The Keynesian Abenomics is Raising Prices in Japan

Posted by PITHOCRATES - April 14th, 2014

Week in Review

Money is a temporary storage of value.  We created money to make trade easier.  We once bartered.  We looked for people to trade with.  But trying to find someone with something you wanted (say, a bottle of wine) that wanted what you had (say olive oil) could take a lot of time.  Time that could be better spent making wine or olive oil.  So the longer it took to search to find someone to trade with the more it cost in lost wine and olive oil production.  Which is why we call this looking for people to trade goods with ‘search costs’.

Money changed that.  Winemakers could sell their wine for money.  And take that money to the supermarket and buy olive oil.  And the olive oil maker could do likewise.  Greatly increasing the efficiency of the market.  There is a very important point here.  Money facilitated trade between people who created value.  Creating something of value is key.  Because if people were just given money without producing anything of value they couldn’t trade that money for anything.  For if people didn’t create things of value to buy what good was that money?

Today, thanks to Keynesian economics, governments everywhere believe they can create economic activity with money.  And use their monetary powers to try and manipulate things in the economy to favor them.  And one of their favorite things to do is to devalue their money.  Make it worth less.  So governments that borrow a lot of money can repay that money later with devalued money.  Money that is worth less.  So they are in effect paying back less than they borrowed.  And governments love doing that.  Of course, people who loan money are none too keen with this.  Because they are getting less back than they loaned out originally.  And there is another reason why governments love to devalue their money.  Especially if they have a large export economy.

Before anyone can buy from another country they have to exchange their money first.  And the more money they get in exchange the more they can buy from the exporting country.  This is the same reason why you can enjoy a five-star vacation in a tropical resort in some foreign country for about $25.  I’m exaggerating here but the point is that if you vacation in a country with a very devalued currency your money will buy a lot there.  But the problem with making your exports cheap by devaluing your currency is that it has a down side.  For a country to buy imports they, too, first have to exchange their currency.  And when they exchange it for a much stronger currency it takes a lot more of it to buy those imports.  Which is why when you devalue your currency you raise prices.  Because it takes more of a devalued currency to buy things that a stronger currency can buy.  Something the good people in Japan are currently experiencing under Abenomics (see Japan Risks Public Souring on Abenomics as Prices Surge by Toru Fujioka and Masahiro Hidaka posted 4/14/2014 on Bloomberg).

Prime Minister Shinzo Abe’s bid to vault Japan out of 15 years of deflation risks losing public support by spurring too much inflation too quickly as companies add extra price increases to this month’s sales-tax bump.

Businesses from Suntory Beverage and Food Ltd. to beef bowl chain Yoshinoya Holdings Co. have raised costs more than the 3 percentage point levy increase. This month’s inflation rate could be 3.5 percent, the fastest since 1982, according to Yoshiki Shinke, the most accurate forecaster of Japan’s economy for two years running in data compiled by Bloomberg…

“Households are already seeing their real incomes eroding and it will get worse with faster inflation,” said Taro Saito, director of economic research at NLI Research Institute, who says he’s seen prices of Chinese food and coffee rising more than the sales levy. “Consumer spending will weaken and a rebound in the economy will lack strength, putting Abe in a difficult position…”

Abe’s attack on deflation — spearheaded by unprecedented easing by the central bank — has helped weaken the yen by 23 percent against the dollar over the past year and a half, boosting the cost of imported goods and energy for Japanese companies.

Japan is an island nation with few raw materials.  They have to import a lot.  Including much of their energy.  Especially since shutting down their nuclear reactors.  Japan has a lot of manufacturing.  But that manufacturing needs raw materials.  And energy.  Which are more costly with a devalued yen.  Increasing their costs.  Which they, of course, have to pay for when they sell their products.  So their higher costs increase the prices their customers pay.  Leaving the people of Japan with less money to buy their other household goods that are also rising in price.  Which is why economies with high rates of inflation go into recession.  As the recession will correct those high prices.  With, of course, deflation.

