What is inflation? An increase in the amount of money in an economy compared to the amount of true assets produced resulting in more money available to purchase assets.
Most countries aim for a 1% rate of inflation. I would define 1% inflation as stealing (defrauding) 10% of every persons savings and 10% of all future earnings, each decade for the rest of their lives.
In economics a general definition for the supply of money or the money stock: is the total amount of money available in an economy at a particular point in time “money” usually includes physical currency in circulation and demand deposits.
“The definition of money has varied. For centuries, physical commodities, most commonly silver or gold, served as money. Later, when paper money and checkable deposits were introduced, they were convertible into commodity money.
The convertibility of money into a commodity has been abandoned since August 15, 1971, when President Richard M. Nixon discontinued converting U.S. dollars into gold at $35 per ounce, has made the monies of the United States and other countries into fiat moneymoney that national monetary authorities have the power to issue without legal constraints.”[1]
Fiat money is a form of fraud because the government or banking entity is counterfeiting money. It has no real value so it will only be accepted through the use of legal force and coercion; fines or imprisonment.
Money is especially a unit of trade where as a certain amount of money stands for work performed or goods and services. The value of money is dependent on peoples willingness to accept the currency.
By increasing the amount of currency in circulation it devalues proportionately all other currency in circulation. The way in which the currency is inflated is irrelevant, whether by credit from a bank, central bank or printed by a government. The way in which inflation of the money supply is used however can correct the devaluation of other moneys in only one way – if it is used to create wealth.
The creation of wealth appears to be controversial so here is its definition for use within this theory. Wealth is anything of value that can be sold. Services are not wealth however they can add to the value of wealth. Wealth can also depreciate in value. The value of currency is equal to assets of the issuing country minus depreciation: Money, Assets, Depreciation. M=A-D
This is a theoretical formula for it requires no government or business deceit in the form of government accounting, central bank accounting, or business accounting fraud. The true way to raise asset value and lower depreciating rate is through technological advances and increased production methods. In a fiat system, currency is based on perception; what people believe the value is or what is enforced by law. Thirty percent of Americans belive the dollar is backed by gold. If more wealth is created than depreciated or destroyed the value of a currency will increase.
Businesses that create wealth balance out businesses that provide services. Some businesses create wealth that appreciates in value and others that depreciate in value. This is not to say that businesses in the service industry are not important because they are an essential part of the economy and a great source of employment. Business banks have traditionally been given a higher priority than other industries because they are seen as an utility.
The balance between credit to wealth creation industry and the service industry is typically balanced by the free market and leads to a slow price inflation or devaluation. The devaluation of currency can not be hidden or suppressed however price inflation can be manipulated through several monetary schemes. The stability of business banks in the modern world has been given a preference because they are a utility, which has lead to the creation of central banks and federal reserve systems around the world.
It appears too common that governments and bank operators have lost sight of their fundamental duty to loan money to businesses which is the only reason they are given a safety net and cheap “free” credit. In the pursuit of higher profits business banks have been allowed to deviate from their primary function and have become involved in consumer debt: short term(credit cards) and long term(home mortgage), and speculation in commodities and stocks among other activities. The deviation from its wealth creation purpose has led to massive devaluation of currencies and price inflation, which has been accelerated due to central banks and central planners.
A careful review and understanding of political history and monetary history leads to the conclusion that neither a central bank or political system is capable of controlling the money supply responsible.
“Since 1914 a sustained decline of the money supply has occurred during only three business cycle contractions, each of which was severe as judged by the decline in output and rise in unemployment: 1920-1921, 1929-1933, and 1937-1938. The severity of the economic decline in each of these cyclical downturns, it is widely accepted, was a consequence of the reduction in the quantity of money, particularly so for the downturn that began in 1929, when the quantity of money fell by an unprecedented one-third. There have been no sustained declines in the quantity of money in the past six decades.”[1]
It is therefore necessary to create a framework for a sustainable and stable economy in which the expansion of the money supply is predetermined by a specific wealth creating industry. The amount created should have a set range, from growth in GDP to a set limit of double GDP growth. The only reason banks are giving the power to create money and receive interest upon it is that they are a utility and they should decide where loans should be made.
It’s alright to have banks as a utility however their utility is not to create money but to arrange loans between the savers and the investor. The creation of money or credit which are indeed one and the same should not be expanded into the banking system because whereever new money is expanded it will end up in the banking system immediately.
I do agree the expansion of money should be in the form of credit but to a different utility, that of energy and the best long term energy investment is renewable energy because the energy is free if you give the energy bank the same deal central banks give commercial banks.
In this system of expanding the money supply through an energy bank instead of a central bank, the business banking sectors power to create credit must be limited and understood by the public.They have no money to buy assets or commodities they only have credit, a power granted to them by the people to expand businesses and jobs, not consumer credit and debt. Business banks should only be allowed to invest in businesses, they should only be allowed to hold reserve cash in preferred stock that pay dividends, treasury notes that pay no interest but are adjusted for inflation, cash, or gold. They should not be allowed to participate in other forms of banking or buy securities unrelated to business loans.
