Saturday 4 May 2019

Excellent analogy about "money"

By Tim Youmans on Twitter:

Many years in the future... Earth is now uninhabitable because [reasons]... out of necessity, the people left figured out how to travel light speed, and are heading to a planet orbiting the star Tau Ceti to start over..

(Years into their journey)

Joe: Wait!!! We have to go back!

Kim: Ha! Good one. There is no going back, we only had enough fuel for one trip.

Joe: But we HAVE to!

Kim: What could be so important?

Joe: (mumbling) I forgot the money.

Kim: Huh?

Joe: I forgot the money! OK?

Kim: YOU FORGOT THE MONEY?!

Joe: Yes. I'm sorry..

Kim: You're SORRY? We're heading to a new planet to save our species, and you leave... wait, how much?

Joe: 100 trillion dollars..

Kim: You leave 100 TRILLION DOLLARS(!!) on our old planet with no way for us to get it?!

Joe: Yeah, pretty much.

Kim: I mean... we should just hit the self destruct button! What are we going to do? We get to our new planet full of resources and everything we need to thrive, but HOW ARE WE GOING TO PAY FOR IT?!! My goodness, Joe! You just killed the human species!!


The author concludes that these people would be saved if they understood Modern Monetary Theory, which is besides the point. MMT is just a (very good) explanation of how it works; money will always come into existence, and MMT can explain it, but an understanding thereof is largely unnecessary.

But excellent analogy nonetheless, see also: lefties wailing about all the wealth hidden in tax havens. There is no wealth hidden in tax havens, what is being hidden is ownership of real wealth in real countries.
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My other favourite analogy is rationing vouchers. When they are issued, it is akin to the government printing money and handing it out as Universal Dividends; when you buy food/petrol and hand over a voucher, that is akin to taxation (i.e. unprinting money - presumably they are then physically destroyed). Those vouchers had a certain value, just like coins and notes, because if you didn't need to use all your vouchers, you could sell them to somebody who wanted to consume more food/petrol than their allotted amount.

So in this case, the spending/money printing comes first and the taxation/unprinting comes last. The purpose of the unprinting is to prevent inflation, i.e. if there are more vouchers in circulation than there is food available, the value of each voucher falls accordingly. It would clearly be insane for the government to demand that consumers hand over vouchers when they want to buy food/petrol before any have been printed!

7 comments:

Lola said...

MMT only 'works' when the gummint has a money monopoly. Evidence suggests that this is a Bad Thing. And the unprinting to control inflation is inflation created by gummint in the first place. Inflation wasn't really a thing when gummint did not have a monopoly of money.

Mark Wadsworth said...

L, the government does not have a money monopoly.

It is true that government spending is inherently inflationary, but that does not mean all their spending is inherently bad. The key is to claw it back in user charges,i.e. land value tax and similar.

Dinero said...

Unlike the case With The government, When a member of the public or business repays a loan from a bank, they sell something, and so they expunge the money they created and they also increase the goods and services introduced to the market place in the process.

Lola said...

MW. I do not agree that 'all government spending is inherently inflationary', as long as it is funded from taxation and/or real borrowings in the market.

Blissex2 said...

«But excellent analogy nonetheless, see also: lefties wailing about all the wealth hidden in tax havens. There is no wealth hidden in tax havens, what is being hidden is ownership of real wealth in real countries.»

NO No no, this is highly misleading and based on missing a vital concept: purchasing power.
All "real wealth" has purchasing power, but not everything that has purchasing power is "real wealth". The money in tax havens, when kept purely liquid, has purchasing power even if it is not "real wealth".
A £20 pound current banknote has purchasing power way larger than that of the value of its physical form, which may be £0.10 perhaps. So does a £20 cheque drawn on a "reputable" bank, even if it is not "backed" by anything.

To understand "money" three aspects of it need to be considered at once:

* As purchasing power.
* As unit of account.
* As currency.

There has been "money" used purely as unit of account, with no currency or purchasing power, and there are today currencies like the Cambodian riel that have no or next to no purchasing power, for example.

But the really big deal about "money" is that it can have purchasing power without being "real wealth", that is it allows acquiring "real wealth" without itself being so, within limits. That's what is called "seignorage".

Blissex2 said...

«But the really big deal about "money" is that it can have purchasing power without being "real wealth"»

There is a general category of stuff like that, and it is "collectibles" (also known as "non-economic goods"), where their purchasing power is much greater than their "real wealth". In the right circumstances land (and gold and much else) are also "collectibles".
When JM Keynes talked about a flight to liquidity invalidating the "so called" Say's Law, from my point of view he is talking of a flight to collectibles, that being goods with a minimal labour content but a high purchasing power then result in labour unemployment.

Lola said...

MW. In my view the government does have a money monopoly. It controls the currency - the system of money in general use in the UK - by both it's production and its price.
And yes, commercial banks do 'create money' but they are enabled in this by the rules and regulations set by the monetary authorities which are part of government - the Bank of England and the various regulatory agencies.

To achieve 'sound money' (which is what I think MMT'ers are about) the exeprience of history is very clear - you cannot have the government, any government, anywhere near money. In every time and place that there has been nationalised money/currency it has always failed: paper money always trends to zero value. And MMT depends on government and no government can be trusted to stick to any rules.

Of course banking will have to be 'reformed' or more accurately market forces must be allowed to work and property rights must have to be enforced but this is not difficult technically. Economically in the short term it would be hard. And politically it is a massive problem, mainly down to all the vested interests and special privileges and, primarily, the loss of power to government and bureaucrats.

MMT is not the answer to any of this.