“In questions of science, the authority of a thousand
is not worth the humble reasoning of a single individual.” Galileo Galilei,
1564-1642
Index
- Synthesis
- . Premise
- Money, boom and recession
- Money and Inflation
- Without backing in precious metals
- Means domestic and international means of payment
- Difference between public economy and private
economy
- The issuance of money is an act of sovereignty of
countries
- The lack of money should not be the cause of the
poverty of nations
- What happens when a country does not have enough
international means of payment?
- Dollars and local currency
- The back of the currencies
- Values of currencies against the dollar
- The exchange rate
- To support the exchange rate governments should
have enough dollars
- Why it is not necessary to devalue
- The G20 confirms the previous idea
- U.S. has no foreign debt
- The case of Venezuela, the Bolivar gold
- Conclusions
1. Synthesis
The aim of this essay is to demonstrate
that lack of money should not be the cause of the poverty of nations, because
governments are free to issue all the money that require their economies;
therefore there is no justification to impose at nation’s painful sacrifices
like financial constraints and the devaluation of currencies.
I realize that my idea about the issuance
of money is in opposition to the orthodox concept that exists in the world on
the subject, which ensures that spending not should exceed income. But I'm sure
I can hold my arguments in a logical, rational and verifiable sense.
2. Premise
There are things that man can create while
others no; for example, man cannot create natural resources such as water or
oil but he can print or not any amount of money. That freedom to create money
is the key to economic behavior; using a metaphor we can say that money is the
lifeblood of the economic process and production heart.
3. Money, boom and recession
Man has established restrictions on
freedom to issue money. These barriers determine economic expansion or
recession, prosperity or poverty, so it is very important to understand the
role of money in the economy.
4. Money and Inflation
Throughout history money has been accused
of causing inflation and that's one of the reasons for restricting its
issuance; the Quantity Theory of Money logically explains the phenomenon. But
really the excess money is not the main cause of inflation. The main cause of
inflation is human selfishness that knows no limits to the accumulation of
wealth.
5. Without backing in precious metals
The first coins were made of gold. That
was the first restriction on issue of money. The gold and silver coins
circulated for a long time. Then came the bank notes backed by gold, to ensure
its value. But, in the mid-twentieth century, that relationship changed and banknotes
ceased to have gold backing.
Since World War II, with the creation of
the International Monetary Fund, the world adopted the U.S. dollar as reserve
new instrument to support the value of currencies.
It should be noted, however, that neither
the dollar nor the rest of the currencies has now enough backing in gold nor can
be transformed in gold. They are essentially fiat currencies, i.e. currencies
that circulate through the good faith of the economic agents, possess no
intrinsic value and represent only a means of payment.
From the creation of central banks only
governments have the legal capacity to issue money. Money has unlimited
liberating power; this mean that when you pay with money you are automatically
free of debt.
We can say, in short, that the money
circulating in the world has no gold backing. The dollar, which is the reserve
currency of value, is not supported in gold, and consequently, the world currencies
that use the dollar as backing neither has backrest.
6. Means domestic and international means
of payment
The first thing is to distinguish between
internal means of payment or currency of each country and international means
of payment, which as we stated before is the dollar of the United States of
America.
7. Difference between public economy and
private economy
The Orthodox concept in income and
expenses says that spending must not exceed the income, but that principle does
not apply to public economics. The reason is simple: because the government has
a privilege not enjoyed by the private economy: the governments have legal
authority to issue money thing that individuals cannot do. Individuals and
corporations are tied to its income, governments no.
8. The issuance of money is an act of
sovereignty of countries
Governments have therefore sovereign
capacity to issue the currency of its own country in amounts necessary to meet
the requirements of its economy. Neither the international agencies nor the
foreign governments have authority to impose to other nations how much money to
issue or not.
9. The lack of money should not be the
cause of the poverty of nations
All the foregoing concepts show that
governments can finance domestic spending by issuing domestic currency, because
the payment of the internal activities of a country is made in the currency of
each country currency.
