Friday, October 8, 2010

The Key


The key to understanding Arthurian Economics is to notice the conflict in policy, and to realize that this conflict has created monetary imbalance.

Policy is the root of the problem. But the problem itself is best described as monetary imbalance. One can see the problem as an imbalance between the components of M2 money -- between money in circulation and money in savings. Or one can see the problem as an imbalance between money in circulation and credit in circulation. (Of course: Credit in circulation is created largely out of money in savings.)

If you want to see the cost problem associated with the imbalance, look at the imbalance between circulating money and credit. Every dollar of credit is just like a dollar of circulating money, except that it costs interest, and it has to be paid back besides. Is there much credit in circulation? Yes: Every dollar of debt identifies a dollar of credit in circulation, costing interest, and awaiting payback.

If you want to see the payback problem associated with monetary imbalance, look again at circulating money and credit. Circulating money, when it comes to you as income, can be used to pay down debt, or to pay interest on it, or for other things.

But because of the imbalance, chances are good that the money that comes to you is somebody else's credit in circulation. You can use it to pay down your debt, sure. But if everybody starts paying off debt -- as we've been doing lately -- all the money must be soon used up, while plenty of unpaid debt remains.

If you want to see why savings rates were low, look at the imbalance between the two components of M2 -- money in circulation, and money in savings. There is already so much of M2 in savings, and so little in circulation, that we simply could not afford to save more. (And saving just a little more, as we've been doing lately, has been enough to create "the worst recession since the great depression.")

It is a natural tendency, the tendency toward monetary imbalance. It is a product of human nature. That is why, before the Federal Reserve was created, we had financial panics on a regular basis: a natural result of human nature. But in our time the natural tendency toward imbalance has been exaggerated by policy, for policy is designed by people, and human nature is mixed up in it.

Good policy would counteract the effects of human nature, and keep the components of money in balance.

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