Welfare
Welfare = produced goods + redistribution curve
At the basic level, welfare in society is just a matter of produced good (including services) and the redistribution curve. Money is not welfare in itself, as you cannot eat money.
However, money is the system that controls the production and redistribution of goods. People with more money are entitled to consume more goods in this moment. But they can also chose to delay the consumption and have no impact in their welfare for the moment, then consume goods at a later time. Or money can lose value and can be never exchanged for the expected value.
Money is motivation to produce goods
Money also controls the motivation in the production of goods - like in working for salary or creating a company to get rich. Money permits to save the value of the goods that you produce now and later consume goods produces later - like when you retire. Money is used to redistribute goods to people that cannot produce goods (like unemployed people).
Money controls the distribution of capital
People with more money can make use of more capital (like land, factories, work) to produce goods. People with less money cannot put the same capital at work to produce goods. Even when borrowed money are used, having money is often an evaluation on how trustful you are to manage capital and produce goods.
Money is someone's liability
Most of the FIAT money come into existence by loans. My money is either my loan or someone else's loan. It can be state's loan, of a company's loan, but it is almost always a loan. When we have money, we own a part of total liability in that monetary system. When I pay money to the baker, the baker might use the money to repay his loan. It is like I owned the baker's liability and the baker redeemed it's liability from me by giving me a bread.
Things are more complicated in real life, there a very long chains of loans and repay, all moderated by money. For example, there is a chain between the one who loans money and buy a house and the one that builds that house. In order to repay the loan, the loaner will work to produce goods, that can be consumed by the one that built the house. Some chains goes over generations, like savings for retirement.
You can read more about this in "Debt gives value to money"
Inflation is unfulfilled production of goods
Fundamentally, money is a promise to produce goods. Owning money is a claim on that promise. The promise might not always happen (debtor might die of just go out of business), however the risk is distributed among all the users of that money coin. When we have inflation, we can say that the promise was fulfilled less than expected initially. Macro-economically the inflation is a fail in producing enough goods to fulfill the initial promise in the value of money.
FIAT money needs some Inflation
A small inflation (1-3%) is often built-in in any FIAT monetary system, it just keeps the money flowing. If the money increases value, everybody waits to buy even more, that created a deflationary spiral that blocks the consumption and production of goods. A small inflation motivated people to consume, so people that produces goods can use it to exchange them to other goods. A small inflation is required for the system to work. Small inflation is often compensated by the economic growth: after one year more products are produced, so likely your share of products increased - you get a small salary raise because of the inflation.
High inflation is stealing
High inflation can erode savings very fast. When a state is creating too much money compared with the available goods, people that saved are ripped off a good portion of the value they had in the moment of saving. This can be perceived as stealing when the value of the goods produced when earning the saved money is much less than the goods that can be obtains with the today's value of that money.
Money pressure
Like pressured oil in a car, money lubricates the economy. Like with oil, if the pressure is too low or too high, you can have problems.
The money pressure depends both on the quantity of money and the velocity of money. Keeping the flow of money in balance with the goods production required a fine tuning that central banks are meant to achieve. When the loans are payed more than created, the quantity of money in the economy drops and they become scarce. If there is not enough money in economy, viable businesses can go bankrupt, the quantity of goods reduces and the general welfare reduces too.
If there are too much money pumped in the economy, people that saves are ripped of their savings. Money become "hot" and everybody tries to spend them before they lose their value, therefore accelerating the inflation.
Money pressure control
As loans are payed with interest, more money goes upstream (to the central bank) than downstream. Therefore, the central bank needs to inject not-loaned money in the system, in order to keep the system "pressurized". The effect is very not-linear, therefore a perfect tuning is very difficult to achieve, especially as the effects can be felt even after years of a change.
There is a big question if such system can be manageable for many decades or it contains an intrinsic instability that is doomed to produce economic crises. It might be that, by design, the system oscillates between recurrent crises. It might be even worse, the oscillation might get higher and higher as the system evolves. I'm not sure if I have all the data and knowledge to correctly model the dumping factor of such complex system, but it might be feasible if we give it some thought. Maybe I will give it a try in a future article.
Dear reader, please leave a message if you exist! ;) Also, please share this article if you find it interesting. Thank you.
