The dynamics behind adding wealth to an economy? Suppose a country has $1,000,000 to start off. They build a mine and start pulling out gold that they sell to other countries. They use that money to open farms, and stores, develop property, manufacturing etc. Overall they have a trade surplus of about 20%.
Would printing money over and above the trade surplus be considered inflationary or would a more acceptable number of dollars be based on a percentage of the credit or paper money floating around.
Let’s try to dig into this story in a little more depth.
They start with a mine. You said it costs a million dollars to open the mine, but that doesn’t tell us how productive the mine is. How much stuff do they pull out of the ground every year? My understanding is that the return to mining can be less than 3% a year, which would be 30k annually from a million dollar mine. It might take this country a bit of time to build farms, and open stores, and develop property, and begin manufacturing, if their available resources after expenses are only 30k a year starting out. But maybe you’re thinking of a surprisingly productive mine.
We can skip ahead. They already have their farms, shops, development, manufacturing. They have a regular working economy. In addition, they have a trade surprise of 20%.
Let’s put some real numbers on it to get a feel. If they had a 300 billion dollar economy, their trade surplus would be 60 billion. We are, of course, talking about a country like Singapore (at least if we’re talking about the current account surplus, which is related but not quite the same thing as a trade surplus).
Then the question.
This is hard to parse.
Dollars are paper money. So the question, read literally, is asking if the acceptable amount of paper money should be based on a percentage of credit or paper money. That doesn’t quite make sense to me. If the acceptable amount of paper money is always 110% of the amount of paper money, then you never have the right amount. You should always have 10% more than what you have, no matter how much you have.
Moving on: We can take another perspective on this. The trade surplus means more goods are exported than imported. People abroad are buying more of our stuff than we are buying theirs. If there were a trade balance, then we could imagine that as our dollars going overseas in order to buy foreign stuff, and then the foreigners using those same dollars to buy an equivalent value of stuff from us. The flow of dollars out, and the subsequent flow back in, match each other.
But a surplus means they buy more of our stuff than we buy of theirs. That means their money is flowing to us, and we’re not giving the money back. We’re keeping it. Foreign money (or more generally foreign assets) are piling up in our sock drawer. We send them goods, and they send us paper assets. That is the meaning of a trade surplus. So if this country has such a trade surplus, we are accumulating many, many, many foreign assets every year. We’re collecting pounds, and euros, and yen, and RMBs, and so on and so forth. We’re not spending this money in the places it can be spent. We don’t use pounds or euros or yen or RMBs domestically. We use dollars. That means if we were spending this money, we would have to spend it overseas on more imports, and that would mean the trade surplus would be smaller. But we’re saving instead. We’re tucking it away. We’re gathering all this paper and we’re putting it in a vault for safekeeping.
So far this has nothing direct to do with domestic money. The amount of domestic money that is needed is based on the domestic economy. If the citizens of this country really feel like gathering 60 billion dollars worth of foreign assets every year, then that’s fine. The government does not need to print any new money at all based on the trade deficit. To turn back to a real example, Singapore has a monetary base of a little more than 50 billion dollars. That is basically the amount of money that they have “printed”. But the Monetary Authority of Singapore (their central bank) has more than 300 billion of foreign assets. They have nearly six times the foreign reserves than they have printed Singapore dollars for domestic use. And that’s just the central bank. Private institutions have huge amounts as well, not to mention Singapore’s massive sovereign wealth funds.
The people of Singapore don’t need dollars to match the trade deficit. That would be massively inflationary. The trade deficit allows them to accumulate foreign assets. It is savings for their people, not money to be used for their economy.
For the sake of simplicity. Let us say there are just two countries. One has a 20% trade surplus per year. If that situation continues forever. Then that country is just really giving away 20% of it’s production every year. Unless there are years where that country has a trade deficit so it can use the saved currency from the other country to balance it.
But if you have stock markets, advanced accounting, etc… Then you can have a very few people conjure that debt into some imaginary real value now, ( for those very few people ) instead of just some real debt that is never paid. If you also have enough stupid people, or a stupid corrupt government, to prop up that imaginary money, that is really just debt.
How does one tell the difference between “imaginary real value” and “value?” For example, China has had a trade surplus with the U.S. for a while, and the Anbang Insurance company recently bought a stake in the Waldorf Astoria Hotel in Manhattan. What’s the difference between “imaginary real value” and “value” in that transaction?
If we can be so confident as to say debt is never paid, is it really debt? Confederate States of America bonds, for example, aren’t worth anything as a debt asset, but only as a historical curio or relic.
Prop up what “imaginary money?” If the money is used to purchase real goods, such as those produced by the nation with the trade surplus (gold in the example in the OP,) how is it “imaginary?” If it’s money that freely trades in an international market, why doesn’t it just lose value through inflation rather than becoming “imaginary” at some point?
I’m not sure I’m following everything you’re saying but you seem to imply that paper money isn’t real. If you believe that, feel free to mail me all the dollars you have and I’ll take them off your hand. I’ll mail you back something real, like a bag of potato chips.
Paper money is real because most people value it. I was at a coffee shop earlier this evening. I gave the guy working there a piece of paper and he gave me a cup of tea and a tuna sandwich. He even gave me three pieces of paper back! So I ended up with a sandwich, a drink and more pieces of paper than I started with.
Paper money is just the way to enable barter without the need to match goods or services.
If I dig my neighbour’s garden, he might give me a chicken. That’s ok. But if I need to hire a tractor, the hire company want something they can use to pay their rent and buy new machinery. They don’t want their gardens dug or a truck load of chickens. So we use paper money to facilitate the transactions.
