ON MONEY CREATION

In terms of a complete understanding of money creation, there is too much time, energy and discussion given to analyzing, describing and criticizing the activity inside the economy – once the money has already been created and becomes active in the economic system – and never enough time given to understanding the consequences of how money enters the economy.  It matters.  A lot.

STOP THE PRESS!

Everyone likes to use the terms “they print it”, or “the Fed prints it up” (Never mind that the Federal Reserve does not print our money, instead, it’s the Bureau of Printing and Engraving, selling to the Fed at cost so that they can loan it back to the same government that printed it.) or “they just turn on the printing press”.  It is utterly insignificant whether or not “they print it”, but rather, what they do to get it into the economy after that. 

In fact, even once the bills are printed, they are not yet “money”.  Not until they are “monetized” by extension of credit (a loan).  Even then, it is not possible to have the bank teller at the window count out your loan, in bills, without that new loan first going through a demand deposit account (checking account) and you writing a check on that account to “buy” some paper currency.  

So, let’s not get sidetracked by - “they print it”.

HOW DID THAT GET IN HERE?

Consider this, there are only three ways to get money into the economy:

1) Gift it 

2) Loan it and 

3) Spend it. 

Each method has its own set of consequences.

First, suppose that money is gifted in.  Gifting the money in means that they print up a bunch and give it away.  They might place a pallet of the green stuff down on the street corner so that you can come grab a chunk of it.  Or they might electronically deposit the new money into your checking account.  If you did not produce anything in order to facilitate the new money creation, then there would eventually be an excess of money in relation to the amount of goods you could buy.  Economists assure us that that is what causes inflation – “too much money chasing too few goods”.   Later we’ll discuss the bigger cause of inflation.  But, that’s gifting.  Making it and giving it away.

Second, new money can be loaned in.  That’s how we do it now.  New money is created when a loan is made. 

When you go into a merchant and use your credit card to buy a pair of shoes, you get the shoes and the merchant gets the money.  New money!  It was not in anyone’s savings account and it did not exist prior to your purchase.  The bank handling your card did not lend anyone’s savings so that you could walk out with the new shoes.  No.  Rather, the bank “monetized” your “promise to pay” (look at the receipt next time you sign for a purchase using your credit card) and created the new money on the spot.  PROBLEM: They only create the money for the shoes; yet, it’s likely that you owe some interest on the borrowed money - they failed to create that.  That money does not exist.  If you pay it, you will have “captured” someone else’s loan principal.  No new money is created to pay interest – only the principal is created.

If only principal is created at the time the loan is made, and you need to capture someone else’s loan principal, in commerce, to pay your loan plus interest.  An unworkable system of ever increasing compound debt with no way to ever pay it all off.

Third, newly created (“coined”) money can be spent into circulation, paying for roads, bridges and other infrastructure, necessary for commerce and beneficial to all US citizens.

Using infrastructure is in keeping with the spirit of the US Constitution, in terms of gold and silver. 

·       Debt free

·       Interest free

·       Inflation free

·       Tax free

If we do nothing, instead demanding to have a gold standard, one will have to answer this question: where do we get all of the gold?  At the time of this printing there is a mild shortage – you have to lock in at today’s spot price and then wait three weeks.  How will you “back” $53 trillion in debt plus $50 trillion in unfunded obligations?  If we go to a gold standard, so few people will have gold that it will make the great depression look mild.  But we could use the same principal as gold!  Wealth.  Same idea.  There’s plenty of infrastructure to rebuild. 

State funding of infrastructure rebuild, by spending new, wealth based money, into the system, is the way out of this economic mess.