This piece is the second part of a collection of pieces on debt and money. Be sure to read the first part, The Meaning of Money.
Once money is in the hands of the individuals in an economy that exchange it–individuals with minds, who are constantly thinking, feeling, judging, comparing, evaluating, remembering–it takes on a psychological meaning. That meaning is what makes it possible, within certain limits, for new units of money to be printed, without any liability attached, and used to compensate individuals for the time and labor they provide to those who cannot repay the favor.
Suppose that the United States were to change its currency to the Grumpel. One evening, bank accounts are shifted over–every Dollar becomes 43,297.65 Grumpel. All debt liabilities to others, and all tax liabilities to the government, must now accept settlement in this new currency–which looks different, feels different, and sounds different when spoken. If you were to go to the store to make purchases in Grumpel, how would you know what was expensive, what was cheap, and what was reasonably priced? Because you have no psychological history with the currency, you would have to continually make conversions in your mind–to the currency that you do know, Dollars. When you see something selling for 7,144,112.25 Grumpel, you would calculate, and realize, ah, that’s $165. For a pair of Levi’s jeans? No way.
Because we have lived in an environment of stable prices, with gradual, virtually unnoticeable inflation every year, dollars have an independent, objective meaning to us. They are real things in our minds, with their own independent worth–on a par with the worth of the types of things they have always been able to buy. Consequently, they are able to offer intangible value to whoever holds them, value that is not contingent on their actual use in making purchases. Earning $100,000,000 and sticking it in the bank can feel great–even when you don’t have anything you want to spend it on, and never will.
When you have large amounts of money, you have power. Even though there is nothing extra that you want others to produce for you right now, over and above what they are already producing, having money means that if, in the future, you identify something that you do want produced for you, you will have the ability to secure it for yourself. Simply knowing that you have this ability will bring you satisfaction and comfort–sometimes more satisfaction and comfort than its actual use.
When you have large amounts of money, you have security. If something bad unexpectedly happens to you, the money that you’ve set aside will allow you to continue your current lifestyle. Simply knowing that your current lifestyle is secure–protected from capricious threats and dangers–allows you to relax and more easily enjoy it. For this reason, you continue to add to your savings, you continue to work and generate income, even though you don’t plan to currently use it, and might never use it. If you don’t ever put the money to use, no problem at all. You can leave it for your family, your children, to provide for their security.
When you have large amounts of money, you have status. Money is one of the chief ways that society measures status. Imagine that you are at a dinner party with interesting people that you haven’t met. Someone asks you, what you do for a living? Answer #1: “I’m a boys special education teacher at the local middle school.” Answer #2: “I’m an investment banker, I work at Goldman.” In terms of improving the plight of real human beings, the special education teacher might add more value to the world than the banker. But who will receive more fawning? The answer is obvious. Like it or not, money has immense meaning as a status indicator, and a significant portion of society uses it to measure who’s who.
The satisfaction of almost every success in life has a large social component. The gratification is not only in the success itself, but in the fact that it is seen and acknowledged by peers–or better, celebrated by them. Money is one of the main ways in which this social component is accounted and displayed. It lets people keep score–assess how they fare relative to their peers, those against whom they measure themselves, and with whom they expect to maintain par. Nothing breeds more strife in the workplace, for example, than for a person to find out that she makes significantly less than her coworkers. The money differential takes on the meaning of an insult–“we don’t value what you do as much as we value what they do.” And it doesn’t matter how much she makes. As long as there is a meaningful difference relative to those that she views as her equals, she will be hurt, angered.
Now, to the economic question. Suppose that we have an economy of producers and moochers. The producers have excess capacity, the ability to produce X more things than they are currently producing. The moochers want those X things, but they don’t have the ability to reciprocate. To the extent that the producers want more money, not to spend, but to hold as a source of power, security, and status, then new units of money can theoretically be created in perpetuity to accomplish the transfer, without inflation. Once spent, the new units will accrue into the hands of the producers, where they will disappear from the system. The moochers will then have what they want–stuff–as will the producers, who will have money and its associated intangibles. Everyone will have what they want, and will be happy.
In this process, the structure of a well-defined, psychologically-entrenched monetary system will have been exploited to create bona-fide charity: producers doing work for moochers without any need for reciprocation. Note that this phenomenon is not limited to monetary interactions–it happens in many other areas of life. As an example, consider a biochemistry professor that works obsessively in a lab to find cures for fatal diseases. He doesn’t do it for the money, he does it for the intellectual achievement itself–the psychological satisfaction that he experiences in mastering his craft, making discoveries that no one else has ever made, solving problems that will change the world, creating value that will be acknowledged, respected, and jovially envied by everyone in his peer group, and by future generations. Instead of being compensated for his work in the currency of money, promises of reciprocation that he has no need for, he is compensated in the currency of meaning, challenge, excitement, victory, congratulation, admiration, respect, each of which is far more satisfying than the consumption of the stuff that somebody else can make.
Because so much of the value of money lies in the intangibles that it offers to its holder, rather than in its use as a claim to consume, there is room to print new units of it even when the economy does not have the productive capacity to support the expenditure of those units. In the US economy, there is ~$11.5T of M2 money, 70% of it locked in savings accounts, a record relative to GDP. There is ~$3T of base money, net money that is not mirrored or offset as an asset by a corresponding private sector liability, a record relative to peacetime GDP. If, by the flip of a psychological switch, even a fraction of that money were taken out of savings accounts and used to make claims on things in the here and now, or conversely, if the velocity at which each unit is exchanged were to return to its level of say, 15 yrs ago, the economy would not be able to support the use, and a significant inflation would result. But because the money sits comfortably (for now, at least) in the hands of those who seek it for its intangible value, who want to have it to have it rather than to exchange it for increased consumption, there is no inflation.
Fortunately, or unfortunately, the individuals most likely to accrue new money that is printed into the economy are individuals who add the most value through their labor, or who own, through corporations, the factors of production, and who can profitably collect rents on the use of those factors. For perspective, in the US, almost all of the saving that has occurred to mirror the government’s borrowing in the current recession has been conducted by the top quintile of earners, who, not coincidentally, own ~90% of all corporate assets. Naturally, these individuals tend to be much closer to saturation in their consumption than their counterparts on the other side of the tracks, and to be pursuing the money for the power, security, and status that it provides. Ironically, it is this entrenched wealth inequality, rightly lamented by so many, that keeps the money from moving around, from being put to aggressive use, and from causing inflation. To the extent that the individuals who accrue it remain tight and efficient in allocating and distributing it, to the extent that they hold it rather than spend it, and thereby minimize its unnecessary leakage into the hands of those who would spend it rather than hold it, no inflationary harm is done.
If not immediate inflation, then what is the cost of financing large portions of public expenditures with new (net) money creation (or with debt, promises to pay later, which will be financed from such)? In the next piece, we will explore the answer.