Alexander Douglas — ‘Printing Money’ – A Grammatical Fiction

I happened to be thinking of this a little before I encountered Alex's post. It really comes down to the view held by not only economists but also most people about the law of supply and demand, and scarcity. To maintain value the money thing must be scarce. Quite obviously, a unit of account that can be entered on books for the price of the pen and ink is not scarce. It must be made scarce by limiting its production. A fixed exchange rate with a real exchanged such as an amount of precious metal, which is scarce, will accomplish this. However, a fiat currency has no limit other than the rules established for its creation.

As Alex observes "printing money" is a misnomer. While technically incorrect, it is meant to imply that in a fiat system the rules that maintain the scarcity of the money thing conceived as "paper," which is relatively worthless ass such, are being relaxed. The further implication that this is dangerous in that it threatens scarcity of money, cheapening its value and diluting it as a store of value. If scarcity is reduced enough, there will be currency revulsion at some point and an ensuing hyperinflation, since no one will want to hold the currency.

The way to approach this may include explaining the role of elasticity along with scarcity in the operation of supply and demand, which is familiar to many from Econ 101. While it is true that money must be relatively scarce and the level of scarcity must be relatively stable, the purpose of money is to facilitate exchange. 

Money overcomes the issue of double coincidence of wants that inhibits a barter economy from functioning at a high level, limiting it to rather primitive conditions. In a certain sense, money is a veil over barter as conventional economists hold.

But as Keynes pointed out money is not just a "neutral" veil over barter that can be disregarded other than for its nominal effect on price level owning to degree of scarcity. Money serves other functions in addition to being a medium of exchange. As a store of value it is desirable to accumulate as savings (financial wealth). As a highly liquid store of value, money has advantages over less liquid savings vehicles.

Saving is not-spending. There for the effect of saving is to make money used for spending less scarce. In technical terms saving reduces the velocity of money.

The result of increased saving desire is greater scarcity for spending, which reduces actual demand for goods in markets. This might result in falling prices, but adjustment is not only in terms of price but also quantity. Firms may choose to adjust quantity produced downward instead of reducing price. Firms tend to prefer quantity adjustment to price adjustment especially in markets where prices are administered rather than set by market competition. The days of the bazaar are over for the most part other than in financial and commodity markets.

Money must in inelastic enough to maintain value relative to goods for the stability of price level. But it must also be elastic enough for the money stock to expand and contract with changing conditions in the economy.

Availability of money needs to adjust to availability of real resources in order to adjust the quantity of goods capable of being produced with available resources with the quantity of goods demanded in markets or resources that are available for use will not all be used. This results in unemployment and underemployment, and it can eventually lead to debt deflationary depression.

Once this process it understood, it become evident that "too little money" is as problematical as too much money." The elasticity of money enables adjustment to changing conditions. Some of this is provided by bank lending, which tends to expand and contract with changing economic conditions. However, net savers of money created by bank lending are necessarily matched by net borrowers by accounting identity. Net borrowing has limits owing to payment schedules and changing conditions over time. 

But government is also a factor in money creation and must also adjust to changing conditions. As the currency issuer, government is in a unique position to do this without putting either itself at risk, or the price level.

Thus the downside is just as significant as the upside in money scarcity. The task of the monetary authority is to ensure that enough money is provided both to stabilize supply and demand for goods at full employment, as well as to provide for the desired level of saving.

MMT explains in outline how to do this using the sectoral balance approach to macro modeling, functional finance for fiscal adjustment of money elasticity, and a job guarantee to mop up residual unemployment so that everyone willing and able to work has a standing job offer.

History shows that most financial and economic loss comes not from "too much money" but from "too little." Modern monetary economies chronically run much higher levels of unemployment and underemployment than needed with better management of money elasticity. This result not only economic waste that cannot be recaptured but also underutilization of human potential and creation of needless human suffering.

Origin of Specious
‘Printing Money’ – A Grammatical Fiction
Alexander Douglas | Lecturer in Philosophy at Heythrop College, London