In a previous blog, I defined the basic terms of economic analysis: assets, liabilities, debt, capital, and production. In the second part of this series, it’s time to introduce the complicating factors of the banking section.
As we defined last time, debt is a liability that must be paid from future production. Assets/savings are properly represented either by unconsumed economic goods; the reason we adopt this strict definition is because you can’t store a service and because we need to differentiate between the real savings of a society and money. If money is itself an unconsumed economic good, as it is with all forms of commodity money, then there is no difference. If, however, the money is issued by fiat, then it is functioning merely as a medium of exchange between members of a society who seek to exchange some of theirs production for the benefits of other’s production.
I’m sure astute readers will notice I’ve left services out of the above discussion. That’s not because they are not valuable, but only because they can ultimately only be paid for out of someone’s production. Sure, I may render a service to someone else who herself only derives income by way of providing services, but one can not base a society of services alone: real goods must enter the equation at some point or we’d all starve to death. That’s why I’m saying that ultimately, services must be paid for out of production.
Now enters fiat money into the picture. By law, it must be accepted as money, and it has a certain par value for the trade of goods and services. If the money supply is fixed at a certain level, then good and services should trade in fairly stable range; in fact, because technology lowers production costs, we should see money gain purchasing power of time. If, on the other hand, money is printed by fiat and injected into the system, then you will start to see price distortions. The price distortions will start in roughly the area that the new money entered the system, but over time it will cause an across the board increase in prices. This is because the purchasing power of each unit of the fiat money is being diluted by the introduction of each new unit of fiat money. Continue reading Exploring the Myths of the Consumer Driven Culture: Part II