Sound money – the good old idea of no appreciation or depreciation of money – now only exists as a metaphor. As the days go by, money is becoming cheaper. Surprisingly, policy makers believe that the gradual loss in its value is good (read: necessary) for economic growth. As a result, the present-day global monetary system is designed in such that the value abates every day. This phenomenon of in-built losses is known by a rather fancy name: inflation.
Why do policymakers exactly love inflation? The answer is quite simple. Excessive note printing by central banks puts more money – as opposed to wealth – in people’s pockets. This results in greater currency chasing the same amount of goods and services. People soon realise that a basket of goods and services will cost more tomorrow if they postpone its purchase today, encouraging them to increase spending in the present. Governments benefit as the so-called size of the economy, commonly known as Gross Domestic Product (GDP), expands, lending credence to the Keynesian theory of money.
But what is so wrong with looking at the subject of money through the lens of Keynesianism – an economic school of thought that credits inflation to an increase in employment? Apparently, a lot, as suggested by Steve Forbes and Elizabeth Ames, co-authors of Money: How the Destruction of the Dollar Threatens the Global Economy—and What We Can Do About It. The duo has used data from the United States and other countries, to build a strong case against “fiat money” – a monetary system in which governments manipulate the value of currency. According to them, whimsical changes in the supply of money produce a weak and unstable currency - a recipe for recurring financial crises, destruction of wealth and stagnation of real (ie. inflation-adjusted) incomes.
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Interestingly, the loss of trust in money is not just limited to high-inflation economies like Iran and Venezuela. A degradation of the dollar, the global reserve currency, is robbing people off their wealth even in the US, despite the official inflation rate being quite low for the past few years. Massive increases in productivity over the last few decades should ideally have led to a great decline in the cost of living had the value of the dollar remained stable, claim Forbes and Ames.
Citing the largest monetary expansion ever recorded in US history, the authors prove that increases in the money supply – from $900 billion in 2008 to over $3.7 trillion in 2013 – produced “miserably feeble GDP growth”. It was less than 2%, which was about half the level recorded in 2003. In other words, “The story of monetary expansion is not a story of wealth creation but rather of wealth destruction.”
The co-authors also blame fiat money for a weak recovery from the 2008 financial crisis – the slowest, post-crisis recovery produced by the “biggest monetary stimulus ever.” Their solution is the establishment of a “gold standard for the 21st Century.” Linking the dollar to gold will ensure stability and unleash entrepreneurial activities that create actual wealth in a society, they propose. Reverting to the gold standard may sound like lunacy to traditional Keynesian ideas, as they would fear slow economic growth. But the authors go to great lengths to show otherwise. According to them, a return to sound money ensures minimal price fluctuations and is purely reflective of the actual supply-and-demand dynamics of a product.
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Along with official data, the authors write that the US economy grew slower in the first 40 years post-1971 than in the previous decades, when the dollar was linked to gold under the Bretton Woods standard. “Had the US economy continued to grow at pre-1971 levels, GDP in the late 2000s would have been 56% higher than it actually was.”
There is a general misconception that a country must own gold in order to have an effective gold standard. The book, however, clarifies it by stating that the gold standard does not mean a rigidly fixed money supply. The only function of it will be to anchor the value of money and save it from manipulation. The main point of the book is simple: Money is not wealth. It’s only a unit of measurement and like all other units of measurement, it should remain stable.
Title: Money: How the Destruction of the Dollar Threatens the Global Economy — and What We Can Do About It
Author: Steve Forbes and Elizabeth Ames
Publisher: McGraw-Hill Education
Kazim Alam is a business reporter at The Express Tribune. He tweets @KazimAlam
Published in The Express Tribune, January 17th, 2016.
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