Keynesians all think they can manipulate the market place to their favor by playing with monetary policy.  But they are losing sight of a fundamental concept in a free market economy.  Money doesn’t have value.  It only holds value temporarily.  It’s the things the factories produce that have value.  And whenever you make it more difficult (i.e., raise their costs by devaluing the currency) for them to create value they will create less value.  And the economy as a whole will suffer.

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Currencies, Exchange Rates and the Gold Standard

Posted by PITHOCRATES - June 17th, 2013

Economics 101

Money is a Temporary Storage of Value that has no Intrinsic Value

Giant container ships ply the world’s oceans bringing us a lot of neat stuff.  Big televisions.  Smartphones.  Laptop computers.  Tablet computers.  The hardware for our cable and satellite TVs.  Toasters.  Toaster ovens.  Mixers and blenders.  And everything else we have in our homes and in our lives.  Things that make our lives better.  And make it more enjoyable.  These things have value.  We give them value.  Some have more value to one than another.  But these are things that have value to us.  And because they have value to us they have value to the people that made them.  Who used their human capital to create things that other people wanted.  And would trade for them.

When we first started trading we bartered with others.  Trading things for other things.  But as the economy grew more complex it took a lot of time to find someone who had what you wanted AND you had what they wanted.  So we developed money.  A temporary storage of value.  So we could trade the valuable things we created for money.  That money held the value of what we created temporarily while we looked for something that we wanted.  Then we exchanged the money we got earlier for something someone had.  It was just like trading our thing for someone else’s thing.  Only instead of spending weeks, months even years meeting hundreds of thousands of people trying to find that perfect match we only needed to meet two people.  One that exchanges money for the thing we have that they want.  And another who has what we want that they will exchange for our money.  Then that person would do the same with the money they got from us.  As did everyone else who brought things to market.  And those who came to market with money to buy what others brought.

Money is a temporary storage of value.  Money itself doesn’t have any intrinsic value.  Consider that container ship full of those wonderful items.  Now, which would you rather have as permanent fixtures in your house?  Those wonderful things?  Or boxes of money that just sit in your house?  You’d want the wonderful things.  And if you had a box of money you would exchange it (i.e., go out shopping) for those wonderful things.  Because boxes of money aren’t any fun.  It’s what you can exchange that money for that can be a lot of fun.

Devaluing your Currency boosts Exports by making those Goods less Expensive to the Outside World

So there is a lot of value on one of those container ships.  Let’s take all of that value out of the ship and place it on a balancing scale.  Figuratively, of course.  Now the owner of that stuff wants to trade it for other stuff.  But how much value does this stuff really have?  Well, let’s assume the owner is willing to exchange it all for one metric ton of gold.  Because gold is pretty valuable, too.  People will trade other things for gold.  So if we put 1 metric ton of gold on the other side of the balancing scale (figuratively, of course) the scale will balance.  Because to the owner all of that stuff and one metric ton has the same value.  Of course moving a metric ton of gold is not easy.  And it’s very risky.  So, instead of gold what else can we put on that scale?  Well, we can move dollars electronically via computer networks.  That would be a lot easier than moving gold.  So let’s put dollars on the other side of that scale.  Figuratively, of course.  How many will we need?  Well, today gold is worth approximately $1,380/troy ounce.  So after some dimensional analysis we can convert that metric ton into 32,150 troy ounces.  And at $1,380/troy ounce that metric ton of gold comes to approximately $44.4 million.  So that container ship full of wonderful stuff will balance on a scale with $44.4 million on the other side.  Or 1 metric ton of gold.  In the eyes of the owner they all have the same value.

