What Money Really Is

Money is not, cannot be a separate entity.  Money has worth as a relationship to the things it can be exchanged for.  This is the monetary aspect of a money metal, and, indeed, the only aspect of fiat money.  This point is very important because the relationship between money and the things it can be exchanged for is very important.

There are a few pillars of economic analysis.  One is consumption.  Another is production.  Relating them is, of course, money.  Now, when consumption goes up and production remains the same, prices rise.  When production goes up and consumption remains the same, prices go down.  This is the price curve.

So, it is said that an economic stimulus package must simply spend to get people working and give them money to spend and thus stimulate the economy.  From a naive view, this works.  However, using the simple price model, we can show that it does not; it does, indeed, prolong a recession.

As these bulletins have repeatedly stated, production is the source of affluence.  Without production, we do not have things and cannot save for the future.  There is no wealth creation with no production, so no wealth to preserve.  That is the value of production.

Now, if a person is paid to do something nobody wants, production happens, but it is not consumed.  Thus, the worker fails to produce usable output.  This means that the worker is now merely a consumer, vying for the real production of the rest of the economy.

As said above, this causes an increase in consumption without a corresponding increase in production, which increases prices for everyone.  Since, as has been argued before, all activity is at the margin, increased prices tend to reduce spending, particularly if the workers feel their reserves are getting pinched.  So, a mere 5% increase in prices may eliminate an entire sector of the economy, such as expensive sit-down restaurants.

Now, all those people are unemployed and must be 'stimulated'.  Unfortunately, that is even more of the economy that is consuming but not producing.  This leads to higher prices all around, which leads to more economic malaise, which leads to more stimulus until the entire economy either hyperinflates or implodes.

Of course, many liberals will now argue that we can pay these people to do things some people want, but this raises the problem of artificially low pricing, which leads to overconsumption of a given item.  For instance, very few people would pay for the average output of the National Endowment for the Arts, yet here we are, with plenty dollars for that output.  Liberals make fairly stupid arguments that without arts we are nothing, yet, prior to the NEA, art flourished, indeed, the very arts they are endeavoring to save developed without any official government policy to support them.

However, consumption of these things clearly exceeds what consumption would be without the subsidy, which tends to require greater subsidy or rationing.  But, that is another argument.

Now, compare this with the proper way to end a recession by simply letting the system fail: house prices fall, reducing costs to the largest portion of the population.  Writeoffs, writedowns and chargeoffs reduce the payment load on these same people.  High unemployment leads to lower labor costs throughout the system.  Through the wonderful mechanism of deflation, prices fall in all sectors, as contributory factors of production drop in price.  This means everyone gets more free income, allowing them to spend into new sectors, such as sit-down restaurants, leading to greater employment.

So, lock the current system in and end up in misery for perhaps fifty years or take a year or two of sharp pain and then get back on track to greater growth.  It's our choice...