The trick with money is to ‘look through’ it because, in the end, it really isn’t that important.
Or, at least, it wouldn’t be, in a sensible, alternative universe.
Because the fact is, all goods and services are, ultimately, paid for by other goods and services.
All that money allows you to do, really, is overcome the “coincidence of wants” problem, thus increasing the number of trades that can take place.
But this is just a mechanical benefit. The fundamental point is that it is only by one person selling something of value to another person that an economy ever emerges.
The pile of paper that we call cash is, ultimately, just a pile of paper.
Most of the financial innovations that have occurred since the start of the industrial era have been what we might call ’mechanical’.
For instance, the invention of the joint stock company introduced the possibility of lots of small savings pots being lumped together so that major enterprises might be financed. Some worked out, some didn’t, but that’s just the attrition of the markets, weeding out the bad and preserving the good.
The point is – the successful ones made products and services that people wanted. And thus value was created.
Apple, for instance, is now enormous because people badly want their technology. And the day they want something else will be the day that it loses its crown.
Money doesn’t change this fact, it merely lubricates the wheels of the buying and selling process, and helps us keep score of who’s winning and who’s losing.
To repeat then – if there are no goods and services created in an economy, the money utilised within it would be worthless.
In a very real sense therefore, no matter how often you hear people talk about how money is supposedly “backed by” the Fed or the Bank of England, it is the economy of the people that imbues money with value, not the government.
People, ultimately, want American dollars to buy (or import) American iPhones, not because the US government has mysteriously created an object of intrinsic value (though many believe it has).
The role of money is, therefore, purely administrative – or ‘mechanical’, as we have described it here – and it is the sole reason why it has value. It is just the means to an end.
The notion that government could create value by bringing more money into existence via deficit spending is thus, in the long run, a mirage.
All they can do is create more paper, not more value.
As they do so, the value that already exists will be ‘smeared’ more thinly across an increasing sea of paper, making each piece worth less, which is the very essence of inflation.
Unless, perhaps, Jeremy Corbyn’s future Cabinet come up with a design for a particularly innovative new smartphone – in which case, I shall close down my blog.
So, with all that said, why is it that “Positive Money”, an otherwise sensible website, should be coming round to look at MMT in an approving way?
As I’ve explained elsewhere, MMT is a modern reworking of an old idea; that deficits don’t matter so governments can feel free to spend their way to riches. Or, at least, deficits do matter but far less than any of us had previously thought, meaning that governments are free to abandon all restraint and turn on the monetary taps.
I’d suggest this is a reaction to the disaster that was 2008.
There are a lot of folks around – including Positive Money – who are determined to replace the tyranny of bank-created money… and quite understandably, in the light of that massive crash.
Government-created money inevitably looks “fairer”, as well as being not explicitly debt-based (though it’s deficit-based, which boils down to something very similar).
So, instead of banks inventing our money, the arguments go, maybe governments should do so instead?
And so here it goes.
If elected, the Left will spend money they don’t have on a scale we’ve not seen before and the Right may complain but will have no right to do so. They ran massive deficits too when they were in power instead of clearing up the mess still hanging around from 2008.
And there will be Magical Money Trees for every inane public project and Non-Job you can imagine.
And the savings of ordinary people will be destroyed by the very people they elected.