What Is Sound Money?

I had a somewhat frustrating conversation the other day. We were discussing how things are becoming increasingly difficult for everyday people. We agreed that wages had not increased in real terms for years. We agreed that the top 1% of people seemed to be getting richer. Then the person I was conversing with said, "If we had 'sound money,' that would not happen". I asked him why. He said that governments dilute the value of the money people hold when they print more money, causing inflation. He said, if we had 0% inflation, then people would be better off. 

I guess I can see why he said that. I remember as a kid being able to buy a Paddle Pop at the shop for 5 cents. I also remember working at the chemist after school for a few bucks as well. Now that Paddle Pop would take all the wages I earned at the chemist if my wages didn't increase. He was thinking of gold. It has in the past been used as currency. It can't be printed. It has intrinsic worth. I guess his argument is that the US dollar, or any currency, should be backed by gold. He said that will stop governments from printing money anytime they want to get themselves out of trouble. 

So I guess he is saying, if America didn't withdraw from the gold standard in 1971, then they wouldn't owe $36 trillion now. They are calling it a disaster. But to create that debt, the other side of the equation is the creation of some asset.  What is that asset, where is it, who owns it? What is that asset doing? If the $36 trillion in assets is working hard for Americans, making life better for them, then no problem. But if Americans are getting richer, then they need to be taxed more so you can pay that $36 trillion off. If the market sees you progressively doing so, then the debt is not a problem. But that's not happening!

Governments want to remain popular, so they raise taxes only as a last resort. They prefer to borrow money. They prefer not to tax the rich because the rich are the political donor class, the lobbyist class. Yet the rich have benefited mostly from that $36 trillion. They live off only a small proportion of the income they generate, so the surplus income can be directed towards buying other assets in the economy that gain in value, thus sucking in more and more income producing assets over time. The rich can utilize available legislation to minimize their tax burden further. Poor people can't find any tax loopholes. There aren't any. Rich people can pay to distort information in the economy, so poor people don't even know who to blame for their plight. Thus immigrants get demonised.

So, how is "sound money" going to stop all the above things from happening? It won't! If you use bitcoin or gold or whatever, if a poor person consumes 100% of their income to live and a rich person consumes 10% and devotes the rest to wealth creation, the poor person gets further and further behind every month that goes by. It doesn't matter what currency you use to measure that disparity in wealth. It's still the same. The only thing that will work is taxing the wealth (as opposed to the income) and transferring it to the poor at a rate where the poor will never feel hopeless and destitute, as they often do at present. If this had been done consistently since 1971, there would be no $36 trillion debt. There would be no Trump. There would be no MAGA movement because the USA would always be great. 

Gold is going up in value. That's true. But is it doing well, or is everything being run badly? And in the end, it will just be another asset class that the rich will collect, thus pricing poor people out of the market. 

"Sound money" doesn't exist if the balance in wealth and power between the classes in an economy is not in a healthy equilibrium. The level of public debt that a country has is a reflection of the maturity of the relationship between an economy's people and its government. The more corrupt the government, the worse the relationship will be. You can buy votes in many ways. It doesn't always have to be in secret. Just borrow more money instead of taxing those people who hold all the wealth in the economy, and shutting down all the tax loopholes. Sound money can only exist in sound economies. 

If fewer and fewer people hold all the productive assets in an economy, then claims on those assets, that is money, must gravitate towards those assets. Without meaningful transfer payments those productive assets also become worthless because there is no market left to buy them. This is when price discovery sets in. Economic implosion occurs. Bitcoin is not a productive asset. Gold and silver were productive assets desired by the wealthy elite who had nearly all the influence in ancient economies. Not so much now. Now the middle class determines the economic strength of a nation. 

You must remember when the GFC 2008 crash happened. Banks loaned so much money to people who had no hope of paying it back that the Federal Reserve and many other Central Banks had to basically make good on those non performing loans to those irresponsible lending institutions. When that happened, it delayed, and in some ways, made worse the problem. Money and financial securities are claims on assets. Assets must go up in price, or you need to increase the number of assets to match the number of claims. When you print more money (pump more liquidity into the market, or lower interest rates) you are just telling the world that the person holding all the productive assets is that much richer. 

If you want the problem to really go away instead of delaying it, you need to tax those holding the productive assets to the degree that their is almost no asst price inflation. 

It is not true that fiat money is backed by nothing. It's backed by the belief of the large majority of the population. That belief is based on the skill and fairness of the leaders in power to lead. When that trust is broken, the money can be broken. 

Ray Dalio talks about the cycles of money going from "hard money" (the person I was talking to calls it "sound money") through to "soft money" where debt burdens can't be met. They also squeeze out productive activity as tent seekers dominate the economy. 

I believe the Central Bank should be given another power. They must have a target Geni coefficient they have to hit. To do this they are given extra powers. They can tax all assets at market value through the commercial banking system. That money is immediately paid out to all citizens at an equal amount in the form of a universal basic income. It's not the creation of a welfare state. It's the creation of a transfer state. 

The last stage of the money cycle Ray Dalio describe is traumatic. If the Central Bank had this power as well as their existing powers, I believe we may never reach the fourth stage in the money cycle describe in Ray Dalio's book. 

As Gary Stevenson says, if fewer and fewer people collect all the claims on all the productive assets, that is money and financial assets like equities, then you need to issue more debt for others to live. The more debt in the system which doesn't have hard assets backing it, the less stable the money cycle is. That's why the Geni coefficient should be one of the Central Bank's targets. And that is why they need to be given the tools to deal with it. 

If you tax the assets which appreciate and transfer that money equally to all members of society, you don't have to create more debt nor print more money to stabilize the society. Also, if the rich find it more difficult to avoid their proportionate responsibility to pay taxes, then the Government may be able to reduce the existing debt because supporting the middle and lower class will be less demanding because those classes now receive a universal basic income from the Central Bank. 

You can't tell Govetnments to tax the rich. If they could do it, they would have by now. Democratic Governments only exist in the short term. They are compromised by "big money" Which exists in the long term and is far more organised. If one Government taxes the rich, the opposition is likely to be sponsored by "big money" to reverse that legislation. So you need to give that legislation to Central Banks who are meant to be independent. They adjust the level of taxes and transfer payments to get the optimum Geni coefficient yet not allow capital flight. They also reduce the burden of controlling public debt off the government.

The mechanism used to do this are mentioned elsewhere in my blog. I won't go into it here. Suffice to say, the short and long term debt cycles need a shock absorber mechanism. This is it. And you won't need to worry about gold or gold standards because if you tax properly and consistently and transfer payments equally and consistently, there should be less need to create debt or print money. So by definition, the currency should remain more sound. You are just making the existing money circulate through the entire economy instead of through only privileged parts of it. This is a more efficient use of the existing money supply. Stop printing money and creating debt. That just leads to asset price inflation which ultimately benefits the elites and causes a form of "ganggrene" of parts of the economy. And that can be deadly.