Moving money electronically is the easiest and quickest manner of exchanging money for ships full of goods.  These ships go to many countries.  And not all of them use American dollars.  But we can calculate what amounts of foreign currency will balance the value of that ship.  Or one metric ton of gold.  By using foreign exchange rates.  Which tell us the value of one currency in another currency.  Something that comes in pretty handy.  For when, say, an American manufacturer sells their goods they want American dollars.  Not British pounds.  Danish kroner.  Or Russian rubles.  For American manufacturers are in the United States of America.  They buy their materials in American dollars.  They pay their employees in American dollars.  Who pay their bills in American dollars.  Go shopping with American dollars.  Etc.  For everyday American transactions the British pound, for example, would be un-useable.  What these American manufacturers want, then, are American dollars.  So before a foreigner can buy these American exports they must first exchange their foreign currencies for American dollars.  We can get an idea of this by considering that container ship full of valuable stuff.  By showing what it would cost other nations.  The following table shows a sampling of foreign exchange rates and the exchanged foreign currency for that $44.4 million.

foreign currencies and exchange rates

If we take the US dollars and the Exchanged Currency for each row and place them on either side of a balancing scale the scale will balance.  Figuratively, of course.  Meaning these currencies have the same value.  And we can exchange either side of that scale for that container ship full of valuable stuff.  Or for that metric ton of gold.  Why are there such large differences in some of these exchange rates?  Primarily because of a nation’s monetary policy.  Many nations manipulate their currency for various reasons.  Some nations give their people a lot of government benefits they pay for by printing money.  Which devalues their currency.  Some nations purposely devalue their currency to boost their export sector.  As the more currency you get in exchange for your currency the more of these exports you can buy.  Most of China’s great economic growth came from their export sector.  Which they helped along by devaluing their currency.  This boosted exports by making those goods less expensive to the outside world.  But the weakened yuan made domestic goods more expensive.  Because it took more of them to buy the same things they once did.  Raising the cost of living for the ordinary Chinese.

The Gold Standard made Free Trade Fair Trade

Some economists, Keynesians, approve of printing a lot of money to lower interest rates.  And for the government to spend.  They think this will increase economic activity.  Well, keeping interest rates artificially low will encourage more people to buy homes.  But because they are devaluing the currency to keep those interest rates artificially low housing prices rise.  Because when you devalue your currency you cause price inflation.  But it’s just not house prices that rise.  Prices throughout the economy rise.  The greater the inflation rate (i.e., the rate at which you increase the money supply) the higher prices rise.  And the less your money will buy.  While the currencies at the top of this table will have exchange rates that don’t vary much those at the bottom of the table may.  Especially countries that like to print money.  Like Argentina.  Where the inflation is so bad at times that Argentineans try to exchange their currency for foreign currencies that hold their value longer.  Or try to spend their Argentine pesos as quickly as possible.  Buying things that will hold their value longer than the Argentine peso.

Because printing fiat money is easy a lot of nations print it.  A lot of it.  People living in these countries are stuck with a rapidly depreciating currency.  But international traders aren’t.  If a country prints so much money that their exchange rate changes every few minutes international traders aren’t going to want their currency.  Because a country can’t do much with a foreign currency other than buy exports with it from that country.  A sum of highly depreciated foreign currency won’t buy as much this hour as it did last hour.  Which forces an international trader to quickly spend this money before it loses too much of its value.  (Some nations will basically barter.  They will exchange their exports for another country’s exports based on the current exchange rate.  So that they don’t hold onto the devalued foreign currency at all.)  But if the currency is just too volatile they may demand another currency instead.  Like the British pound, the euro or the American dollar.  Because these stronger currencies will hold their value longer.  So they’ll buy this hour what they bought last hour.  Or yesterday.  Or last week.  There is less risk holding on to these stronger currencies because Britain, the European Central Bank and the United States aren’t printing as much of their money as these nations with highly devalued currencies are printing of theirs.