If there is not enough money for attending
the economic needs of an economy the government is responsible because it is
who must ensure the availability of financial resources. Consequently, the lack
of money should not be the cause of the poverty of nations because countries have
autonomy and sovereign capacity to issue money.
10. What happens when a country does not
have enough international means of payment?
The problem arises when countries do not
have enough dollars to buy goods and services or pay foreign currency debt.
Then nations have two options: a) produce more to sell more in international
markets and thus get more dollars or b) borrow from international banks. That
was how began the great debt of developing countries from the seventies of the
last century as a result of rising oil prices.
11. Dollars and local currency
There is no justification to ask loans in
dollars to convert those dollars in the currency of each country. This practice
has led to extreme indebtedness of developing countries.
12. The back of the currencies
Theoretically, the backing of the countries’
currencies is the amount of international reserves in dollars, gold and IMF values.
13. Values of currencies against the dollar
The parity of national currencies of the
countries against the dollar should be set by a formula in which the total
amount of money in circulation must be divided by the sum total of the
country's international reserves.
The result of this division should be
theoretically the exchange rate of the national currency against the dollar
and, therefore, should represent the external purchasing power of the domestic
currency.
14. The exchange rate
But countries do not always respect the
formula above and this determines the considerations some experts make regarding
the purchasing power parity, the overvaluation and devaluation.
15. To support the exchange rate
governments should have enough dollars
Governments can set a fixed exchange rate
of its currency against the dollar, but this requires that they are willing to
cover the demand for dollars with its own reserves of that currency when
circumstances require. If not, immediately raises the informal dollar market in
which the price ---any amount--- is fixed by the private owners of the dollars.
16. Why it is not necessary to devalue
Governments can issue all currency
requiring their economies without officially devalue its national currency, i.e.
without altering the exchange rate between the national currency and the
dollar. The reason is very simple: because what counts in the end is not the
amount of domestic currency of a country, but only the total amount of foreign
reserves, the steady flow of dollars and the willingness of the government's to
keep the exchange rate officially established through intervention, when
necessary, the foreign exchange market.
17. The G20 confirms the previous idea
At its 2013 summit held in Moscow, the
Group of 20 officially declared on February 16, 2013 that a "currency war
between major economies is unfounded.” The Group requested does not stimulate
the economies through the manipulation of exchange rates.
18. U.S. has no foreign debt
Under international rules, foreign debt is
the debt acquired in foreign currencies. Consequently, the U.S. debt cannot be
considered foreign debt but domestic debt, because it is constituted in its own
currency, the dollar.
For the reason stated before the United
States can deliver the amount of money needed to meet their domestic needs and
the needs of the international economy without this being considered a fiscal
cliff.
The same is applicable to the other
countries of the world which can issue all the necessary money in their
national currencies to meet the needs of their economies without representing a
danger of fiscal cliff.
I think the fiscal cliff occurs only when
a country cannot meet its international payments, i.e. payments in foreign currency.
19. The case of Venezuela, the Bolivar
Gold
Since 1983 Venezuela has been unable to
escape the vicious circle devaluation-inflation-devaluation and shall not be
able to find a solution unless it changes its course and look completely new
economic formulas.
I proposed creating a new currency, at par
with the dollar, the Bolivar gold, based on oil and gold reserves of Venezuela,
as a way to achieve monetary stability, lower inflation and getting a higher
level of welfare.
20. Conclusions
- Money is a creation of man who is free
to print more or less as needed, therefore there is not none justification to impose
painful measures of austerity and devaluation of currencies, like happen currently in many
countries of the world.
- In the modern world money has no backing
in precious metals.
- Money has no intrinsic value. Its value
is acceptance, faith of economic agents in their capacity as mean of payment,
nothing more.
- For the same reason stated above the
devaluation of the currencies does not make sense, since governments can issue
currency without altering the exchange rate against the dollar.
- As warned the Group of 20 Summit in 2013 held
in Moscow on February 15, 2013, "governments should not stimulate the
economies through the manipulation of exchange rates”.
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