More about Inflation
and the monetary paradigm I developed
[For the record, I do have an M.A. in economics.]
I developed an alternative monetary paradigm for the existing economic system. It would absolutely, positively eliminate unemployment and poverty for adult citizens of a nation (and any nation could adopt it). It would also provide a way to fund government without taxes/public debt — all government, from local to national (forevermore at the current per capita rate of total government spending). It would systemically increase sustainability. In addition, it would make the economy self-regulating, meaning the continuation of those outcomes would not depend on politics. [More about the paradigm is at “A Most Beneficial Economic Change” (a “2 min read” here in Medium with links to articles about the paradigm from various economic perspectives — with nothing I publish here behind the paywall).]
Yet, people have not responded positively to this idea — at least, not enough to advocate for it. It (finally) occurred to me that people might simply be unable to believe that it could be kept from leading to monumental inflation. After all, it does call for creating money as needed to fund a minimum guaranteed income (in an amount a person could actually live on, given current prices) and to fund government (as noted above).
So of course inflation is an obvious — and legitimate — concern. I do address the issue of inflation in writing about the paradigm, but people apparently remain unconvinced. It finally dawned on me that people might have a fundamental misunderstanding that I have failed to address. People might think of the money that would be created as being added to the amount of money already in the economy. That is not the case.
It is vitally important that the money for the guaranteed minimum income would enter the economy as income for people. As such, it would not be an addition to current income. Rather, it would replace existing income. (To see how that is the case a reader will have to read an existing article: I can’t relate the whole of the paradigm every time I write anything about it.)
One of the most common mistakes in economics — one perpetuated by many economists (for ideological purposes) — is the notion that ‘inflation occurs when too much money is chasing too few goods’. That is not quite accurate.
Inflation occurs when demand exceeds supply. Demand depends on income.
A sudden burst in inflation could result from a sudden, significant increase in total income, but absent that it must be instigated by a sudden shortage of supply. An example of the latter occurred when the ‘supply chain’ got disrupted by Covid — and Russia invaded Ukraine, disrupting the global flow of oil and natural gas — then demand resumed very suddenly following the crisis, before supply could get back on track. Another example occurred in the 1970’s, when OPEC was first formed and the oil-producing nations that were members of it reduced output (so, the supply of oil) in order to raise the price of it.
The point is that a sudden increase in inflation is usually instigated by a sudden shortfall in supply, not a sudden increase in demand. The one exception is invariably a sudden, large increase in spending by government, such as funding a war by borrowing money. In such cases the supply of money is inevitably increased to purchase a — significant — portion of the suddenly larger debt (in the form of bonds) that the national government has issued. (That money, unlike money borrowed from banks, remains in the economy permanently — see below). ‘Regular’ borrowing by government helps to sustain the ‘necessary’ ‘normal’ rate of inflation (see below).
So inflation occurs when prices rise but demand does not fall (or fall enough to cause prices to go back down). To sustain their existing level of demand people must reduce their savings or borrow (which are unsustainable ways to sustain demand, thereby supporting increasing prices, for very long) or their incomes must increase. For incomes to increase employers must dip into their reserves of money (and saleable assets) or see their rates of profit decrease (or some combination of those) or charge more for their products. Guess what they do.
It is the case that, ultimately, to sustain inflation the supply of money must be increased so demand can be sustained at the higher (and higher) prices. To defeat inflation demand must be throttled.
That is routinely achieved in part through a decrease in total income, via layoffs. In fighting inflation layoffs are always accompanied by a decrease in the discretionary disposable income of people who still have jobs (with “disposable income” being income minus taxes), money people have ‘left over’ (if any) from their disposable income after debts and other regular obligations have been taken care of, money they are free to spend as they choose. Decreasing discretionary disposable income can be achieved by decreasing disposable income itself, via higher taxes, but that route is in general politically impossible to implement. The other approach is to decrease discretionary income, therefore total demand, via higher rates of interest. That discourages borrowing, making total demand less than it would otherwise be (leading to layoffs), and, where adjustable rates exist (such as credit cards as well as some equity loans and mortgages), increases the amount of income that must go to paying on existing debts (further reducing total demand).
A certain level of inflation is necessary in an economy that depends on growth — increases in total output (i.e., ‘gross domestic product: GDP’) — (as all nations’ economies currently do) to keep it from collapsing. Growth is sustained through debt. Borrowing from banks increases demand (as all borrowing is for the purpose of making purchases of some kind) — forging growth. Borrowing from banks also simultaneously increases the supply of money in the economy to sustain that increase in demand: the money borrowed is money created by the bank, not money from its vaults. (It is a tad more technical than that, but for present purposes that is definitely an accurate-enough statement.) That increase in the supply of money is temporary: an amount of money equal to the money that is created when a loan is issued gets ‘destroyed’ as the loan is repaid (as it gets ‘written off’ a bank’s ‘books’). On the other hand, loans from banks must be repaid (including interest) out of income. That reduces discretionary disposable income, creating a tendency towards reduced demand, thus negatively impacting growth. Yet, growth in total income is needed to sustain demand for total output. In the end, for the economic house of cards that is every nation’s growth-based economy (via borrowing from banks) to keep from collapsing prices must increase over time — including the price of labor, i.e., wages/salaries. That increase in the price of labor creates the increase in income needed to pay off debt while sustaining demand at the level necessary to keep the economy growing (mostly through more debt) — but it does lead to increasing prices for goods and services, in order to keep rates of profit from falling. The trick is to maintain ‘enough’ inflation without having inflation get beyond the control of the powers that be that ‘manage’ — or at least strongly influence — the economy.
So my paradigm attacks that ‘need’ for inflation by providing money to fund a guaranteed minimum income, which sustains demand, without using debt (or taxes) for that purpose. So a need for inflation to increase total income to repay debt is absent. Since the money created for that income replaces existing incomes, it does not add to total demand. Given that it does not add to total demand, it cannot contribute to inflation.
It is the case that the guaranteed minimum income would represent an increase in income for many adult citizens. For that reason it would have to start at a lower level and be gradually increased, so that supply could be increased apace.
Creating money to fund government is a similar case. All money disbursed by government at every level, whether as income to employees or payments to other recipients, or purchases of goods and services, or even payments on debt, is income for whoever or whatever entity receives that money. That income contributes to demand. So, funding that demand by creating money as needed does not increase that contribution to demand.
It is the case that doing away with taxes would increase discretionary disposable income. So in making the transition to this paradigm taxes would have to be gradually reduced in the same way that the guaranteed minimum income would have to be gradually increased.
This alternative monetary paradigm does include a need for a mechanism to withdraw money from the economy. That is addressed in every article I have ever written about it. Here, I will only relate that individuals and businesses could accumulate plentiful pools of money and bountiful baskets of assets and, unlike a tax, no money would be collected from any person or business before it could be used for purchases/investments. For any person, however rich or not, to have any money collected could only be the result of indifference.
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For more about the paradigm (the same as the previous link): “A Most Beneficial Economic Change” is a “2 min read” here in Medium with links to several articles about it from different perspectives — with nothing I publish here behind the paywall).