This is the advantage of gold.  Countries can’t print gold.  It takes an enormous expense to bring new gold to the world’s gold supply.  It’s not easy.  So the value of the gold is very stable.  While some nations may devalue their currencies they can’t devalue gold.  A nation printing too much money may suffer from hyperinflation.  Reducing their exchange rate close to zero.  And when you divide by a number approaching zero the resulting amount of currency required for the exchange approaches infinity.  Weimar Germany suffered hyperinflation.  It was so bad that it took so much money to buy firewood that it was easier and less expensive to burn the currency instead.  This is the danger of a government having the ability to print money at will.  But if that same country can come up with a metric ton of gold that person with the container ship full of wonderful stuff would gladly trade it for that gold.  Even though that person will not trade it for that country’s currency.  This was the basis of the gold standard in international trade.  When nations backed their currencies with gold.  And kept them exchangeable for gold.  Forcing nations to maintain stable currencies.  By maintaining an official exchange rate between their currency and gold.  If that nation devalued its currency the market exchange rate will start to move away from the official exchange rate.  For example, say the official rate was $40/troy ounce.  But because they printed so much of their currency they devalued it to where it took $80 to buy a troy ounce on the open market.  So a nation could take $80 dollars of that devalued currency and exchange it for 2 troy ounces of gold from that nation.  The official exchange rate forcing the nation to give away 2 troy ounces of gold for $80 when the real market exchange rate would only have given them 1 troy ounce.  So devaluing your currency would cause gold to flow out of your country.  And the only way to stop it would be to decrease the size of your money supply.  Undoing the previous inflation.  To bring the market exchange rate back to the official exchange rate.  Which is why the gold standard worked so well for international trade.  Nations could not manipulate their currency to get a trade advantage over another nation.  Making free trade fair trade.  Something few say today.  Thanks to currency manipulators like China.

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Farming, Food Surplus, Artisans, Trade, Barter, Search Costs, Money, Precious Metals, Pound, Dollar and Gold Standard

Posted by PITHOCRATES - October 9th, 2012

History 101

Food Surpluses allowed Everything that followed in the Modern Age

Humans were hunters and gatherers first.  When the environment ruled supreme.  Then something happened.  Humans began to think more.  And started to push back against their environment.  First with tools.  Then with fire.  Bringing people closer together.  Eventually settling down in civilizations.  When the human race embarked on a new path.  A path that would eventually usher in the modern age we enjoy today.  We stopped hunting and gathering.  And began farming.

Throughout history life has been precarious.  Due to the uncertainty of the food supply.  Especially when the environment ruled our lives.  That changed with farming.  When we started taking control of our environment.  We domesticated animals.  And learned how to grow food.  Which lead to perhaps the most important human advancement.  The one thing that allowed everything that followed in the modern age.   Food surpluses.  Which made life less precarious.  And a whole lot more enjoyable.

Producing more food than we needed allowed us to store food to get us through long winters and seasons with poor harvests.  But more importantly it freed people.  Not everyone had to farm.  Some could do other things.  Think about other things.  And build other things.  Artisans arose.  They built things to make our lives easier.  More enjoyable.  And when these talented artisans and farmers met other talented artisans and farmers they traded the products of all their labors.  In markets.  That became cities.  Enriching each other’s lives.  By allowing them to trade for food.  For things that made life easier.  And for things that made life more enjoyable.

We settled on using Precious Metals (Gold and Silver) for Money for they were Everything Money Should Be

As civilizations advanced artisans made a wider variety of things.  Putting a lot of goods into the market place.  Unfortunately, it made trading more difficult.  Because while you saw what you wanted the person who had it may not want what you had to offer in trade.  So what do you do?  You look for someone else that has that same thing.  And will trade for what you have.  And when the second person doesn’t want to trade for what you have you look for a third person.  Then a fourth.  Then a fifth.  Until you find someone who wants to trade for what you have.

This is the barter system.  Trading goods for goods.  And as you can see it has high search costs to find someone to trade with.  Time that people could better spend making more things to trade.  What they needed was a temporary storage of value.  Something people could trade their things for.  And those people could then use that temporary storage they received in trade to later trade for something they wanted.   We call this ‘something’ money.

