PROFOUNDWISDOM . INFO (PW)
MONEY
People see folding money as something that buys what they want. A check that won't bounce has almost the same look. Especially a government check.
Everyday experience convinces us that there must be a quantity of money governments own, borrow and collect (in taxes), that represents all the money government can spend or lend—to fix problems over which we all fret.
Yet in 2009, using its central bank, the American government (including that bank) had an additional source of money—with which to fix a major problem:
the problem was to find money enough to lend to credit worthy borrowers—money to meet their payrolls and other current obligations.
What the central bank found was authority to create more money by directly buying government bonds with new money which relieved government from borrowing or collecting in taxes the amount it received for its bonds:
The method was called "quantitative easing". It increased liquidity in the "system"—and and it illustrates the point that the quantity of money government can find, if it must, is more than we might have guessed.
Little has been made of a nation's central bank as a source of emergency money with which to prevent governments from writing checks that would otherwise bounce. And there is little theory to predict how much of this kind of money ought to be used by government to accomplish its goals.
The kind of money it is, distinguishes it from money borrowed from others.
"Quantitative easing" avoids increasing government's interest payments and increasing the national debt. In effect, it can radically lower taxes—when combined with increased private savings it can even eliminate all undesirable taxes.
Inflation protected savings, following a principle of cost of living adjustment for savings account balances—as we do for social security pensions and treasury inflation protected securities—is essential for quantitative easing or any other plan to use fiat money for real production to keep supply abreast of demand.
In other words, government can find more money when it wants to. But will that money raise the output of things it is expected to buy? Will monetized demand stimulate production of a matching supply?
We prove every day that supply, alone, does not create monetized demand—it is also self-evident that monetized demand, alone, does not create a matching supply. The profound truth of these facts is that money's purpose includes not only facilitation of an immediate exchange, but facilitation of sustainable trade toward desirable ends. Money that cannot do that, is not sound money at all.
Money that can do that will rely on indexed savings accounts to keep savings ahead of inflation—with extreme simplicity in their computations and promotional information. The foundation of their success will be mass production of supply not complexity in their accounting.