Where does money come from?

A world class economics professor explains in lay terms the answer to the question all of us should know by now, Where does money come from?

On this brief video economics Professor Richard Werner answers the million dollar question, Where does money come from? This is a must see video for everyone, since all of us are living in this wicked system that has based everything upon money.  It wont hurt to know a thing or too about that thing we need to survive everyday in today’s modern society, MONEY.

Facts about money:

  1. Notes and coins circulating are just 2-3% of the existing money supply.
  2. The remaining 98-97% of the money supply is created by private banks in the form of credit.
  3. As long as banks create credit for productive purposes, like the production of good and services there will be economic growth without inflation.

Professor Richard Werner is a is a German academic, economist andprofessor at the University of Southampton. Werner is a monetary and development economist and has written extensivelyin macroeconomics, banking and monetary policy in Japan and Europe.  He has been a fellow researcher for the Development Bank of Japan and a visiting researcher for the Bank of Japan and has been visiting scholar of the Institute for Monetary and Fiscal Studies at the Ministry of Finance of Japan.  His strong academic ties in with Japan’s main financial government institutions has made him one of the few western scholars in the world with the best understanding of the Japanese financial system.  His book Princes of the Yen: Japan’s Central Bankers and the Transformation of the Economy is a journey through the Japanese modern monetary system, where he explains its origins, role in the Japanese and World’s economy and criticisms towards its functioning model.  I highly recommend reading it if you are interested inunderstanding more how money is created and how an economy can flourish and bedestroyed through irresponsible monetary policy and private banking.

Richard Werner has been appearing recently in Youtube in a series of interviews and here is one interesting one I would like to share with you where he talks about Where does money come from? here is the video.

“Where does money come from?” an interview with Prof. Richard Werner

Powerful: Energy for Everyone

Powerful: Energy for Everyone is a recent documentary that explores success stories of sustainable energy around the world.  From windmills to solar energy, Powerful gives testimony that sustainable energy is possible in today’s world.  All around the world nations are developing new methods of energy harnessing that are cleaner, more efficient and sustainable.

Such is the case of Barcelona, this progressive city in Spain has pushed forward a strong solar energy agenda.  Since year 2000 new buildings are forced by law to produce more than 60% of their hot water from solar energy.  Solar panels are a common view in Barcelona’s modern cityscape, and this can be seen in Chernushenko’s documentary in which he interviews Josep Puig, vicepresident of the European Renewable Energy Association (Eurosolar), the main supporter of solar energy development in Spain and Europe.

The documentary also covers success stories in Sweden, US, and Canada.  This is a must see for those curious about the current sustainable energy situation around the world.

[youtube]http://www.youtube.com/watch?v=TG_33v3vORU[/youtube]

The Next Decade; An Economic Analysis of the World’s Future

The Next Decade is an hour interview with american historian and economist Webster Tarpley.  In The Next Decade, Tarpley exposes an honest and precise analysis of the current global economic situation, with its future prospects.

 

The interview covers the following issues.

 

  • Financial dictatorship of the IMF, which explains the role in global economic and political destabilization.
  • The plan of the global oligarchy in global population reduction and deindustrialization.
  • Criticism to the Obama administration and the Wall Street conspiracy in America’s financial crisis.
  • The Middle East and China, and American geostrategy.
  • A political and economical proposal for the future.

An Inflated Conception: An Essay on Inflation

Inflation is probably one of the most obscure concepts in economics.  The lack of honest information by the government and financial institutions have created a lot of confusion around it.  This essay will try to explain in simple terms the fundamentals of this concept.

The argument I will try to defend is that monetary inflation is fundamentally bad for an economy.

The general conception of inflation is that it is the generalized increase of market prices.  However, people fail to understand that the increase of prices is the effect of inflation.  The fundamental definition of inflation is that it is the artificial increase in the money supply.  This phenomenon occurs when the central bank or issuing agency decides to print or issue more money into the system, what they call monetary expansion.

The Problem with Monetary Expansion aka Inflation

Usually when monetary expansion occurs it happens in disproportion from the supply of goods and services available in the market.  Money supply expands while the supply of goods and services stays constant, in other words more money created chasing the same amounts of goods.  Markets balance this situation by increasing prices, in order to avoid shortages of goods and services.  Below I will explain the case of Coconut Island to understand the situation.

The Case of Coconut Island

Lets study the case of the imaginary Coconut Island.  Coconut Island is a coconut economy, where the currency is sea shells and the main source of food are coconuts. The ruler is the coconut king who controls the money supply, in this case shells.  One day the coconut king decides to open his coffers and give away his fortune of shells to his islanders. Before islanders used to buy a coconut for 1 shell, however after receiving the extra shells from the king they rushed to the nearest coconut vendor and stocked up on coconuts.  Since producers could only harvest a limited amount of coconuts per season they decided to raise coconut prices from 1 shell to 10 shells.   The increase of money supply and not of production causes prices to increase.   But producers increase prices in a way that did not destroy the demand of coconuts, so they figured out that 10 shells was just an affordable enough price for the shell rich islanders.

Here we can see that the increase in coconut price is a consequence of the increase in money supply artificially created by the king.  Similar phenomenon happens with today’s economy where monetary inflation is the cause of the increase in generalized prices.

