The news isn't so good these days. Major financial institutions are in serious
trouble. Some have failed and their assets been taken over. The stock
market has been fluctuating sharply. Various experts disagree regarding the
magnitude of our current crisis. Some say
fundamentals of our economy are sound, while others say we haven't had such a
Depression of the 1930's.
Regardless of how one explains such events, and there have been many explanations,
they all depend on and deal with one factor, money. There is talk of prices
or debt or money supply but always the subject of the explanation is some relationship
involving money. Whenever an economy is not doing well the subject of money
will arise. But one question that is never asked and never answered is "Why
are such troubles possible at all?" What is it about an economy such that
with a lot of skilled people and many resources and many needs to be met, they
sometimes stop working to produce things from those resources? After all, people
will suffer from want because they need those products that are no longer being
made. They become poor. None of these people want to stop working, and producing.
None of these people want the situation in which they find themselves. No one
wanted this to happen because it harms everyone, even the rich. And yet there
it is. Different people have different ideas about how to solve the problem
but for one reason or another, the problem seems to continue and get better
or worse in its own time, uncontrolled by governments or businesses.
Let's try to answer that question of why such economic dislocations and disasters
are possible in the first place. The first thing to notice is that the supply
of a physical object money is independent of the supply of goods and services
for sale. The supply of money can be quite volatile increasing rapidly (the
usual thing) or decreasing rapidly which can be just as bad. Increasing the
money supply by printing or coining more currency is one obvious way of increasing
the money supply but it is not the only way at all. It is much more common
for the supply of money to be changed by loans. When one loans money one increases
the supply of money because the person who lends still owns the money and the
person who borrows also can spend the same money. (Yes, I know that sounds
silly but money is pretty silly in what it lets us do.) So if a bank has $100
in deposits and loans $50, there is $150 of money that can be spent. Thus when
lots of people in an economy borrow lots of money from one another the supply
of money can increase hugely. If they cannot pay it back (and there is never
really enough money to pay back what is borrowed because of the interest) then
the money is gone and neither the borrower nor the lender has the money and
the money supply shrinks. Okay, that is all pretty simple. So what's the problem?
Well the problem is that there are things in all economies which we can call
loops. For example, if Joe loses his job and stops having income,
Joe can't spend as much money as before so there is less demand for goods since
Joe isn't buying as much as before. That drop in demand means that Sam will
be laid off since demand is down. Now Sam isn't spending either so Willy and
Fred are laid off. This sort of thing can also work the other way, of course.
Usually there are enough good and bad things happening for the economy at any
one time that they sort of balance out. Things may be trending generally toward
expansion or toward a little contraction but generally they are stable
and trend to more production. However, if there is a big enough change
in the economic
situation, like lots of people not being able to pay their mortgage payments,
the amount of feedback of one kind builds up a sort of momentum. Then a lot of
people stop spending so a lot of people lose their jobs which results
in much less spending. This feedback loop affects the loop those who make loans.
people losing their jobs, the lenders are less willing to loan money out since
it is less likely to be repaid. The reduction in money for loans means that
less money can be borrowed for general spending which again reduces demand
and decreases employment. The increase in defaults on loans results in banks
losing money since the value of the property they had accepted as collateral
is now less than the amount of the loans that are not being repaid. So the
money supply decreases even faster.
Why can this happen? Mostly because the supply of money has little to
do with the supply of goods and services for sale. There are many other contributing
factors but that is the single most important.
Why is this not possible in a non-POM economy? Because in such an economy
the amount of money is a product of the amount of goods and services available
the balance between the two is very close. If something is produced for sale,
that amount of money comes into existence. If something is purchased, that
amount of money ceases to exist. The balance is always maintained.
But beyond that, whenever one produces beneficial things, one gets paid for
that benefit. One always has a money motive to produce since money is no object.
One's very act of production increases the available money just as one's very
act of consumption reduces the supply of money.
In a non-POM economy money cannot be borrowed or lent. There is no credit.
To buy something one must have enough money to pay in full. But this doesn't
reduce the demand for goods and services because there is plenty of money available
to buy them all. There is no unemployment because anyone can produce. There
is a tacit agreement between the Payers and the producers that the Payers will
pay any who produce net benefit. Thus all who desire to work are employed.
The very idea of people not producing even though they want to work in a non-POM
In a non-POM society money is no object. If it is good for others there is
money to pay for it, always.
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