Money Is Losing Its Meaning

Money Is Losing Its Meaning, by Jared Dillian. Money printing has been going on since the debt crisis first emerged, in the GFC in 2008. But the COVID response is going to send it through the roof.

A custom Bloomberg index measuring M2 figures for 12 major economies including the U.S., China, euro zone and Japan shows their aggregate money supply had already more than doubled to $80 trillion from before the 2008-2009 financial crisis. …

Doing “whatever it takes” to save the global economy from the coronavirus pandemic is going to cost a lot of money. …

It’s been some time since people thought about the concept of money and its purpose. The broad idea is that money has value, but that value is not arbitrary. Former Fed Chairman Paul Volcker once said in an interview that “it is a governmental responsibility to maintain the value of the currency they issue. And when they fail to do that, it is something that undermines an essential trust in government.”

The value of paper currency is determined by its scarcity, and the job it has to do in the economy and paying taxes:

The dollar has no real intrinsic value, backed only by the full faith and credit of the U.S. government. Under a fiat currency system, the government says that a dollar is a dollar. Its value relative to things such as other currencies and gold is determined on global markets. Gold is considered to be an objective store of value, and the metal’s rise in dollar terms can be expressed another way, which is that the dollar fell in gold terms. That implies the market has rendered a decision on the value, or rather, the purchasing power of the dollar. …

But inevitably the temptation to print is too great, when some emergency or other comes along:

It took a while, but it seems as though the U.S. government has decided that it has no constraints on its spending, as long as the Fed continues to monetize government borrowing by purchasing the debt issued to finance expenditures.

Nobody really knows how this is going to turn out. In smaller economies, runaway government spending has resulted in hyperinflation and social unrest, such as well-documented cases in Venezuela and Zimbabwe. Many think that wouldn’t be possible in the U.S. given the dollar’s role as the world’s primary reserve currency. Perhaps, but it’s not one of those questions we’d really want to experiment with.

Read it all for an accurate and readable summary of how money works, and how it is gradually failing.