Understanding the Central Concern of Macroeconomics and “Money” Versus Real Resources

Corn. An amusing word if you say it a few times. Food. Another word that can be amusing too if said repetitively. “Food” is a generalised description of the things that humans eat to stay alive. The word “corn” simply narrows food down. It is a more precise description of one of those things we eat to stay alive. Of my five children, two do not like corn. When corn makes its way onto the supper menu, Ian, my oldest son takes great pains to remind everyone that he doesn’t care for corn. Sawyer, my youngest, doesn’t like corn, or most other types of food either. To him, most everything is a toxin except for PB and J’s, dry cereal, cookies and chocolate; things which he considers to be “the stuff of life”.

Corn is what is known as a commodity. A commodity can be raw material like iron ore, gold, diamonds, oil and coal, or it can be any good or service produced from a nation’s real resources to satisfy some need or want of consumers. The amount of corn available in any growing season is finite. Over a period of time – say, two hundred years – as long as there is good agricultural land that does not shrink in size and the soil is conducive to growing, then the amount of corn that can be produced in the future is certain, though it always remains finite and that is the key thing here. It is finite. Corn is limited in availability. It does not matter that a nation can produce so much corn that it can feed everyone in the nation plus many in other nations – corn is still finite. There is an end point on Earth where no more corn can be produced. If we colonized Mars and discovered that we could grow corn there, then production could expand, but still, there would remain a limit – corn would remain finite.

Corn can be used as food, or it can be viewed as a raw material from which we can produce other products. Biofuel is one, high fructose corn syrup is another. But what is important at this point when we talk about corn is the hierarchy of human needs. Food is the ultimate priority since humans must eat to stay alive. Fuel for a car or the desire for a questionable sweetening agent sits far below food in the pyramid of needs. Needs sit at the top, wishes and desires sit at the bottom. Since we know that there is a limited supply of corn in any growing season and since we know that humans need to eat to stay alive, then setting aside large swaths of farmland to grow corn to provide fuel for automobiles will shrink the already limited supply of corn and thus, shrink the food supply. Should we then set aside more farmland to grow corn to feed cattle, which by nature do not consume corn, then we further shrink the food supply. Continuing to set aside more farmland to grow corn to create sweeteners and other products will continue to reduce the supply of food. If we then allow some of the corn intended for human consumption to be exported, then the domestic food supply is even further reduced. Having said that, if we know that there are people in the nation who do not get enough to eat in the first place and we then shrink the supply of corn intended for humans to eat in the aforementioned ways, then that is highly inefficient. Thus, we understand that macroeconomics is not a question of scarcity as the mainstream would have you believe, but it is a question of efficiency.

Unlike macroeconomic fantasy peddled by mainstream mystics, diviners and alchemists known as “economists”, macroeconomic reality looks at a nation, tallies up all of its resources and asks, “How can this nation best put those resources to use?” After the answer to the question is satisfied, a proper macro plan can be designed for the national government and then implemented. The national government then spends its currency into the economy to provision itself with goods and services necessary for the government to function and to affect the consumption of production in its domestic economy. Full employment, which ensures a stable means for the population to consume production, being the end result of national government spending. The more abundant the nation’s real resources are, the easier it is for the nation to meet needs and so, more currency, or “money” issued by the national government is required to access, or “tap” those resources.

“Money”, or better said, “currency” (US Dollars, British Pounds, Japanese Yen, Canadian Dollars, Australian Dollars) is a voucher that is issued by a national government. It is not a commodity like corn. US Dollars or British Pounds consist of only two things: a number and a label – the label tells us what nation is issuing that number. For example:

100

tells us nothing, really. “One hundred what?” we ask. One hundred apples? One hundred cars? We simply do not know without further information. As Sherlock Holmes would say, we need data – “Data, data, data! I cannot make bricks without clay.” As a side note, were his words applied to federal spending, they would be: “Resources, resources, resources! I cannot issue currency without real resources.” So, we need a label which will then shed light on the question, “one hundred what?”

$100

Now we are getting somewhere. Clearly, it is one hundred dollars that we are talking about. Several nations use the term “dollar” and the “$” symbol, so depending on the nation which we are focusing our attention, then we derive further information. If it is the US we are discussing, then “$100” is one hundred US Dollars. Let us now break down one hundred US Dollars into its two components.

$ = A concept brought into existence from the imagination of the human mind. It is a symbol called “the unit of account” that only the national government has the authority to declare.

100 = A number which forms the basis of mathematics. Numbers can be both positive and negative and they are infinite. They have no end.

$100 = A US government issued currency that is equal to the number 100.

$ – How many US Dollars? 100.

$ = A product issued by a national government consisting of numbers which are infinite.

