JOBS DO NOT CREATE MONEY.
Let’s imagine a small nation with a population of 100 people and a total money supply of $100 created as interest-bearing loans by the bank. Let’s say that 75 people have jobs and 25 do not. If each employed person is paid one dollar a month, seventy-five percent of the money supply is needed each month to meet the payroll. Seventy-five percent of the money supply must move completely through the economy to the wage earner, back to the wage payer, and then on back to the wage earner each month. That leaves twenty-five dollars or twenty-five percent of the total money supply available to be held out of circulation (the monthly cycle) in short or long term saving. Let’s say the seventy-five workers produce seventy-five widgets with a retail price of one dollar. (One widget equals the total monthly goods and service produced per person). Then we create twenty-five new jobs that produce twenty-five more widgets. Now we have one hundred workers producing one hundred widgets. 100% of the money supply is now needed to meet the monthly payroll and to pay for all the monthly goods and services produced. No money is available for saving. All money must come out of savings and move into circulation (the monthly cycle). Creating more jobs and producing more widgets have created no more money. The money most be redistributed from one purpose to another, or more money must be created. The workers want and need to have some savings for a rainy day and/or future retirement. If 50% of the workers reduce their spending so that they can save ten cents monthly out of their pay and put it in saving, $5.00 or 5% of the monthly money supply would move from circulation into savings. Without an increase in the money supply this savings creates a real problem. The nation cannot meet it $100 monthly payroll with only a circulating money supply of $95. To meet the monthly payroll either jobs must be eliminated or wages reduced. Or more money must be created. The same problem surfaces if; instead of increasing the total number of jobs, we give half the population a wage increase. 50 people continue to work at $1 per month and 50 receive a raise to $1.50 per month. This would mean it would require $125.00 to meet the monthly payroll. Even if all the money must came out of saving and moved into circulation it would be impossible to meet the monthly payroll unless the money supply was increased.To have ‘savings’, more jobs, more production or higher wages for some, without lowering someone else’s standard of living, the money supply must be increased. The money supply is the fuel that runs the ‘economic engine’ not jobs or more production. Jobs, do not create money. Jobs create goods and services. Goods and services do not create money. Only loans create money. It should not be that way! Velocity of money can grow the Gross Domestic Production (GDP) but it does not and cannot increase the money supply. If the money supply is $100, and the money needed to meet the national monthly payroll is $100, then the entire money supply must stay in circulation and complete the monthly cycle or the monthly payroll can’t be met. In making the complete monthly cycle from wage payer to wage earner and back to wage payer, the money may pass through many hands or a few hands. The more hands it passes through in a given time span, the greater the velocity. The greater the hustle and bustle and the faster society must move and the larger the GDP will be. Let me illustrate using a wage earner working in a store. He gets his monthly paycheck. Before leaving the store he cashes his check and buys something for 10 cents from that store. He has increased the GDP by 10 cents. Those 10 pennies made the complete cycle from the wager payer to the wage earner and back to the wage payer in one transaction. If the wager earner uses his pay to put gas in his car, that transaction will increase the GDP. If the gas station uses that same money to pay its phone bill, that transaction again increases the GDP but it does not increase the money supply. If the wager earner’s money passes through ten hands, or makes ten transactions, before it finds it way back to the wage payer, the velocity of money is greater. The GDP has grown by a factor of ten but the money supply has not grown.
People have a natural tendency to multiply. If the population of our imaginary nation grows to 200 people and 150 people are to be in the work force at one dollar per month, a money supply of $150 in circulation is required to meet the monthly payroll cycle. This, of course is impossible if the total money supply is only $100.
How do we increase the money supply to enable 150 people to have paying jobs without lowering the pay of those working before the increase? Now we increase the money supply as loans. As soon is interest is added to the loans, the debt becomes greater than the money supply. Therefore, the debt must constantly grow. Adding the unpayable cost of interest to our production causes a constant and growing spread between the price of raw products and the price of finished products diminishing the purchasing power of our medium of exchange. Growing numbers have difficulty making ends meet. To have a sustainable economy, we must increase the money supply through monetized production, not monetized debt. We must ‘spend’ new money into circulation not ‘lend’ it into circulation.
The following companies have announced job cuts since the start of 2009.
Note: Some figures are approximations from percentages of labor force, with total labor force estimations obtained from recent 10K filings.
|Company||Number of cuts||Date||Industry|
|NEC Corp.||20,000||1/30/2009||Computer Hardware|
|Cessna||2,000||1/29/2009||Aerospace & Defense|
|Walt Disney ABC||200||1/29/2009||Media & Entertainment|
|Ford Motor Co. Credit||1,200||1/28/2009||Financial|
|Boeing||5,500||1/28/2009||Aerospace & Defense|
|Starbucks||6,700||1/28/2009||Food & Beverages|
|Texas Instrument||3,400||1/26/2009||Computer Hardware|
|American Greetings||200||1/23/2009||Consumer Products|
|Clear Channel Communications||1,850||1/21/2009||Media & Entertainment|
|Rohm and Haas||900||1/20/2009||Chemicals|
|Warner Bros.||800||1/20/2009||Media & Entertainment|
|Blue Cross Blue Shield of Michigan||1,000||1/16/2009||Health care|
|Advanced Micro Devices||1,100||1/16/2009||Computer Hardware|
|Saks Fifth Avenue||1,100||1/15/2009||Retail|
|Barnes and Noble||100||1/14/2009||Retail|
|Neiman Marcus Group||375||1/13/2009||Retail|
|World Wrestling Entertainment||602
||1/9/2009||Media & Entertainment|
|Boeing||4,500||1/9/2009||Aerospace & Defense|
|Cessna||2,000||1/9/2009||Aerospace & Defense|
|Haliburton||unspecified||1/8/2009||Aerospace & Defense|
|EMC Corp.||2,400||1/7/2009||Computer Hardware|
|New York & Co.||350||1/7/2009||Retail|
|Alcoa||13,500||1/6/2009||Metals & Mining|
I like your post, Soderberg. I think I understand what you’re talking about. A perfect world would be one of no needed capital and no necessary debt. Even-steven– you give me five pairs of shoes and i’ll make you a kitchen table. It’s difficult to price things but wouldn’t it be nice and easy if we could use math to our advantage? I need you to make me five pairs of shoes. Say I only make you the table(including with that, labor) according to how much your labor + five shoes cost? even-steven. Someone mention a credit system, on a different CM link. I make you a nice table but I only need one pair of shoes. I now have a credit, of four$ shoes, with you. Hm… I wonder about this stuff too. Wonder what it was back then during the bartering times, eh?
Thanks for this post Gregory… I always enjoy reading what you have to say, I have since your first post.