Thread: Funny Money=No Honey

Money Is Losing Its Meaning

By throwing trillions of dollars at the coronavirus problem, governments risk undermining trust in currencies.
By Jared Dillian
April 15, 2020, 5:00 PM GMT+7
What is money? Photographer: Bloomberg Jared Dillian is the editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics, and the author of "Street Freak" and "All the Evil of This World." He may have a stake in the areas he writes about.

Doing “whatever it takes” to save the global economy from the coronavirus pandemic is going to cost a lot of money. The U.S. government alone is spending a few trillion dollars, and the Federal Reserve is creating another few trillion dollars to keep the financial system from collapsing. A custom Bloomberg index measuring M2 figures for 12 major economies including the U.S., China, euro zone and Japan shows their aggregate money supply had already more than doubled to $80 trillion from before the 2008-2009 financial crisis.

These numbers are so large that they no longer have any meaning; they are simply abstractions. It’s been some time since people thought about the concept of money and its purpose. The broad idea is that money has value, but that value is not arbitrary. Former Fed Chairman Paul Volcker once said in an interview that “it is a governmental responsibility to maintain the value of the currency they issue. And when they fail to do that, it is something that undermines an essential trust in government.”

The dollar has no real intrinsic value, backed only by the full faith and credit of the U.S. government. Under a fiat currency system, the government says that a dollar is a dollar. Its value relative to things such as other currencies and gold is determined on global markets. Gold is considered to be an objective store of value, and the metal’s rise in dollar terms can be expressed another way, which is that the dollar fell in gold terms. That implies the market has rendered a decision on the value, or rather, the purchasing power of the dollar.

The three main functions of a currency are as a unit of account, a medium of exchange and a store of value. It is that last function that is most important. Ideally, a central bank would want its currency to retain its value over time. The era of flexible monetary standards, however, allow central banks to manipulate a currency’s value to help fight recessions as well as smooth out and lengthen business cycles at the expense of inflation. But even low inflation, say on the order of 2%, will greatly erode the purchasing power of a currency over time.

And if there are too many dollars in circulation, the monetarists would say that the value of those dollars has diminished, eventually leading to higher prices for things. That theory hasn’t worked too well in the last decade, because inflation has been low and stable, but it is too soon to declare it discredited. The transmission mechanism that results in inflation is not well understood, even 45 years after the last great period of inflation.

It took a while, but it seems as though the U.S. government has decided that it has no constraints on its spending, as long as the Fed continues to monetize government borrowing by purchasing the debt issued to finance expenditures. It’s not crazy to think government spending may reach $10 trillion – for just one year! And the numbers will go up from there.

Nobody really knows how this is going to turn out. In smaller economies, runaway government spending has resulted in hyperinflation and social unrest, such as well-documented cases in Venezuela and Zimbabwe. Many think that wouldn’t be possible in the U.S. given the dollar’s role as the world’s primary reserve currency. Perhaps, but it’s not one of those questions we’d really want to experiment with.

If all this money that’s being created does spark inflation, or at least boost inflation expectations, it will be difficult - if not impossible - to reverse. Inflation rates soared in 1979, but that was during a time, unlike now, when most government officials believed that balanced budgets and careful spending were important. A blistering series of interest-rate hikes pummeled inflation expectations, but the result was a hurricane-force recession. Argentina, which has more or less been practicing MMT for some time, proves that it’s hard to put the inflation genie back in the bottle. Argentines have been hoarding dollars—the only practical store of value, other than gold—for decades. They probably view recent events in the U.S. with some trepidation.

The counterexample to all this is Japan, which historically has had the most debt relative to the size of its economy and the most radical monetary policy, and yet has a peaceful, productive society with scant inflation. Demographics explain a lot about inflation and inflation expectations, and Japan’s steadily declining and aging population has put downward pressure on prices for years in spite of all the printing. Economists and central banks generally fear deflation more than inflation because it can hinder investment. History has shown that persistently high inflation rips societies apart; in deflation, people band together.

Throughout Venezuela’s economic crisis, we saw images of ordinary Venezuelans tossing their useless bolivars in the streets. That is what happens when money has lost all meaning; it is in jeopardy of becoming a commodity when it is supposed to be a scarce resource. There are a million reasons why the U.S. will never meet the same fate as Venezuela, but you still don’t want to tamper with people’s perception of the value of money. After you throw a few trillion dollars around, people start to believe that it’s all a big joke.

Bloomberg/asia

Originally Posted by tomcat

...well, the hope is that folks will take the cash and go shopping...then sit on backsides until another check comes...

well yes but if people get say $1000 to just shop and create no value or provide no service then doing nothing is now worth $1000 so $1000 = 0. so if I'm paid $1500 to actually work $1000 of that =0 so I've just taken a massive pay cut ?

Originally Posted by bowie

free money for us 'Mericans

Originally Posted by bowie

Americans $2,000 a month

How many of the single parent families can survive on that. It's what, ฿64,000 a month?

Maybe in Thailand, but ameristan?

Originally Posted by tomcat

.then sit on backsides until another check comes..

Possibly not.

The $349 Billion Small Business Loan Program Is Now Out Of Money

The Trump administration’s Paycheck Protection Program (PPP) for small businesses slammed by coronavirus has run out of funds, hitting the $349 billion initial allotment Thursday morning, according to the Small Business Administration (SBA).


The SBA says more than 1.62 million applications were approved, totaling $349 billion in loans from more than 4,900 lending institutions.


In a joint statement on Wednesday evening, Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza said:


“The SBA has processed more than 14 years’ worth of loans in less than 14 days...

We urge Congress to appropriate additional funds for the Paycheck Protection Program—a critical and overwhelmingly bipartisan program - at which point we will once again be able to process loan applications, issue loan numbers, and protect millions more paychecks.”

Continues:

The $349 Billion Small Business Loan Program Is Now Out Of Money | Zero Hedge

The dollar has no real intrinsic value, backed only by the full faith and credit of the U.S. government.

And since ditching the Gold Standard for faith it has mostly worked for the last few decades.

It has led to speculation about what actually underpins the strength of one currency vs another currency and why is the $US the global standard. The best theory I read was the size of the US Navy makes the difference. The most powerful navy in the world with more aircraft carriers than the rest of the world combined and also the world's second biggest 'air force'. Most trade around the world is still done by sea and having the control of sea-routes has historically made the currencies of the Empire of the day preferential. Even in countries sanctioned and blockaded by America the $US is still king.