About Money

I have been pleased to find some lively discussions on Facebook, along with the frustration you often get on Facebook. Facebook is seldom the place to exchange real information and have constructive dialogue. Accordingly, I have decided to take the talk about "money" offline into this blog for people who are genuinely interested.

What is a dollar? First, let's ask "what is Canada"? That's obviously a huge question that could only be answered at book-length. For our purposes, we can highlight a few things that are "moving parts" in the vast machinery we call Canada.

• We have a Federal government that is "representative". At least, in theory, it works on behalf of the citizens and in the interests of the citizens. It owes its legitimacy to this assumption. Call it a myth if you like, but it's "our" government, even if we didn't vote for it. One thing citizens would hate is to wake up one morning and find out that their dollars are suddenly worth 10 cents.
• Among the many "moving parts" of liberal democracy is a constitution that defines the "ground rules". Among one of these rules is freedom from arbitrary confiscation of property. Property rights. Canadians can own stuff, including money.
• One of the least understood responsibilities of government (evident only when it goes wrong as in, say, Venezuela) is the protection of its currency - ensuring stable prices. This is more than just religious "faith" in the money. The money must be an effective means of buying real things like food and shelter. The stability of the currency also implies that Canadians can buy things manufactured from all over the world. Behind the scenes, this means that Canadian money is "worth something" in, say, US dollars.
• Canada has a "market economy". This machine creates winners and losers, along with large numbers of people who cannot afford to buy what they need (such as food and shelter). However, any serious attempt to run a modern economy without a market (such as in the USSR or Venezuela) by "top-down" decisions on prices and availability has historically ended in disaster. On the other hand, "market fundamentalism" can also end in disaster - in fact it regularly does so due to inherent instabilities in the system. The bottom line is that neither the government nor the market can exist without the other, nor does it in Canada. In Canada, we strike a balance that is constantly being re-negotiated.

So now, about money. Canadian money. Not Venezuelan money.  $1 CDN represents a claim on anything for sale in Canadian currency. The bearer decides how to spend it, but the key to the concept is that a very wide variety of choices exist (that's the free market again). You can use money to pay rent, buy food or a holiday to Mexico. You can exchange money for "real things". There is nothing "imaginary" about this. You may want to compare this to truly "imaginary" money, such as Bitcoin, and the difficulty in "spending" money that is backed solely by the belief that is worth something.

How is money created? It is "printed" by the government (more often by simply bumping up the numbers in bank accounts). There is no big pot of money where money comes from. In this sense, it is created "out of thin air". But another function of government (again misunderstood) is to create a budget that specifically lays out how much money will be created (spent). The budget also includes a mysterious thing called "taxes" which we will discuss later. For the moment, we must point out that taxes are not "revenue". There are many ways to look at this but you might ask why the government needs to collect money when it can print as much as it wants. Effectively, taxes are simply burnt, but there is a better analogy that I will come to.

We need a dynamic (moving) analogy to picture what is going on. Imagine a garden. You pour on the water which is used by the plant to grow. The process of photosynthesis captures energy from the sun but also returns water to the atmosphere. So the plant depends on water flowing through its tissues to grow. One of the best ways to kill a plant is to over-water it. There is a balance to be maintained, analogy to our "stable prices" goal in the economy. Too much "wanter" (money) leads to inflation. But watch out for the limits of this analogy. It's more complicated than that, of course.

Government spending flows along through the market economy, triggering millions of transactions where money changes hands (freely). At many places along the line, taxes take a little bight, especially if one side of the transaction gets money called "income". The net effect is that the amount of money is maintained at an optimum level so that the economy will thrive and prices will not vary wildly. The complex process that creates a Federal Government aims to influence the "shape" of the economy by directing the "flow" in ways that benefit the people of Canada. In theory of course.

If you read about Modern Monetary Theory (MMT), you are first horrified by the fact that the money that you worked so hard for is burned by the tax department. But this is a bad analogy. It's still better than the outright lie that the Government is like a household and cannot "spend" more than it "brings in". On the other hand, advocates of MMT can make fiscal recommendations that are easily misunderstood, such as the idea that the government can spend any amount at all, especially on programs advocated by the political "left". In fact, the government can and does spend "any amount it wants" but usually on war. MMT works for the right as well as the left. American spending on the Viet Nam war eventually broke the world's gold-based monetary system, resulting in our current system of "fiat" money. Modern money is in no way analogous to gold. It is "backed" by an IOU from the nation, which can be cashed in for anything for sale in government currency. It's a much better system, but open to abuse, which we will come to later.

That's all I have time for today. I'd be happy to expand on this and answer questions as they come up.