01 August 2013

Day 244: Transforming Currency into Money with Living Income Guaranteed

In the video "Hidden Secrets Of Money - Ep1 'Currency Vs Money'" Mike Maloney and others present one of the problems we are facing in our current economic system and that is - how the value of our currency is able to change over time - where it can both appreciate and depreciate - but throughout history it has mainly depreciated until it becomes worthless and then a new currency is introduced. The video explains the problem, but it doesn't offer a real solution - which I will be discussing in this blog.

Now - when I said 'the value of our currency is able to change over time' - with 'our currency' I am not referring to a specific currency such as Dollar or Euro or Rand - I am referring to fiat currency. For those who are not aware of the history of our currencies: paper bills were introduced as IOUs - a piece of paper stating that: I owe you 5 gold coins, for instance. Say that you deposited 5 gold coins at the bank. The bank would then write you a claim check that specifies that with that piece of paper, you can at a later time come and claim those 5 gold coins back. Now - over time what started happening, is that when people would go to the market place and wanted to buy something for 7 gold coins, but they only had 2 on them - they would go: "You know, I only have 2 gold coins on me, but I've got 5 at the bank, how about I give you the 2 gold coins plus the claim check for the 5 gold coins at the bank, and then you can just go and claim them." And from there, the ball started rolling and less and less people went to actually collect gold at the bank and started simply trading with the paper claims - which is what we currently know as paper bills. From there, it didn't take long before banks would just start printing money that was no longer 'backed up' by any gold at the bank. From this point onwards - we started trading with fiat currency - a currency that is not limited by the resources that is 'backing up' the value of the currency.

Why does that matter? It matters from the perspective that the amount of gold in the world is limited and therefore, the value of gold stays round about the same over time. What determines the value of gold? It's determined by how much of it is in circulation, and thus - by consequence, how much we are able to buy with it. So - let's take an example of a little village where 10 people live and there are in total 10 gold bars in circulation in this mini-economy. These 10 people have certain goods they want to buy and each a certain amount of gold that they are willing to spend on it. This determines the demand for the goods in the village. The suppliers balance their costs with profits - where they know that if they charge a high price, there will be less villagers able to buy the product, and if they charge a lower price it will become harder to make a profit and eventually even difficult to cover their costs. So - balancing demand and supply - a price for the goods is determined. Now - let's say that suddenly - instead of 10 bars of gold, there are 20 bars of gold - what will happen to the prices? They will go up because the demand goes up. Herein - understand that demand means: people want it and they can pay for it. So - when there is more money - it doesn't mean that people suddenly want more of something - it means they always wanted that amount, but they couldn't demand it because they didn't have the money to demand it. So - with demand increasing - the suppliers will realize that they can now charge a higher price - and so the prices of the goods in the village go up. What has happened to the value of gold? The value of gold decreased, because with the same amount of gold, people are now able to buy less of the goods - because the price went up.

So - with currency initially being backed up by gold - it limited how much money was in circulation - and so, it kept the value of money stable - because it was tied to the amount of gold that was available in the world. Gold is not something we can create - we can melt gold down and change the form but we cannot make new gold. So - the amount of gold we have in the world today is the same amount of gold that we had centuries ago. With fiat currency, however, reserve banks are able to simply print more paper money, increase the money supply - and in turn prices increase and the value of the money depreciates.

So far the reasoning of the economists seems sound - however, it is not - because they are misusing the term 'inflation'.

When they discuss inflation they assume that it means: the prices of all goods and services in an economy go up as a result of an increase in the money supply - and therefore, money becomes worth less and people can buy less and less stuff.

But what is not considered is the following: with inflation - the price of literally EVERYTHING in the economy goes up - and that includes the price of labor. So - from that perspective - if the prices of 'stuff' doubles, it's not a problem, because your wage would have doubled as well. And so - technically - yes - the nominal value of money depreciates - but the real value remains the same: you can buy less with one dollar, but you can still buy the same amount with your wage.

So - this reveals a problem in our current economic system - and how it is deviating from how things should be done. Let's take again the example of a village where there are 10 people and there are 100 dollars in circulation. If the money supply suddenly increases to 200 dollars, suppliers will up their price because the demand increased. Now - this higher price has to also increase the wages of those who work for the suppliers - and when their wage increase, they will have no problem paying the higher price. The wage of the workers would go up simply because they will demand a higher wage through their labor unions because otherwise they cannot pay the higher prices. But instead - what's been happening: the suppliers keep the wages of the laborers the same or only give them a slight increase - and instead: just make a lot more profit. And have a look - that's exactly what's been happening in the world. Why? Because when laborers demand higher wages - what do the bosses say? Well - if you don't want to work for that wage - I let you go and I will find someone worse off than you and have them do the work. That is why we have so many companies that closed down in Europe and America that moved to China and the third world in general - because they could profit from people being worse off there than in their country, that were willing to work for much lower wages.

And this is why within Living Income Guaranteed - we suggest that prices be determined according to the value that was put into it - which includes your labor. And valuing labor means: your workers must have a wage that allows them a certain lifestyle. This should be enshrined in the Constitution as a Human Right - otherwise one creates cycles of abuse where some win and most lose. And so - if all prices in the economy go up because of an increase in the money supply - your wages will have to increase simultaneously - otherwise you're committing a crime against life.

Herein, then - it doesn't matter whether you have fiat currency or not - becaue the real value of the currency remains the same. In the video they explain how the difference between currency and money is that money is a store of value - its value remains the same over time - and with currency this is not part of the definition. So - with making this one adjustment to the economic system, so that it would function how it is intended to function - we would be able to say that our fiat currency is in fact money - because the real value of the currency remains the same over time.

Is it a solution to step away from fiat currency and go back to silver and gold? No! Why not? Exactly because the amount of gold and silver in the world is limited - it doesn't change. But what does change? The amount of people in your economy. So - if you take  again the village of 10 people with 10 gold bars and let's say each owns one gold bar, but now they all make babies and suddenly there are 20 villagers and still the same 10 gold bars - you obviously have a problem - because now each villagers (assuming an egalitarian society) only owns half a gold bar. And yes - the value of gold remains the same: you can still buy the same amount of stuff with one gold bar before there were babies as you can after there were babies - but not everyone has a gold bar anymore - so the standards of living goes down anyway as you can suddenly buy less stuff.

So - to have your money supply absolutely the same over time, regardless of a change in population, is also counterproductive. When it comes to money creation - it should be calculated according to two points:
- available resources
- population

Furthermore - which is quite fascinating - in the video the economists point to history and how throughout history every fiat currency reverted back to zero - and therefore we should use gold/silver instead. But they ignore the fact that throughout history people have always also gone back to fiat currency - simply because it is much more convenient to carry around paper or a plastic card with a chip than a bunch of gold bars. I mean - making gold/silver the currency would eventually lead to history repeating itself, just because it's not practical to transport gold for transactions.

Therefore - instead of telling people to invest in gold and silver because currency will become worthless - and then at least you have something to trade with - rather correct the problem with fiat currency so that it works for everyone.

We continue in the next blog with our discussion on money and currencies where we'll have a look at the nonsense of having currencies with different values.

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  1. Hi, thank you very much for this sharing, I just have one question, where am I able to find the video that you mentioned? Please

    1. Here is the link again: http://www.youtube.com/watch?v=DyV0OfU3-FU

  2. Es por eso que necesitamos el cambio del sistema de dinero para crear igualdad de condiciones en todos los sentidos en el planeta. Gracias .