We have used many things for money.  Some things better than others.  In time we learned that the best things to use for money had to have a few characteristics.  It had to be scarce.  A rock didn’t make good money because why would anyone trade for it when you could just pick one up from the ground?  It had to be indestructible and hold its value.  A slab of bacon had value because bacon is delicious.  But if you held on to it too long it could grow rancid, losing all the value it once held.  Or you could eat it.  Which would also remove its value.  It had to be divisible.  A live pig removed the problem of bacon growing rancid.  However, it was hard making change with live pigs.  Which is why we settled on using precious metals (gold and silver) for money.  For they were everything money should be.

The Key to Economic Activity is People with Creative Talent to make Things to Trade

Money came first.  Then government monetary systems.  Traders were using gold and silver long before nations established their own money.  And when they did they based them on weights of these precious metals.  The British pound sterling represented one Saxon pound of silver.  The U.S. dollar came from the Spanish dollar.  Which traces back to 16th century Bohemia.  To the St. Joachim Valley.  Where they minted private silver coins.  The Joachimsthaler.  Where the ‘thaler’ (which translated to valley) in Joachimsthaler became dollar.  The German mark and the French franc came into being as weights of precious metals.  People either traded silver or gold coins.  Or paper notes that represented silver or gold.

We used silver first as the basis for national currencies.  Then with new gold discoveries in the United States, Australia and South Africa gold became the precious metal of choice.  Using precious metals simplified trade by providing sound money.  And it also made foreign exchange easy.  For when the British made their pound represent 1/4 of an ounce of gold and the Americans made their dollar represent 1/20 of an ounce of gold the exchange rate was easy to calculate.  The British pound had 5 times as much gold in it than the U.S. dollar.  So the exchange rate was simply 5 U.S. dollars for every British pound.  Which made international trade easy.  And fair.  Because everything was priced in weights of gold.

The pure gold standard, then, was part of the natural evolution of money.  The state did not create it.  It does not require an act of legislation.  Or political decree.  The pure gold standard existed before the state.  And states based their currencies on the monetary system that already existed.  Using weights of precious metals as money.  That is, a pure gold standard.  Central banks and fiat money are only recent inventions of the state.  And bad ones at that.  For the thousands of years that preceded the last hundred years or so there were only traders mutually agreeing to trade their goods for precious metals.  Using these precious metals as a temporary storage of wealth.  To temporarily hold the value of the things they made.  So the key to economic activity is people with creative talent to make things to trade.  And a sound money like gold and silver to facilitate that trade.  Not a central bank.  Or monetary policy.

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Macroeconomic Disequilibrium

Posted by PITHOCRATES - September 24th, 2012

Economics 101

In the Barter System we Traded our Goods and Services for the Goods and Services of Others

Money.  It’s not what most people think it is.  It’s not what most politicians think it is.  Or their Keynesian economists.  They think it’s wealth.  That it has value.  But it doesn’t.  It is a temporary storage of value.  A medium of exchange.  And that alone.  Something that we created to make economic trades easier and more efficient.  And it’s those things we trade that have value.  The things that actually make wealth.  Not the money we trade for these things.

In our first economic exchanges there was no money.  Yet there were economic exchanges.  Of goods and services.  That’s right, there was economic activity before money.  People with talent (i.e., human capital) made things, grew things or did things.  They traded this talent with the talent of other people.  Other people with human capital.  Who made things, grew things or did things.  Who sought each other out.  To trade their goods and services for the goods and services of others.  Which you could only do if you had talent yourself.

This is the barter system.  Trading goods and services for goods and services.  Without using money.  Which meant you only had what you could do for yourself.  And the things you could trade for.  If you could find people that wanted what you had.  Which was the great drawback of the barter system.  The search costs.  The time and effort it took to find the people who had what you wanted.  And who wanted what you had.  It proved to be such an inefficient way to make economic transactions that they needed to come up with a better way.  And they did.

The Larger the Wheat Crop the Greater the Inflation and the Higher the Prices paid in Wheat

They found something to temporarily hold the value of their goods and services.  Money.  Something that held value long enough for people to trade their goods and services for it.  Which they then traded for the goods and services they wanted.  Greatly decreasing search costs.  Because you didn’t have to find someone who had what you wanted while having what they wanted.  You just had to take a sack of wheat (or something else that was valuable that other people would want) to market.  When you found what you wanted you simply paid an amount of wheat for what you wanted to buy.  Saving valuable time that you could put to better use.  Producing the goods or services your particular talent provided.

Using wheat for money is an example of commodity money.  Something that has intrinsic value.  You could use it as money and trade it for other goods and services.  Or you could use it to make bread.  Which is what gives it intrinsic value.  Everyone needs to eat.  And bread being the staple of life wheat was very, very valuable.  For back then famine was a real thing.  While living through the winter was not a sure thing.  So the value of wheat was life itself.  The more you had the less likely you would starve to death.  Especially after a bad growing season.  When those with wheat could trade it for a lot of other stuff.  But if it was a year with a bumper crop, well, that was another story.

If farmers flood the market with wheat because of an exceptional growing season then the value for each sack of wheat isn’t worth as much as it used to be.  Because there is just so much of it around.  Losing some of its intrinsic value.  Meaning that it won’t trade for as much as it once did.  The price of wheat falls.  As well as the value of money.  In other words, the bumper crop of wheat depreciated the value of wheat.  That is, the inflation of the wheat supply depreciated the value of the commodity money (wheat).  If the wheat crop was twice as large it would lose half of its value.  Such that it would take two sacks of wheat to buy what one sack once bought.  So the larger the wheat crop the greater the inflation and the higher the prices (except for wheat, of course).  On the other hand if a fire wipes out a civilization’s granary it will contract the wheat supply.  Making it more valuable (because there is less of it around).  Causing prices to fall (except for wheat, of course).  The greater the contraction (or deflation) of the wheat supply the greater the appreciation of the commodity money (wheat).  And the greater prices fall.  Because a little of it can buy a lot more than it once did.

Keynesian Expansionary Monetary Policy has only Disrupted Normal Market Forces

Creating a bumper crop of wheat is not easy.  Unlike printing fiat money.  It takes a lot of work to plow the additional acreage.  It takes additional seed.  Sowing.  Weeding.  Etc.  Which is why commodity money works so well.  Whether it’s growing wheat.  Or mining a precious metal like gold.  It is not easy or cheap to inflate.  Unlike printing fiat money.  Which is why people were so willing to accept it for payment.  For it was a relative constant.  They could accept it without fear of having to spend it quickly before it lost its value.  This brought stability to the markets.  And let the automatic price system match supply to the demand of goods and services.  If things were in high demand they would command a high price.  That high price would encourage others to bring more of those things to market.  If things were not in high demand their prices would fall.  And fewer people would bring them to market.  When supply equaled demand the market was in equilibrium.

Prices provide market signals.  They tell suppliers what the market wants more of.  And what the market wants less of.  That is, if there is a stable money supply.  Because this automatic price system doesn’t work so well during times of inflation.  Why?  Because during inflation prices rise.  Providing a signal to suppliers.  Only it’s a false signal.  For it’s not demand raising prices.  It’s a depreciated currency raising prices.  Causing some suppliers to increase production even though there is no increase in demand.  So they will expand production.  Hire more people.  And put more goods into the market place.  That no one will buy.  While inflation raises prices everywhere in the market.  Increasing the cost of doing business.  Which raises prices throughout the economy.  Because consumers are paying higher prices they cannot buy as much as they once did.  So all that new production ends up sitting in wholesale inventories.  As inventories swell the wholesalers cut back their orders.  And their suppliers, faced with falling orders, have to cut back.  Laying off employees.  And shuttering facilities.  All because inflation sent false signals and disrupted market equilibrium.

