Saturday, March 19, 2011

There’s Money and then there’s Money

There is an unfortunate habit in today’s world to value brevity and being concise a little too much. This leads to a great deal of writing and speaking which can be misleading and confusing for the non-initiate. For example, the term money is used in a number of different ways. This, I think, is bedeviling the efforts of liberals to explain economic proposals. I have read blog posts lamenting that we have wasted so much money, a trillion dollars or more, in Iraq, and this is a blow to the prosperity of the nation. I have also seen blog posts from the same sources, perhaps from the same authors, advocating that in the current economic climate the treasury should just print and distribute money as the money doesn’t matter. (Hence helicopter Ben Bernanke who recommended, at times past, that dropping money from helicopters would be a sound policy). These two claims, however, would seem to the casual observer to be contradictory. How to solve this paradox?

The problem is that in the two cases we are discussing two different issues with the term money. The word money is used to refer to currency, dollars, yen, euros and the like. A person with more money has more currency, or at least has access to more currency. We also use money to refer to the value of goods, services, capital and land, the resources that a person, people or nation have at their disposal. This value is by no means equal to the quantity of currency available, indeed it is almost always a great deal larger.

So the issue with the waste in Iraq, is that a resources were expended in Iraq with no comparable return to the nation. The prosperity of a nation comes from when the resources of the nation, including the products produced from raw materials and transformed into finished products by the labor of the nation, are exchanged with those of other nations. Large quantities of the resources of our nation were sent to Iraq, never to return, without be traded for any goods of value. The quantity of resources expended is measured in dollars, but it is not the currency lost that is a detriment to the nation but the resources themselves. Were it just that a trillion dollars were printed and then burned, there would be no loss (beyond the value of the paper and ink used in their printing), but what was lost was a trillion dollars of the productive output of the nation. That is a loss.

The proposal to just print and drop money into the economy is, on the other hand, simply an issue of currency, not materials. Our economy is suffering, with some 9% of the population not working, because there is not enough currency in circulation. Too great a quantity of currency is held in reserve by those who have little demand to purchase things. The basic exchange of useful services, where more than two or three people are involved, require currency. Too little is available for those who would use it to produce and trade useful things. The treasury can produce more currency easily and release it into the economy, which will stimulate production and trade (see this story). This does not involve and loss of productive output.

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