Welfare = produced goods + redistribution curve
At the basic level, welfare in society is just a matter of produced good (including services) and the redistribution curve. Money is not welfare in itself, as you cannot eat money.
However, money is the system that controls the production and redistribution of goods. People with more money are entitled to consume more goods in this moment. But they can also chose to delay the consumption and have no impact in their welfare for the moment, then consume goods at a later time. Or money can lose value and can be never exchanged for the expected value.
Money is motivation to produce goods
Money also controls the motivation in the production of goods - like in working for salary or creating a company to get rich. Money permits to save the value of the goods that you produce now and later consume goods produces later - like when you retire. Money is used to redistribute goods to people that cannot produce goods (like unemployed people).
Money controls the distribution of capital
People with more money can make use of more capital (like land, factories, work) to produce goods. People with less money cannot put the same capital at work to produce goods. Even when borrowed money are used, having money is often an evaluation on how trustful you are to manage capital and produce goods.
Money is someone's liability
Most of the FIAT money come into existence by loans. My money is either my loan or someone else's loan. It can be state's loan, of a company's loan, but it is almost always a loan. When we have money, we own a part of total liability in that monetary system. When I pay money to the baker, the baker might use the money to repay his loan. It is like I owned the baker's liability and the baker redeemed it's liability from me by giving me a bread.
Things are more complicated in real life, there a very long chains of loans and repay, all moderated by money. For example, there is a chain between the one who loans money and buy a house and the one that builds that house. In order to repay the loan, the loaner will work to produce goods, that can be consumed by the one that built the house. Some chains goes over generations, like savings for retirement.
You can read more about this in "Debt gives value to money"
Inflation is unfulfilled production of goods
Fundamentally, money is a promise to produce goods. Owning money is a claim on that promise. The promise might not always happen (debtor might die of just go out of business), however the risk is distributed among all the users of that money coin. When we have inflation, we can say that the promise was fulfilled less than expected initially. Macro-economically the inflation is a fail in producing enough goods to fulfill the initial promise in the value of money.
FIAT money needs some Inflation
A small inflation (1-3%) is often built-in in any FIAT monetary system, it just keeps the money flowing. If the money increases value, everybody waits to buy even more, that created a deflationary spiral that blocks the consumption and production of goods. A small inflation motivated people to consume, so people that produces goods can use it to exchange them to other goods. A small inflation is required for the system to work. Small inflation is often compensated by the economic growth: after one year more products are produced, so likely your share of products increased - you get a small salary raise because of the inflation.
High inflation is stealing
High inflation can erode savings very fast. When a state is creating too much money compared with the available goods, people that saved are ripped off a good portion of the value they had in the moment of saving. This can be perceived as stealing when the value of the goods produced when earning the saved money is much less than the goods that can be obtains with the today's value of that money.
Money pressure
Like pressured oil in a car, money lubricates the economy. Like with oil, if the pressure is too low or too high, you can have problems.
The money pressure depends both on the quantity of money and the velocity of money. Keeping the flow of money in balance with the goods production required a fine tuning that central banks are meant to achieve. When the loans are payed more than created, the quantity of money in the economy drops and they become scarce. If there is not enough money in economy, viable businesses can go bankrupt, the quantity of goods reduces and the general welfare reduces too.
If there are too much money pumped in the economy, people that saves are ripped of their savings. Money become "hot" and everybody tries to spend them before they lose their value, therefore accelerating the inflation.
Money pressure control
As loans are payed with interest, more money goes upstream (to the central bank) than downstream. Therefore, the central bank needs to inject not-loaned money in the system, in order to keep the system "pressurized". The effect is very not-linear, therefore a perfect tuning is very difficult to achieve, especially as the effects can be felt even after years of a change.
There is a big question if such system can be manageable for many decades or it contains an intrinsic instability that is doomed to produce economic crises. It might be that, by design, the system oscillates between recurrent crises. It might be even worse, the oscillation might get higher and higher as the system evolves. I'm not sure if I have all the data and knowledge to correctly model the dumping factor of such complex system, but it might be feasible if we give it some thought. Maybe I will give it a try in a future article.
Dear reader, please leave a message if you exist! ;) Also, please share this article if you find it interesting. Thank you.
Comments