Sunday, September 16, 2012
This is from the bit he advises journalists to read so that they might know something:
Does printing money make us richer? Obviously not. Printing money does not create more value (real wealth). If it did, we could end poverty in Africa by sending over a few photocopiers. As the great economist Ludwig von Mises observes, ‘An increase in the quantity of money results in no increase in the stock of consumption goods at people’s disposal.’ And indeed, this isn’t just true of paper money. David Hume explained two centuries ago, suppose the amount of gold in the world magically and suddenly doubled. Would we be twice as rich? Clearly not. What makes us rich is the abundance of goods.
Why do governments do it? There are a few reasons. First, printing money redistributes wealth (to governments and their agents). Imagine a little old lady with savings of £100. Now picture the government printing more money. Remember, the more money there is swilling about, the less valuable it is (that’s why prices go up). As a result of the new money, the real value of the little old lady’s savings has been reduced. The value that has disappeared from her savings account (the wealth that has been stolen from her) has been redistributed, in effect, to the agent printing the new money (the government). In other words, printing money is the ultimate stealth tax. As the economist Murray Rothbard puts it, the government, by printing money, ‘can appropriate resources slyly and almost unnoticed, without rousing the hostility touched off by taxation.’
Printing money is also way of defrauding people who have lent the government money. Let’s say the government borrows £100 (by selling bonds to people who want to save for their pension). If the government prints more money, then the £100+interest which it pays back, will, in real terms, be worth less than the £100 it borrowed. As Thomas Gale More, a member of President Reagan’s Council of Economic Advisors, reassured him in the mid-80s, not to worry, ‘We can pay off anybody by running a press.’
Governments also like printing money because it creates an artificial and temporary boom which makes politicians look good. In the words of Rothbard, ‘counterfeiting [government printing of money] can create in its very victims the blissful illusion of unparalleled prosperity.’ It temporarily creates, he says, ‘a tinsel atmosphere of “prosperity”’.
In short, governments have every incentive to print money. But apart from stealing from people, does printing money do any harm? Yes it does. It is the cause of ‘boom and bust’, of recessions and depressions. Let’s see how. Imagine a game of Monopoly, in which the total amount of money magically doubles. You suddenly get £400 for passing Go and you get twice as much for winning a beauty contest. But at the same time the cost of the Gas Works and Fleet Street and the price of houses and so on are also doubled. Obviously the effect will be zero. The vital point to remember about printing money is that it is only because the new money makes its way gradually into the economic system that it has any impact at all.
And it is this that does the damage. In the end, all prices will rise, but there is a lag between price rises in different sectors of the economy, and this confuses business. At first the appearance of new money looks like good news. As von Mises says, ‘An increase in the quantity of money leads to the appearance in the market of new desire to purchase, which had previously not existed: “new purchasing power,” it is usual to say, has been created.’
For many businesses, they see the price of the goods they’re selling pushed up. But the price of wages and raw materials has not yet risen (the new money hasn’t reached that far yet). They are deluded into imagining that there is a genuine rise in demand and that their businesses are more profitable than they really are. These businesses then expand.
The trouble is (I’m sure you can see what’s coming), when the new money has made its way through the system, the businesses which have expanded (during the ‘boom’) suddenly find themselves in difficulty. The ‘new demand’ has evaporated and, as the price of raw materials and labour catch up, so their profits return to where they were before. But, having expanded in the ‘boom’ (often by borrowing money), their overheads are now much higher and they have debt to repay. The investment in boom-time turns out to have been what economists call ‘malinvestment’. The phony ‘boom’ has turned companies which may once have been healthy and profitable into loss-making, indebted concerns in danger of going bust.
But that’s not all printing money does. An interest rate, in a true market, is the price borrowers pay to savers for the temporary use of their money (plus a commission to the banks). Printing money artificially suppresses this price (producing more of anything tends to lower the price). But lowering interest rates, of course, discourages saving and encourages borrowing. Since the value of money is falling, you’d be a mug to keep it in a bank, watching it grow ever less valuable. Borrowing, by contrast, is a great idea. The interest payments are low, and the money you pay back in the end will be worth less, in real terms, than the money you borrow. Since the government allows banks to lend money they haven’t actually got (this is one of the ways they produce more money), we end up with the kind of financial and banking crisis which is currently spreading havoc throughout the world economy.
The question of whether the government monopoly is a good thing or not turns on whether (A) politicians, there for a short time, or bankers, whose entire business depends on dependability, can be more trusted not to inflate & (B) whether a monopoly or free competition is most likely to provide the incentive not to inflate. Experience suggests that (A) is definitely in favour of the bankers who, though well short of perfect, rarely engage in the deliberate inflation politicians do & (B) that free competition virtually always provides be incentives to maintain brand reputation whereas monopoly doesn't, so long as extensive forgery is impossible. Thus a paper currency requires government to prevent forgery. A gold or silver economy benefits from having government putting its seal on the metal (ie coining it) to affirm that it is genuine )that is almost all currency until the 18thC) while an electronic currency would all be recorded elsewhere and could not be counterfeited.
This strongly suggests such an electronic currency holds considerable advantages over what we have now, particularly with a large proportion of transactions already being by credit card, is currently practical.
Beyond that I have a thought.
Suppose Virgin bank offered a Virgin dollar backed by a promise to pay, in gold from asteroids, with a set interest rate? On the one hand it would be a gamble since, although the gold is undoubtedly there, we don't know when it can be carted back to Earth. On the other hand keeping your money in government owned currencies is no sort of gamble - we know it will be inflated to a greater or lesser degree.
This could fund a lot of space development.
A different point is that I suspect Greece will shortly become a 2 currency state. When it returns to the drachma there are still going to be a lot of people around with Euros - their main industry being tourism from the EU. I don't see anybody refusing to take Euros from tourists, or anybody else, and such productive industries will be willing to pay in that currency. I don't fancy being somebody on the Greek government payroll but cutting that payroll way back will be good for the country.
If you want a modern example, especially with a medium that exists only electronically you really need to read up on BitCoins, and the never-ending comedy that's resulted in.
Just out of curiosity, what's your explanation for virtually every developed nation eventually adopting a fiat currency enforced and legislated by a central government if the other alternatives were so obviously superior according to you? For all your talk of advancing Scotland into the future, you seem pretty determined to revive fiscal and social policies that were rightfully left behind in the 19th century...
Having read what I have previously written you will be aware that, astobishingly enough, central government often acts in the interests of central government even when the interests of the people are different.
I'm not sure what relevance the "Battle of Matewan" has to your point. More relvant would be the way various african countries are seeing trade done in mobile phone credits. You might also care to explain how the quantative easing carried out by Zimbabwe's is obviously superior to any alternative & how such Keynsian practices have turned that country into one of the world's wealthiest.