 100.
While all three money measures have risen substantially, inflation has been comparatively modest, and within the Fed’s target of 2.5% annually. Why?
Here is another graph comparing the rise of federal debt(total of T-security accounts) with the consumer price index:
Federal debt grew massively while inflation remained moderate.
Again, there seems to be scant relationship between federal debt growth and inflation.
It would be difficult to look at these data and conclude that federal deficit spending (i.e. money creation) causes inflation. In fact, money creation seems to be a government’s response to inflation, not the cause.
Where does that leave us?
Inflation is based on the value of goods and service vs. the value of a currency. The value of goods and services is based on Demand/Supply. The value of a currency also is based on Demand/Supply.
The formula for the value of goods and services (Demand/Supply) is driven mostly by changes in the Supply side of the fraction. When food or energy are in short supply, inflation is inevitable. The Demand for food and oil (today’s stand-in for energy) is far less variable.
In the formula for the value of dollars, Demand/Supply, both Demand and Supply can be quite variable. The Demand for currency is based on Reward/Risk. The Reward for owning dollars is interest. The Risk would be the reduced “full faith and credit” of the issuer.
Because the full faith and credit of the U.S. essentially is perfect, Risk is not an important variable here.
This means that inflation comes when the Reward for owning dollars (interest) declines and/or the Supply of food and/or energy declines.
A larger economy has more money than does a smaller economy. For instance, California has a larger economy and more money than does Los Angeles. Therefore, to grow an economy requires growing the money Supply.
That indicates that trying to fight inflation by limiting the money supply (aka austerity), via reduced deficit spending and/or increased taxation, will lead to recession or depression.
Annual % change in Federal Debt shows that reductions lead to recessions (vertical bars), and increases cure recessions.
As for surpluses (i.e. extreme deficit reductions), they lead to depressions (i.e. extreme recessions):
1804-1812: U. S. Federal Debt reduced by 48%. Depression began in 1807.
1817-1821: U. S. Federal Debt reduced by 29%. Depression began in 1819.
1823-1836: U. S. Federal Debt reduced by 99%. Depression began in 1837.
1852-1857: U. S. Federal Debt reduced by 59%. Depression began in 1857.
1867-1873: U. S. Federal Debt reduced by 27%. Depression began in 1873.
1880-1893: U. S. Federal Debt reduced by 57%. Depression began in 1893.
1920-1930: U. S. Federal Debt reduced by 36%. Depression began in 1929.
1997-2001: U. S. Federal Debt reduced by 15%. A recession began in 2001.
Bottom line: Inflation devolves to two variables: The supply of food and/or energy and interest rates.
The prevention and cure for inflation is to make sure the Supply of goods and services (usually food or energy ) is adequate, and the Reward for owning dollars (interest), remains adequate.
Example: Zimbabwe’s hyperinflation began when its leader, Robert Mugabe stole farm land from white farmers and gave it to black people who had no experience farming.
The resultant food shortage caused inflation. Then, Mugabe’s response was to print currency, which did nothing to solve the fundamental shortage problem. And as the inflation worsened, more and more useless currency printing followed, and it was the currency printing that wrongly was blamed for the inflation.
It was as though someone prescribed wine to cure a cancer. As the cancer progressed, more and more wine was prescribed until the patient died, and the wine was blamed as the cause of the cancer.
In short, to prevent inflation don’t cut federal deficit spending. Rather, make sure the economy has plenty of food and energy and high enough interest rates.
And so, to cure an existing inflation, you must increase your supply of food and energy, and/or increase interest rates.
Printing more currency is an ineffective inflation cure, as is cutting deficit spending (aka “austerity.) Both exacerbate inflation and lead to recessions and depressions. Instituting austerity to grow an economy is like applying leeches to cure anemia.
What should a Monetarily Sovereign country do about inflation? Here are the best steps to take:
Increase interest rates to make the currency more valuable. This is the method the Fed uses to control inflation.
Support farmers by cutting farm taxes, passing farm support bills, support farm research to increase crop yields.
Support energy creation: Oil drilling, renewable energy.
Do not blame federal deficit spending for causing future inflations
Do not begin austerity (reduced deficit spending, increased taxation)
Do not print additional currency.
Do not borrow a foreign currency
What about monetarily non-sovereign nations like the euro countries, which do not have a sovereign currency?
If the EU cannot be convinced to prevent and cure inflations, while supporting economic growth, euro nations must re-establish their own currencies, and become Monetarily Sovereign, again.
The most important problems in economics involve the excessive income/wealth/power Gaps between the richer and the poorer.
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.
Implementation of The Ten Steps To Prosperity can narrow the Gaps:
/cloudfront-eu-central-1.images.arcpublishing.com/diarioas/SHIIKXQJ6ZJPFA7VS6CJUOHX7I.jpg)
#Monetary Sovereignty - Mitchell 