Thursday, April 22, 2021

Money Creation and Pricing Signals

In the last post, we postulated a money creation event and then lightly explored responses from decision makers who had two different theories of money positioned in their minds. Disruptions to otherwise stable work patterns and resource allocations were found. Here we focus more carefully on the financial and economic forces at work when money is created.

[In the ontology of money followed here, fiat money is a product of government, benignly produced to act as a store of value for the enhancement of trade.* To the extent that money becomes an accepted store of value, money represents wealth. Hence, if government creates new money, government is at the same time creating wealth.** Hence, when government spends newly created wealth, it is effectively rebalancing the existing wealth of the economy. Therefore, when rebalancing wealth, government is acting as if it was the de facto owner of the economy and all the assets within it.***]

About Money

We begin by noticing that the private sector does not have the ability to create fiat money. This ability is reserved to government or government authorized institutions (such as a central bank). Hence, the private sector always gets it's fiat money by interacting with government. We can therefore safely say that government never makes payment in anything other than genuine base fiat money. This description does not disallow government from obtaining fiat base money through taxation [which creates a stable economic situation], nor does it disallow the private sector from leveraging the base money it has by using a lending process through private banks.

We shouldn't let ourselves be diverted with arguments of exactly when fiat money is created. The only important point in time is when government first interacts with the public sector to deposit newly created money/wealth into private ownership. After this transaction occurs, public sector owners can be measured as having incrementally more financial wealth.

Once presented and accepted into the private sector, money may go into hiding in the hands of some owners for long periods of time. Despite not moving, this money will have a continuing measurable presence as base reserves in non-government owned bank accounts or in government obligations owned by either the private sector or central bank.

A Look at a Proposed Spending Plan

We can use the proposed Biden infrastructure plan as model for how this all works. This proposal is for government to spend more money in a number of subareas of the presently semi-stable economy. We will be looking at the caregiver enhancement program as a typical example:

We already have caregivers working in the economy but they are  not considered as being highly paid workers. To improve their situation, government may offer (or even mandate) a subsidy that could be claimed by people needing care, then passed on to caregivers. Government would pay for this with newly created money.

To accomplish this, government would employ people to administer the program, which would boost employment numbers. Employment would get a further boost from an expected increase in the number of caregivers in the field. How many of these new program funded workers would come from present, presumably inferior paying jobs, is hard to predetermine. Some displacement of present workers seems inevitable. Some upward pressure on average wages seems inevitable. The magnitude of displacements is impossible to predict at this time .

As soon as the first program paycheck is delivered, the privately owned money supply will have grown. This is true no matter how the money is spent. New money will begin a life within the ownership confines of the private sector. This life of money will continue until government recalls and pays down debt (even if the debt is to government itself via the central bank).

The frequency of re-spending each unit of new money will depend upon private owners. In the modern western economies, the frequency of repeated spending rapidly falls as money becomes aggregated into the vaults of debt and pension asset managers to be used as position collateral. Money held in reserve in bank vaults can be loaned, thus speeding up spending frequency but this activity places the lending bank in a somewhat risky position.

The Broader Financial Effects of the Caregiver Program

Those workers getting program checks are first in line to benefit from the new program. They will be getting, on average, the best economic exchange available to them. They will be able to compete at the broad economic table with more money in hand than they would have had without the program. On the other hand, all the other participants in the market, having earned their money without enhancement from the care giving program, will observe more competition for the limited supplies of products available.

Government is sending several pricing and management signals to the domestic private sector when it uses this newly created money:

1. Government does not need private money before increasing it's spending. The idea of the private sector saving money for lending is discouraged; government simply does not need that money. 

2. Government pays better than the private sector. This realization makes most private sector jobs seem like inferior jobs. A side effect here is to encourage the more-talented workers to migrate to government supported jobs, to the detriment of the remaining private sector.

3. The availability of money as a rationing mechanism is distorted. In it's place, money takes on an expanded role as a mechanism for direct government guidance of economic activity.

Combining the effects of these three price signals, we have government setting or modifying effective prices in an extremely wide swath across the economy. The role of government here can be best described as being that of a de facto owner of the entire economy. doing for the entire economy those things a store owner might do for his own store. Government, acting as a single decision maker, is replacing the collective pricing decisions of many money owners and supply owners.

What Pricing Signals are Being Sent to Foreign Suppliers?

We can envision three ontologies of foreign suppliers:

1. The supplier is interested in a near-barter trade wherein money is a temporary placeholder. This supplier would not be very interested in the long term value of money.

2. The supplier is interested in becoming a long term owner of a foreign currency for one reason or another. This supplier would be concerned about long term relative value stability.

3. The supplier is interested in utilizing surplus labor to produce something that brings at least a veneer of long term value. The trade here is labor for a veneer of paper based possibilities. Real world examples can be found in the ownership rolls of government bonds.

In the real world, foreign suppliers interact with currency traders to establish relative values among currencies. Sharp changes in relative values can follow dramatic central bank policy changes, which seems to be a demonstration of a predictive element in play. Apparently the currency market takes note of changes such  from competitive pricing to government set pricing.

Fairness to All Workers

We have already mentioned that when government creates money and spends it into the economy, government is acting as if it de facto owned the economy and had the right to rebalance wealth as it sees fit. We can easily extend this thought to recognize that ALL workers are de facto government employees. It becomes unrealistic to think of present government workers as the ONLY government employees. Following this view, government needs to ensure that all employees see the improvements made available to caregiving workers.

Is the Biden Infrastructure Plan Inflationary?

The proposed caregivers program has been analyzed as presenting increased competition for products in the marketplace. Increased demand is widely accepted as an effect that puts upward pressure, inflationary pressure, on marketplace prices. With that said, there are also other forces present in the marketplace:

1. Increased productivity that lowers cost of products in the consumer marketplace.

2. Foreign based production from nations that are following ontology 3 (described above) which is surprisingly insensitive to market based rewards.

Both of these factors may be present to counter the upward pressure on prices from increased demand.

Will Presently Working Employees Benefit Financially From the Biden Infrastructure Plan?

It is hard to see how this group might benefit. Because they are already working, they are part of the status quo. Viewed as a whole, the gains of the caregivers can only come from the present status-quo working-group's production; we are seeing a rebalancing of future purchasing power. Most workers, including self-employed workers, will see an effect of same-work exchanged for slightly less purchasing power.


A particular ontology of money (outlined at the beginning of this post) led us down a logical path of cause and effect. This is not a new path to those who believe government has been of a money-creation mental persuasion for the last 80 years or so.

When government prints money, it's acting as if it was a de facto owner of the economy. Unfortunately, this places one or just a few government decision makers in the position of displacing many owner decision-makers.

The presentation has been very mechanical, intentionally so, trying to avoid a sense of politics. That said, hints of politics did creep in through the use of terms and phrases characteristically heard in an economy with decision makers who are owners. The mechanical aspects of money tend to flow smoothly from microeconomics to macro economics. The political effects of money creation flow not so smoothly between ownership ontologies.

A brief look at the possible pitfalls of money creation is planned as a subject for a future post. 


* This is the base case for fiat money. It's the economic mechanism that remains after the politically soothing 'frosting' is removed.

** When well-run central banks create money, they at the same time require a bond guaranteeing repayment. Both money and bonds represent wealth, hence we can say that wealth is always created two units at a time. (M + B = 2W where M is money, B is bond, W is wealth)

*** Only owners of assets have the the legal right to relinquish ownership. Ownership of assets becomes the bright line of difference between the economic philosophies of Marxism and Capitalism.

(c) Roger Sparks 2021

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