This is something the Keynesians don’t understand.  Or refuse to understand.  They believe they can control the economy simply by continuously inflating the money supply.  By just printing more fiat dollars.  As if the value was in the money.  And not the things (or services) of value we create with our human capital.  Economic activity is not about buying things with money.  It’s about using money to efficiently trade the things we make or do with our talent.  Inflating the money supply doesn’t create new value.  It just raises the price (in dollars) of our talents.  Which is why Keynesian expansionary monetary policy has been such a failure.  For their macroeconomic policies only disrupt normal market forces.  Which result in a macroeconomic disequilibrium.  Such as raising production in the face of falling demand.  Because of false price signals caused by inflation.  Which will only bring on an even more severe recession to restore that market equilibrium.  And the longer they try to prevent this correction through inflationary actions the longer and more severe the recession will be.

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Money

Posted by PITHOCRATES - November 7th, 2011

Economics 101

The High Search Costs of the Barter System Hindered Trade

Agriculture advances gave us food surpluses.  Food surpluses gave us a division of labor.  The division of labor gave us trade.  And trade gave us an advanced civilization.  By allowing more specialists to live together in crowded urban settings.  Creating a rich surplus of goods for trade.  That people traded.  With other people.  Near.  And far.

As trade grew civilizations got better.  The division of labor grew larger.  And more complex.  Producing more things.  Soon there was a rich variety of goods to trade with for other goods.  From civilizations in distant lands.  Which made life more interesting.  And enjoyable.  During that brief time when you weren’t working.  Or trading.  Which was taking more and more time.  To find someone to trade with.  That had something you wanted.  And who wanted something you had.

This is the barter system.  Trading goods for goods.  Producers took their goods to other producers.  And asked, “What will you take in trade for that?”  Often the response was, “Nothing that you have.”  To which the trader replied, “Very well.  I shall keep looking.”  And sometimes would spend days, weeks and even months looking.  And that was time spent not making anything new.  This was the high search cost of the barter system.  And it hindered trade.  We needed something better.

Money made Trade more Efficient and Unleashed the Human Capital of the Middle Class

For civilization to advance further we had to make trade more efficient.  We had to reduce these search costs.  What we needed was a temporary storage of value.  Something we could trade our valuable goods for.  And then trade the value of our goods, held temporarily in this temporary storage of value, for something else of value later.  And we call this temporary storage of value money.

Money greatly simplified things.  Allowed a more complex economy.  A greater division of labor.  And it allowed wages.  Allowing more people to work on more narrow specialties.  These producers could then take their wages to market.  And buy what they needed.  Instead of spending days, weeks or even months traveling to find people to barter with.

Money made trade more efficient.  It allowed cities to grow in size.  And become even more advanced.  It unleashed the human capital of the middle class.  For they could spend more time creating and building new and better things to trade.  And this economic activity allowed more people to live together peacefully.  As producers produced.  And traded with other producers.  All made easier by money.  A temporary storage of value.

Money doesn’t Create or Produce, it just Temporarily Stores the Value of what we Create and Produce

Please note what came first here.  First there was trade.  Then there was money to make that trade more efficient.

At the heart of all economic activity is our human capital.  What we use to create and produce.  Money doesn’t create or produce.  It just stores the value of what we create and produce.  Which is why Keynesian economic stimulus doesn’t work.  Making money to give to people to spend simply does not create new economic activity.

Our skills create economic activity.  That ability to create things other people value.  And wish to trade for.  Because we are traders.  Not spenders.  We trade things of value.  And to trade things of value someone has to create them first.  If you just take things of value without offering something of value in trade it is not trade.  It’s plunder.  And little different from the uncivilized barbarians on the frontier of the civilized world.

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