Paper money is no different to a cheque, except that it is issued by a government and is more widely acceptable. So if my neighbour pays me with paper, I can give some of that to the hire company and some to the butcher to buy a chicken. Result, happiness.
Paper money has the fictive value which it is assigned to have.
Money makes trading much easier, since its much easier to give the sales person €/$300 for a TV, rather than paying with 7 chicken of which 4 weigh 1.6kg, 2x 1.7kg and the last one 1.9kg if I’m not a chicken farmer.
Just imagine, I’m a baker and have to bake bread for a guy to get coal - to get washing power for a guy to give me paper bags, that the guy needs to give me umbrellas which the chicken farmer wants, just so I can buy a TV.
The TV guy has 37 TV’s in stock, what is he doing with 259 chicken?
However, coming back to OP’s question.
Depending on how rare or common the material they get out of the mine is or how much is suspected to be in the mine and what the demand of the material is - their money may just climb in value by itself and printing more money will keep the value the same or lower it, depending on how much that mine is evaluated to be worth.
It was stated in the question that a country has a 20% trade surplus. They use the money to do things. That money is foreign currency. Where do they spend it? Where do they purchase all those things? They will have to convert that currency to their own currency. If their trade partner is running a 20% trade deficit, then the currency should be of a lower value.
If this situation keeps on happening year after year, the foreign currency will lessen in value every year. The surplus country will keep on getting less return.
Make it even simpler. You and your neighbor farm. You each grow cows and veggies. You grow all the cows and veggies you need. Your neighbor is always short of veggies. So you grow extra veggies and offer to sell them to him. He gives you IOU’s “money” for your veggies. In this basic economy. You are getting nothing but debt. It is of no use until the situation changes. Maybe you have a bad veggie crop. Well if you are very lucky, your neighbor suddenly has a good crop and exchanges some for his old IOU’s.
Balanced trade is the best target. You have an excess of an item, shortage of another. Another country has the opposite situation. You trade, helping each other out. Generate no debt, generate more economic activity with the trade.
Someone said I don’t think money is real. A lot of money is not real. It is debt. Real money represents real goods and services. Bank loans create money that has no current value in goods or services. I get paid in money, after I create my goods and services. That money represents what has been done, created. A bank loan is generated out of a promise to create goods or provide services. That “money” may be used to buy a house or car. But the money is only worked into existence over time. Till then it is imaginary. These days a bunch of loans that have yet to be paid back can be used as collateral for another loan.
There is an ever growing bubble of owed money. It is not yet real. The larger that bubble gets, the more likely that a bigger chunk of it will never be made real.
Anyway, money is an advancement beyond this reciprocity system because reciprocity breaks down badly once people are living in societies large enough that most people don’t know each other face-to-face: In a reciprocity system, you both need to know who you owe and who owes you, but also who isn’t trustworthy and who is honest, but you gotta watch ’im. With money, things can get squared away on the spot and the people never have to trust each other very far; debt challenges this, but debt can be captured in ledger books and made good by external agents, such as insurance companies, because it isn’t personal to most of the people involved.
And with debt and ledger books, you have the origins of modern money.
Consistency isn’t your strong point. You’re trying to say, for example, that the Chinese ownership of the Waldolf-Astoria in Manhattan isn’t real.
OK - then demonstrate how it isn’t real. Do the owners not get the profits from the hotel? If there were a legal fight, would the justice system deny that the Anbang Insurance Company had rights over the hotel? If they sell it, will they be paid in ‘real’ currency or ‘imaginary?’
Care to explain? This group of sentences makes no sense.
So what you’re trying to say is that people take out loans and never exchange the money they’ve borrowed for goods or services? Why the devil did they take out the loan then?
Strange. You quote me saying that it might be used to buy a house or car, then say I imply they never use the money?
The purchase of the Waldorf is late in a long chain of financing by debt. The trade deficit with China is financed with treasury IOU’s and other debt. If that debt chain or parts of it collapse, there are many purchases that will be cast into doubt. I have a car loan. I am making payments. If I stop making payments the car is no longer mine. The bank that gave me the loan, does not have enough collateral to cover all the loans it has made. If enough people cannot make their payments, the debt chain / web that the bank is in the center of can collapse.
You yourself (in the bolded blue) said people who take out bank loans can’t spend it on goods or services. In the bolded red, you explain (correctly) that money must be exchangeable for goods and services. Ergo, if some money is “imaginary” then it must be money that cannot be exchanged for goods and services.
In addition to being rather obviously not true, the question stands: why do you think anyone would take out a bank loan that can’t be spent on goods or services?
You seem to be confused about the nature of money - you think that the money supply includes not only the money loaned to someone, but also that the bank’s including the loan on its assets column in its balance sheet means that’s money as well.
It isn’t. Two minutes on wikipedia could have told you that while the money the debtor receives from the bank is part of the money supply, assets on the bank’s balance sheet are not:
No “bank assets” on there. Maybe you mistook “bank reserves” for “bank assets?”
Think about your example: the bank loans you $20,000 to buy a car. When you buy the car, the money goes to the dealership who use it to pay for their employees, their building, their stock of cars, their profit, etc.
If you don’t repay the loan, two things don’t happen:
The bank doesn’t go to the dealership or its employees and try to take the money away.
None of the types of money listed above (M1, M2, M3, etc.) shrink.
None of the money that you got in your loan was “imaginary.” It all went to pay for goods and services, not just the car, but also the pot roast that goes on the salesman’s dinner table.
Just because debts can go bad, doesn’t mean there’s some type of money that can’t be used to pay for goods and services. You’re confusing two different things. The money used to buy the Waldorf was clearly exchanged for a good - the hotel itself. Therefore, it must have been “real” money by your own definition.