Pathological reasons for inflation

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  • Tue, Sep 08, 2009 - 06:49pm



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    Pathological reasons for inflation

When I spend money at the store, what percent of that money do you think leaves the hands of American workers and producers?

Obviously, not all the money I spend at the store goes back into a paycheck in the form of a dollar. Sometime it is in the form of a foreign paycheck denominated in something else in dollars.

It is easy to see what happens. When dollars I spent are sent overseas to buy imports, they are not immediately recuperated because different currencies dominates most foreign consumer markets.

Instead, these dollars pool inside what is known as the foreign currency exchange market.

It is easy to see that every dollar added to this foreign currency exchange market is a dollar taken away from the US domestic consumer-producer market. In our system of credit, the primary means of making up for the money lost to the currency exchange market is the issuing of credit. Therefore, just to maintain our ability to facilitate the payment of even constant periodic liabilities requires the issuance of credit to match or surpass the trillions lost to the foreign currency market. This debt is often tied to borrowing for imports, which facilitates the downturn of our currency.

On average, the amounts of deposits of demanded is proportional to outgoing cash flows of the deposit holders. The intuitive reason for this is that the money velocity of deposit account is the same as the typical frequency of payment: 12 per year. Therefore, because of compounding interest, the amount of deposits demanding grow proportionally and exponentially to the payments. And accordingly, the debt will follow, amounting to trillions.

While more money in the hands of the consumers (through credit) at expense of the producers’ access to credit would raise prices, more money in the hands of the producers (through commercial bank credit, bailouts, etc.) would facilitate imports, outsourcing, and our economy’s fixation on both. That money in the hands of producers therefore has the secondary effect of transporting dollars to the foreign currency exchange market. This is not the only way it happens, but it constitutes a significant portion of the trillions of dollars lost.

Without plugging the drain of dollars into the foreign currency exchange market, no amount of financial savvyness can sustain the currency without the addition of more dollars into the economy. Any attempt to avoid this, would facilitate the ballooning of debts in our debt-based economy. Even when the credit market is tight, the interest compounds, and the general population will inevitably be force to borrow to pay for someone’s default on a loan. This would occur even without compounding interest, albeit at slower rate in the long term.

Government claims to be able to reduce the debts of others by creating their own. Other than arguments concerning the lower interest rates of government bonds in comparison to credit cards, this approach has absolutely no economic merit since it does not reduce the overall debt of the economy. Even worse, encouraging the deficit as a percent of GDP to change very rapidly involve a massive shift in allocation of human labor, which is counterproductive to developing the economy, except in the rarest cases of excess (e.g. American Revolutionary War and World War II) which are almost always peculiar to their time and whose benefits would be redundant to replicate (e.g. New World land acquisitions and technological developments in the middle of the 20th Century).

Such points have been used to propagate the notion of a one world currency. However, if we are not willing to support a one world currency or even a North American currency, we must in some way support a US national currency, whether or not it involves “Federal Reserve Notes”. In order to make that feasible, an exceptionally high degree of economic autonomy must be achieved by the US. The infeasibility of this has made some people believe that a one world currency is the only sustainable form of “money” and is perhaps the long term inevitable result of economic interdependence.

The Obama Administration’s policies is probably the inevitable result of our clinging to the old “Federal Reserve Note” that is one-and-the-same as the much revered US Dollar. For many reasons, which I outlined as being pathological, we are being forced into debt for reasons that have nothing whatsoever to do with what society values in health care, education, etc.

It is time to see the forest for its roots.

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