The lack of money should not be the cause of the poverty of nations

“In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual.” Galileo Galilei, 1564-1642

Index

1. Synthesis
2. . Premise
3. Money, boom and recession
4. Money and Inflation
5. Without backing in precious metals
6. Means domestic and international means of payment
7. Difference between public economy and private economy
8. The issuance of money is an act of sovereignty of countries
9. The lack of money should not be the cause of the poverty of nations
10. What happens when a country does not have enough international means of payment?
11. Dollars and local currency
12. The back of the currencies
13. Values ​​of currencies against the dollar
14. The exchange rate
15. To support the exchange rate governments should have enough dollars
16. Why it is not necessary to devalue
17. The G20 confirms the previous idea
18. U.S. has no foreign debt
19. The case of Venezuela, the Bolivar gold
20. 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.

http://www.reuters.com/article/2013/02/16/us-g20-highlights-idUSBRE91F02620130216

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”.