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Okay, I exaggerate (slightly).  If you follow Libertarian/Conservative economic arguments (and can take the pain), you'll eventually hear a plaintive call to either go back to a gold standard for money or use a 'basket of commodities' that's 'representative of the market'.  Why the simpering need for commodity currency?

Follow me below the fold...

So, why do conservatives prefer a monetary regime based on a commodity or collection of commodities?

Conservatives of all stripes want to believe that money is a limited resource that should be earned and if we peg the value of the dollar to gold, then there's a limited supply that must be competed for.  If you competed for it and you win, you deserve it.  Even worse, they make their arguments regarding fiscal policy based on the assumption that the money supply really is strictly limited.  This is where the phrases 'balance the budget', 'overspending' and the fervor to 'cut taxes and leave more in (rich people's) pockets' come from.

In 1913 we were on a gold standard, but it's now 2013 and we've been off of a gold standard since October 1976! Their arguments hold some small amount of merit if you're not a printer of your own currency like Greece, Spain, any US state, county, city, town or household.  Those entities are users of currency, not creators of currency.  And money that comes in is either earned or it is debt to be repaid later, reducing future income.  Fiat currencies are created ex nihilo and there's an infinite well available to draw against, even if it's not always the best course of action to create near infinite amounts of currency.

So, just by knowing that there really is a difference between Greece and the US, you know more about economics than most conservatives.  To be fair, many will acknowledge that there's a theoretically infinite supply of money, but like I mentioned above, if you ask them how this knowledge affects their policy proposals, nothing would change, they still treat money as if there were a limited supply that we all must prove our worthiness over.

So, if money is not in limited supply, what does that really mean?  How does this change the way we should be looking at the US economy?

Enter Modern Monetary Theory, or MMT

MMT is descendent of Chartalism, the moniker under which the first understandings of fiat currency came about.

The main idea is that in fiat currency regimes, the value of currency is

  • not fixed to some good or service and
  • mainly based on two things:

   1. How much money put into the economy compared to how much is taken out with taxes and fees.

   2. How much money exists compared to how much wealth there is at a given point in time.

If you think about it, both of these things basically boil down to "What's the relative amount of money compared to some other thing?"  

It's helpful to think of your standard kitchen sink when thinking about these two arbiters of the value of a currency.

In the case of the currency itself, think about Faucets (printing money) and Drains (taking money out of the system, taxes and fees).  If your drains are slower than your faucets, you have an ever increasing volume of water (money).  That could be bad... inflation could happen, where the water overflows the sink.

BUT, if your economy is growing, then the size of your sink is ALSO increasing, and you want to keep the water at a certain level, too little water and you can't wash the dishes (deflation), too much water and you have to mop the floor (inflation again).

If you want an absolutely stellar example of how MMT operates, look at the economy of EVE Online.  Pun fully intended.  There are drains: taxes that take money OUT of the system, like combat losses, auction fees and corporation fees.  And faucets: systems that put money INTO the system like mining asteroids, moon minerals and running missions.  Then there are activities that shuffle money around while increasing wealth like trade and gifts, but don't generate currency, these increase the size of the sink itself.  

The PhD economist hired by CCP to run the economy has to carefully consider how much of a given resource is allowed to be gathered at any given point in time.  He controls the faucets and the drains, the players control the size of the sink. In exactly the same fashion, the US generates currency, that's the faucet, collects taxes, the drain, and wealth is increased by trade, the size of the sink.

Now, since there are no hard limits on the amount of currency that can or should be printed, we enter a regime where money is not a limited resource to be competed over and collected by the worthy.  Instead, it's more akin to a renewable resource that we can use for the social good - we're never going to run out of money and as long as our economy is growing, there's actually a requirement for more of it!  The question is, what do we do with this resource?

We give it away to the necessitous.  Why?  Remember that currency is valued on the differential between printing and taxes as well as the amount of currency compared to the size of the economy.  Well, what grows the economy?  Trade!  What do necessitous people do with money?  Buy stuff!  What's another term for buying stuff?  Trade!  Good times.

Money has a velocity based on how many trades it enables.  If it sits in a hedge-fund account for 30 years, it has low velocity, and enables the creation of little, if any wealth.  If you give money to a store clerk and she buys coffee from the local coffee shop with it, and the manager of that coffee shop buys beans from the local roaster and the roaster contracts the service of a repair person, who then goes and buys a record from the store clerk... well, that money has high velocity and it has created wealth at every step of the way.

Our currency, the People's Currency, should be used for the welfare of all, not the unwarranted benefit of a few.  It's time we started pushing back and not ceding ground to the Conservatives with their false assumptions that currency is a limited resource.  

Originally posted to Zyx on Fri Sep 27, 2013 at 04:30 AM PDT.

Also republished by Money and Public Purpose.

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