$100, $1,000, $10,000, $100,000, $1,000,000… to infinity.

£100, £1,000, £10,000, £100,000, £1,000,000… to infinity.

¥100, ¥1,000, ¥10,000, ¥100,000, ¥1,000,000… to infinity.

Now then, let us examine how corn and currency interact with one another.

Currency, being the thing issued by the national government, is used by both producers who use it to grow corn and consumers who use it to buy corn and eat it. The national government’s currency buys more than corn though. It can buy any good or service as long as that good or service is offered up for sale in the national government’s currency. Corn in the United States will be offered for sale in US Dollars to American consumers, because the US government lays a tax that is payable only in the US government’s US Dollar. The tax causes corn growers to need to be paid exclusively in US Dollars by American consumers, because the farmer must pay taxes and cannot do so without US Dollars. If the US farmer who grows corn only accepted British Pounds, then he would face two serious problems. Firstly, he would have a tough time selling his corn to Americans, because American consumers use US Dollars for the same reason the farmer does – they have to pay taxes and cannot do so without US Dollars. For the farmer to have any hope of selling his corn to Americans, consumers would first have to exchange their US Dollars for British Pounds. Secondly, even if American consumers exchanged their US Dollars for British Pounds and purchased the farmer’s corn, come tax time, the farmer would either have to exchange his British Pounds for US Dollars or simply not pay the tax. If he did not pay the tax, then it is quite clear to us all what the federal government would do to the farmer. Therefore, the farmer will only offer his corn for sale in US Dollars. Understanding that, let us now compare corn and currency.

Let us imagine two ears of sweet corn. One is located in the United States and the other one is located in Great Britain. What is the difference between the two ears of corn? Nothing. Whether the corn is in the US or the UK, it is still just corn. It will taste the same to a US citizen as it will a UK citizen – it will taste like sweet corn. A question, though, arises when we try to determine the method necessary to obtain the corn.

Referring to the above example of American consumers and US Dollars, in the UK, UK consumers will use British Pounds to obtain the ear of sweet corn for the same reasons that American consumers use US Dollars – the UK government lays a tax payable only in British Pounds. The US government has no authority to issue British Pounds and the UK government has no authority to issue US Dollars. Both nations have the authority to grow sweet corn.

Corn is the product of a nation.

Currency is the product of the nation’s national government.

So, corn is corn no matter where you go in the world. Currency, however, is the thing that is different. Here we have the exact same product in both the US and UK, yet consumers cannot use the exact same payment method to obtain the product. They both do use the same method to pay – “money”, because each national government operates a monetary economy. The difference in “payment method”, however, is created intentionally by both the US and UK governments.

Because we as humans choose to divide ourselves up by national identities, we create a very real difference between ourselves when there is essentially no difference at all. A human is a human, whether in the US or UK. A human, whether in the US or UK, requires food to survive. A human can consume corn as food, so, a human whether in the US or UK, can consume corn as food. The difference is only one of human design – one of self-imposed “national” identity. It is a choice to be different and then compare ourselves. So then, here is the United States and at the head of the nation is the US federal government and there is the United Kingdom and at the head of the nation is the UK government. Each government issues its own currency and lays a tax payable in that currency, which then creates a national economy. The national economy of the US is different than the national economy of the UK, because of the currencies. The currencies are different, because the two nations are different.

Corn, however, remains corn regardless if it is stamped with the Union Jack or the Stars and Stripes. Corn doesn’t care. Corn is corn.

The corn is in both nations, but the voucher that is issued by the two national governments which preside over each nation will determine how the two sets of humans obtain the same product – corn. If people in the UK wish to buy American produced corn, they need to import the corn. This means that someone will pay the US growers in US Dollars, then ship the corn over to the UK where it will be sold for British Pounds. The exchange rate between the two currencies is determined by market forces, not the two governments, and so, the exchange rate dictates whether or not US corn will be obtained expensively or cheaply by UK consumers.

The exchange rate between the currencies of the US government and the UK government is a gateway, allowing the same product – corn – that can be grown in both nations to be exchanged between the two nations and consumed by each nation’s consumers. The gateway is necessary because the two currencies issued by the two national governments are not the same and cannot be the same, because as we’ve discussed, the UK government has no authority to issue US Dollars, because the UK government is not the regulatory authority which commands the US economy and the US government has no authority to issue British Pounds, because it is not the regulatory authority which commands the UK economy. The exchange rate, or the gateway, allows the two different nations the ability to interact with each other’s economy. Without it, exports and imports would be nearly impossible. In order to achieve exports and imports between the UK and US without an exchange rate, both nations would have to agree to a common currency. If we entertain a hypothetical common currency between the US and UK, we can then clearly understand the problem in Europe with the Euro. Let us assume that the US and UK agree to a common currency called the Whippet. The exchange rate no longer matters and so, it is thrown off entirely by this act. However, there are two radically different courses of possible action available and an important decision needs to be made before the two governments can begin with the Whippet:

1.) The two governments maintain independent control over their economies, or

2.) The two governments merge into one central fiscal authority (one national government), which becomes the supreme currency-issuing and regulatory authority of both national economies, as well as the supreme legislator.

