Money is Merely a Government Construct

Money is Merely a Government Construct

I’ve got good news. You’re no longer a target. You’re now a tool. A policy tool.

This might not sound like much of an improvement. But it is an important one. It should radically alter how you behave. And invest.

Your wealth used to be what politicians wanted to get their hands on. The more control they have over a country’s wealth and income, the more they can do to try and get elected with other people’s money.

Everyone’s got a plan to improve the world. Until they have to raise the money to make it happen.

Money talked, in politics as much as the private sector. And that money had to come from somewhere. It used to come from you and me, the taxpayers.

But all that’s finished. These days, your wealth is a policy tool, not a target.

Politicians see your money as something they can control and direct. They don’t even need to take it anymore. They’ve found a new way to raise the funds needed to pay for their wacky political projects.

A limitless source of funding.

Last week, we got confirmation this source of money came live in Australia too. They announced it in…Armidale…?

Here’s what’s changed. Politicians and their henchmen, sorry henchpersons, at central banks have figured out that they don’t actually need to make money first in order to spend it. They’ve figured out that money comes from the government, not from taxpayers like you and me.

You might think that money and wealth is born in the private sector. It is then taxed (or borrowed) and then spent by the government.

But you’d be wrong. At least, you’d be wrong about the last 50 years or so. Before that, you would’ve been partially right. But that’s another story.

These days, the concept of money is very different. It is whatever the government decides it is.

This sounds so outrageous it’s hard to grasp. But didn’t you ever wonder where the trillions of dollars, euros, yen and pounds came from when central banks created them? And how were they spent into the economy?

That money wasn’t taxes. It wasn’t our wealth.

The new money came from nowhere. Nothing but an arbitrary decision by a central bank official. The government, via central banks, simply created it.

And where did it go? It funded government spending, for the most part. Quantitative easing bought government debt.

This suggests that the amount of money in the economy is entirely up to the government. And thereby the amount of government spending is limitless.

The central bank can simply conjure up the money required, and that money is usually injected into the economy via government spending.

On Tuesday last week, Reserve Bank of Australia governor Philip Lowe told an audience in Armidale that all this applies to Australia too. Reuters has the details: ‘Australia’s central bank would consider quantitative easing in some circumstances though it is still unlikely […]’

That means the central bank is willing to print money to buy government bonds. Why bother taxing?

As for the inflation that’s supposed to emerge…well, there isn’t any. Back to why in a moment.

All this sounds a little odd. But only because everything you’ve been taught is wrong. The economic framework we think in is incorrect. It is outdated — from a time when money wasn’t completely controlled by the government.

Money used to be something of value. Or something connected to something of value. It had to be earned and created. The gold had to be mined, the silver stored and the tobacco dried. These things were money because they had value.

But today, money itself has no inherent value.

Why do we attach value to money?

So why do we attach value to it? Why is a number on a piece of paper, or a digit on a screen, valuable?

The answer to that question is what is revolutionising economic thought today. And the answer is surprisingly simple.

Because you have to pay taxes in money. If you don’t, you get put in jail.

Now, I don’t know about you, but I don’t want to go to jail for tax evasion. Which means I need money, the type of money the government demands in payment, if I’m to avoid jail.

That is what gives money its value. The desire to avoid prison. The value we attribute to money is derived from this simple power of the government. To make laws about money. And to enforce them with violence, if they have to.

It’s why money in an electronic bank account is the same as cash. Two completely different things that we attribute the same value to. Because the government says so. It’ll accept both in payment of taxes.

The fact that coins are worth less than banknotes is a funny variation of this. The metal in the coin is worth more than the plastic in the note. Yet we treat something worth more as being worthless. Why? Because the government tells us to, on pain of becoming a POM.

Once you realise all this, everything else follows logically.

If money is merely a government construct, it can be controlled and manipulated by the government to any purpose. It no longer needs to be raised in taxes either.

You and your wealth are no longer a target.

Instead, the government’s attention turns to something else. Outcomes only. Employment, GDP, infrastructure, welfare, healthcare, etc. How to pay for them no longer matters.

But what outcomes are important enough to spend money on, if nothing has to be paid for…in the traditional sense? It’s like a cost/benefit analysis without any costs…

Actually, it isn’t. Because the wrong forms of government action, or too much spending, can begin to cause bad outcomes. Like inflation. Too much of a good thing, and all that…

There are still constraints, it’s just that they look completely different.

So, in coming years, we can expect governments to run the economy like a machine. More than ever before. Their decisions will be based purely on the impact of their policy, not its cost. You’ll become a policy tool, not a target.

The real question is, do you think they’ll do a good job of it? Do you think they’ll spend too much and cause inflation? Do you think they’ll make a mess of the economy by shifting real resources to bad projects?

I do. Which is why I think you’ll need a way to escape.

Like I said, politicians and central bankers are starting to realise what’s changed, right now. Even in Australia, thanks to the Armidale Admission. They’re embracing their new found revelation and beginning to abuse their powers.

Universal basic income, a Green New Deal, arms races and plenty more is in our future.

The only question is whether you remain within their currency system, or begin to look for alternatives.

Are you going to keep and measure your wealth in terms of a measure that the government has complete control over?

That doesn’t sound like a good idea to me.

The good news is, alternatives are there, ready and waiting for you.

And they’re so much better than government money, that they can actually be rather profitable too.

Just as the supply of our government money is completely at the whim of politicians, the supply of these currencies is predetermined and outside of anyone’s control.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia