Saturday, June 9, 2012


If we have more future contracts ("money" for the rest of us) being drawn on the same pool of labour, with the same capital tools enabling them to produce an amount of goods - then it stands to reason that the value of each individual contract (unit of currency) will be smaller.

If we reach full employment, and if government spends on things that do not increase the productivity of the labour pool in 1-2 years (the time it takes for information to propagate through the system) then we have inflation - too many contracts chasing too little labour.

As a corollary of the same line of thinking - are banks richer when they accumulate a lot of money? well, no... bear in mind that the pool of labour is the same, and the productivity is less, because credit is less available... so in 2012 the banks have more money (contracts) in their vaults and on the computers, but they cannot exercise them - as the real things that they could exercise them on (the pool of labour) have stayed the same. They have created an imbalance in the system.

This is one of the functions of money: to indicate when the system is working well, and when the system is out of balance.

Back to the banks - in effect they are like someone at poker who is rich in poker chips, but he cannot find anyone to play with. In the meantime, the real economy does not have enough "tokens" to function properly - in order to go back to good functioning the government will print more "contracts" and get the gears moving again. As a consequence of the dead money in the banks, we will have inflation, the mechanism to regulate imbalances.

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