A central banks role should be to make sure the banks are holding the required reserve ratios established by law, the higher the reserve ratio to less inflation and “bubbles” the banks may cause. The money supply or the money stock is the total amount of money available in an economy at a particular point in time.The standard measures to define “money” usually includes currency in circulation and demand deposits. A sound currency based economy backed by energy would require the currency in circulation to equal energy reserves in storage (ERS). Depending on the reserve ratio demand deposits may not be required to be backed by ERS.
The modern economy is based on energy which is a utility more important than banking. The best wealth creation industry is renewable energy; wind, hydro, geothermal, solar, and also nuclear power. These are wealth creators that appreciate in value, wind power takes 8-10 years to pay for itself then creates wealth for approximately 65 more years. However current monetary policy and interest rates make wind investment 16-20 years to pay for itself. Approximately 1 year is added for 1 percent increased interest rate charged. Solar power which is a 12-16 year investment is turned into a 20-24 year investment at an interest rate of 8%. If the expansion of the money supply were redirected to renewable energy, energy prices would fall for the next several decades until it reached its bottom.
By expanding the money supply through an energy bank the interest rate it charges should have a set range such as 0-4 percent and those businesses which want the loans would be required to match a percentage of the loan in that energy project set at a range of 25-50 percent of the loan (1 Billion dollar loan at 25% =250 million business investment). This matching provision would remove the moral hazards now present in our banking system which allows a small group of people to decide which banks are given the cheap loans; “credit”.
Business banks should still be protected from collapse and should only be allowed to loan to businesses because they still have the power to make money through the money multiplying effect granted in a fractional reserve bank. In addition the currency in a stable economy must be backed by a commodity, something of value, actual wealth. In the modern economy I believe energy should be used as that commodity because it will give the added benefit of stabilizing energy prices, it has easily measurable quantities, it is counterfeit proof, and more can be created.
Energy is now and will be in the foreseeable future the most valuable commodity. For every quantity of energy a country stores it can issue currency backed by that wealth in storage without causing inflation. This is because the modern economy is based on the price of energy; crude oil, coal, natural gas make the majority now. Funding renewable energy will pay for itself and if the energy bank is giving the credit through a central bank it would cost nothing. Besides the cost of maintaining the transmission lines and plants that convert the energy to hydrogen, natural gas or liquid fuel the energy prices would begin to fall as well as energy imports.
A rapid decrease in the price of energy would be a shock to the economy and should be smoothed out over a long period of time by adjusting the matching percentage of the loan and the interest rates of the loan. The energy companies receiving loans would be required to pay a certain percentage of their federal taxes in the form of energy, which the government is required to hold in a strategic petroleum oil reserve. For the first ten years the currency should be backed by oil, the following ten years should also be backed by natural gas in storage and in the following ten years should also be backed by hydrogen in storage.
“The United States has experienced three major price inflations since 1914, and each has been preceded and accompanied by a corresponding increase in the rate of growth of the money supply: 1914–1920, 1939–1948, and 1967–1980. An acceleration of money growth in excess of real output growth has invariably produced inflation in these episodes and in many earlier examples in the United States and elsewhere in the world.” [1]
In 1918 the size of the physical money supply doubled from 1 billion to 2 billion in the US, and the currency lost half is purchasing power. Of course the central bank has been the key to paying for sustained wars in the last two centuries. With out the inflationary tax of central banks government would not be able to convince its people to pay for long wars with obvious tax increases.
“That relation between money and prices is historically associated with the quantity theory of money. There is strong empirical evidence of a direct empirical relation between long-term price inflation and money-supply growth. These underlie the current reliance on monetary policy as a means of controlling inflation. This causal chain is however contentious, with heterodox economists arguing that the money supply is endogenous and that the sources of inflation must be found in the distributional structure of the economy.” – Money supply – from Wikipedia, the free encyclopedia (also see Lance Taylor’s 2004 Reconstructing Macroeconomics)
It appears an argument over money supply growth vs distributional structure is irrelevant because they are one and the same. If the distributional structure does not increase with the money supply growth then you are growing the money in the wrong place. Every recession is preceded by an increase in the price of necessities and followed by a collapse of credit. The price of everything in a modern economy is based on the price of energy in some measure.
A increase in energy price leads to general price increase and to a shrinking economy; all other things being equal. Out of the last 10 recessions, 9 have been preceded by a large rise in oil prices. In an economy which imports a large percentage of its energy with a trade deficit leads to a devaluation of the currency. The ultimate question a great society can answer is what utility to increase the supply of money in; Banking, Energy, Education, Food and water or Transportation?
Set rules to maintain 0% inflation and honest accounting standard. An overall analysis I believe that inflation is not unstoppable, debt is not perpetual, peace is not impossible, and war is not inevitable with a modern monetary policy. The concise encyclopedia of economics Money Supply by Anna J. Schwartz www.econlib.org/library/Enc/MoneySupply.html
For more on Renewable Energy, check out Renewable Energy.
Read more about Energy based economy.
A working paper
By: Sean Shea
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