So far so good, islanders still can afford their coconuts with the only difference that they have to take more shells to the market than before, but here is the problem.  With more shells in circulation islanders now face a big problem, although they can afford their coconuts, the value of whatever amount of shells they saved in the past became diluted.  Before islanders could buy 1 coconut with one shell, now they have to use ten shells, this means that their savings have also become diluted by 10.  So whatever they have in the shell bank will become 1/10 fraction of its previous value.  In other words the king by increasing the shell supply in the island contributed to the destruction of value created in the past, therefore impoverishing the islanders.  This will be a big problem for some of the elder islanders, who had been saving for years for their retirement.  Now they would have to spend 10 times more their savings to buy coconuts to feed themselves.

Problems generated by inflation in the island.

1.  Artificial increase in demand. The excess shells (money) in the system generated an increase in the demand of coconuts, the perception of having more money made islanders buy more goods.  Since coconut producers can only create a limited amount of coconuts per season they are forced to increase prices in order to avoid the depletion of their produce.

Increase in demand caused by inflation has also been a cause of natural resource depletion on earth, the motto is “lets buy it because we can afford it”.  As long as economies can afford cheap oil, water, wood and steel, they will keep consuming it, regardless of nature’s ability to replenish it.

2. Destruction of value. Existing value in the community through savings and other types of investment will be destroyed proportionate to the increase in the money supply.  People who are affected the most in this case where the elder islanders who faced the dilution of their savings by 10.

The effects of inflation in the island were devastating to the economy, on one hand islanders started consuming more and on the other purchasing power was lost affecting all those who had savings.

Why inflation?

The island case is just a simple example of how he fundamentals of inflation work, however it is more complex than this.  The main question is why government or central banks incur in inflationary policy.

Based on American economist Peter Schiff there are 4 reasons for creating inflation:

1. Inflation makes the fiscal debt more manageable because it can be repaid with cheaper money.

2. Inflation finances social programs that voters demand but avoids the politically unpopular alternative of higher taxes.

3. Inflationary spending is confused with economic growth, which is confused with economic health.

4.  Inflation causes nominal asset prices to rise, such as those of stocks and real estate, instilling in the minds of investors an illusion of wealth creation even when the real purchasing power of their assets falls.

After reading the above I wouldn’t be surprised if people still think that inflation is something good for the economy.  Without a doubt it is absolutely good for the government, fed and Wall Street.  Inflation is definitely a charming force that can give a false illusion.  The charms of inflation is what keeps the public unaware of the devastating effects it can create in a country’s economy.  Even Allan Greenspan back in 1966 in his essay, “Gold and Economic Freedom,” called inflation “a scheme for the hidden confiscation of wealth.” That was back in the 60’s, when he probably had more freedom to express ideas with common sense, now it must be different when your retirement money depends on how absurd your thinking is.

Just like the unexplainable rationale of the current chairman of the Fed, Ben Bernanke who in the Time Magazine article,  Is Inflation Good for the Economy? quoted,

“When inflation is low, there’s another reason people don’t spend. Why buy something now when I can buy it a year from now at the same price, or even better maybe at a lower price.  So inflation can been a big driver of consumption, and boosting spending mainly by companies that seem to be sitting mounds of cash is exactly what we need right now.”

In an economy with no future that grows through expenditure and not productivity of course a rationale like this works wonders.  In the above quote you can see clearly the Fed’s philosophy, the promotion of indebtedness and consumption and not of productivity.

"Lets stock up now, even with stuff we don't need cuz they're dirt cheap!", exclaimed Helicopter Ben!

Politicians and Wall Street pundits have generalized a positive perception of inflation.  This rationale was also expressed the other day by a friend of mine with the following explanation.

“If you borrow $5 to buy a house and inflation goes up so that the value of the house is $10, then you owe half as much as you did before inflation- that is half the house.”

Looking at this superficially, sounds like inflation is a wonderful economic blessing.  This explanation portrays inflation as an instrument to reduce debt value in the future, wonderful!  However, what my friend overlooked was that the initial value of the house was not incremented, but diluted through inflation.  One thing you have to keep in mind with inflation is that dollar price and real value are not the same, the dollar price is visible but real value not.  In other words the generalized increase in prices will not only affect real estate but all the market prices in general, meaning that you will need more dollars to get the same amount of stuff you bought before using less money.

So honestly I do not see why inflation should be considered a good thing.  If people think that losing purchasing power is a good thing then I would understand, otherwise I do not see the logic.

The way I see it is that inflation is definitely a bad symptom in an economy and monetary policies should be geared towards avoiding it.  Of course it is unavoidable if it occurs naturally, for example, when shortages of goods and services occur, prices increase, that is the nature of markets.  Monetary expansion should be controlled in a way to pair the productivity and supply of goods and services of a country.  When this balance is lost the value of money diminishes impoverishing the people.

Lack of awareness of the devastating effects of artificial monetary expansion is the main cause of economic crisis.  People should understand this fundamental principle in order to prevent their governments from abusing the power of excessive money supply in the system.  Monetary policies should be handled responsibly, and government information should be distributed in a honest and comprehensible way to its citizens.  Because the lack of comprehension is the real doom of the human being.

 

Article by Anthony T.

 

Reference

Schiff, Peter.  Crash Proof: How to Profit From the Coming Economic Collapse.  (2007)

Schiff, Peter. How an Economy Grows and Why It Crashes. (2010)

Greenspan, Allan. Gold and Economic Freedom. (1966)

Gandel, Stephen. Is Inflation Good for the Economy?. Time Magazine, February 3, 2011.