If the US and UK choose course number two, then the Whippet becomes the product of the new national government. The Bank of England and the Federal Reserve merge into one central bank and Her Majesties Treasury and the US Treasury merge into one treasury. The US Congress and UK Parliament merge into one national government and the citizens of the UK and US become one populace, united under one currency – the Whippet.

If the US and UK choose course number one, then both nations will embark on a very shaky course. In addition to the Bank of England and the Federal Reserve, a third central bank will have to be established that will issue the Whippet for the US and UK to use. This is precisely because the two governments chose to maintain sovereign control over their own nations and thus, their own economies. They remain two separate nations, the US and UK, but use one currency – the Whippet. Because they chose to embark on the Whippet, the exchange is gone and so, if the UK government issued the Whippet at will and so did the US government, the two governments could interfere with each other’s national economy. Since they desire separate control over their own economies, a neutral authority is required to issue the Whippet and so, the US government and UK government are no longer sovereign currency-issuing governments that have control over their own currencies. They are now two nations which are users of a currency that they have no authority to issue. The third central bank that was established becomes the currency issuer. Both nations continue to conduct separate fiscal policy measures for their own domestic economies, but now, because they are users of currency like Texas is, they must tax to collect revenue to spend or issue bonds and actually borrow to fund their spending. Soon, this lack of control over the Whippet causes a serious problem to emerge.

Both the US and UK government’s fiscal spaces are constrained and so, they must find a way to earn as many of the available Whippets as they can get their hands on to not only maintain employment and stable economies, but also to maintain necessary social programs and infrastructure. The two nations continue to compete with one another as they did prior to the Whippet, but now, the competition becomes deadly. The US, being the larger nation with greater real resources and a more powerful trading position, will thrive and the UK will die a slow death when unemployment from a lack of Whippets in the UK rises causing its tax receipts to fall. More borrowing must be done to fund spending and keep the economy afloat. But as it does this, its national debt, which is now very real because it is denominated in what amounts to a foreign currency that the UK government cannot issue, rises to the point to where the UK government faces insolvency without a bailout measure or a debt write-off by the new central bank.

Thus, we can see the problem in Europe with the Euro. There is no central fiscal authority. Each nation in the EMU remains a separate nation, but use what amounts to a foreign currency. The nations have all agreed to put themselves into a real position of being able to go broke. They must tax and borrow to fund spending.

They’ve all agreed that a fancy € symbol and a number is far more important than food, medical supplies, hospitals, cars, fuel, energy, housing, labour, toilets, plumbing and every good and service you can think of. So, they’ve all agreed to limit what would normally be infinite were each separate government to have kept their own currencies and make currency (vouchers) as finite in supply as corn. Because of that, they also agree to limit real production potential, forcing it to remain idle. That, in short, is the very definition of macroeconomic madness.

Meanwhile, corn remains corn.

Corn is a commodity; it is not “money”. “Money”, or better said, “currency”, (US Dollars, British Pounds, Japanese Yen, Canadian Dollars, Australian Dollars) is a voucher that is issued at will by a national government that is used by everyone to access corn. Corn is food and food is necessary for survival. US Dollars, in and of themselves, are meaningless until the issuer of US Dollars – the US government – lays a tax payable only in US Dollars. That is when the US Dollar becomes necessary for survival, because the US Dollar is the one thing that can be used to obtain everything that is for sale in US Dollars.

The US government has declared that its currency is the one thing that will enable everyone in the US to buy food. And so, since the US government has such extraordinary power over the very lives of its own citizens; a government that supposedly operates for their benefit, then the US government is duty-bound as a currency-issuing government to issue enough US Dollars through deficit spending to maintain an indefinite state of full employment so that every last citizen can obtain the basic needs required for their survival.

So, in summary, grow corn for human consumption, thus increasing the food supply and let the national government issue the correct amount of currency necessary for full employment to be sustained indefinitely, which will then guarantee that all of the nation’s citizens can obtain corn. Whether it’s corn, housing, plumbing, shop vacs, iPhones, cars, trucks, books, clothing, toothpaste or any good or service you can think of, they are the important things. We cannot access them without the national government’s currency. The national government must deficit spend to the limit of the national economy’s ability to produce those goods and services. The end result is efficiency.

That is macroeconomic reality.