Value of the Currency

Modern monetary theory (MMT) makes clear that the only genuine constraint on fiscal policy in a flexible exchange-rate fiat-currency system (a ‘modern monetary system’) is real-resource availability. As the currency issuer, the government is always in a position to purchase goods and services that are available for sale in its own currency if this is considered desirable. Attempting to spend beyond this point would be inflationary, and devalue the currency. With this in mind, it is worth considering how, in the view of modern monetary theorists, the value of the currency is determined. Here, the concern is with the value of the currency domestically as opposed to the determination of exchange rates with other currencies. In considering this topic, it will be possible to address some related questions concerning the connections, if any, between productivity, job guarantees, and the value of the currency.

The starting point of modern monetary theorists is that demand for the currency is underpinned by taxation. By imposing a tax obligation on the non-government sector that can be met only through payment in the government’s fiat money, the government creates a necessity for members of the non-government sector to obtain the currency. This, in turn, ensures the non-government sector, in aggregate, will transact with the government, which enables the government to transfer some goods and services from the private to the public domain. Provided the tax obligation is sufficiently enforceable – backed by brute force if the government is capable of such brute force and deems it necessary – the government commands real goods and services with its fiat money.

Clearly, then, in this view there is compulsion underpinning demand for the currency. There is no suggestion that this compulsion is a good thing, although I have put forward my own view (which is in no necessary relation to the views of modern monetary theorists) that the compulsion of taxation is preferable to a variety of other forms of compulsion (e.g. a sole resort to brute force), and probably necessary until and unless we reach a stage where we all cooperate and share resources of our own volition.

In any case, at a minimum, an enforceable tax obligation is all that is required, in the view of modern monetary theorists, to make the government’s fiat money functional. It does not matter particularly for current purposes whether in its everyday activities the non-government sector transacts in some other money, a commodity, or barters in preference to the fiat money. As long as the non-government sector abides by, or is compelled to abide by, the tax laws, it will demand the government’s fiat money to the extent necessary to facilitate the government’s transfer of some goods and services to the public domain.

At the same time, provided the government is able to enforce its tax laws, members of the non-government sector can be assured there is a demand for the currency, and this will tend to induce them, for reasons of convenience and safety, to transact among themselves using the government’s fiat money, and also to save to some extent in the government’s money or by holding financial assets denominated in it. But this decision by the non-government sector is not strictly necessary to the viability of the government’s fiat money.

According to MMT, not only does taxation underpin demand for the currency, but the more difficult it is to obtain the means for paying taxes, the more valuable the currency. Further, the difficulty of obtaining the government’s money – its scarcity – is at the discretion of the government. This scarcity depends on the size of the tax obligation relative to the government’s expenditures, while the price level itself ultimately depends on the prices the government pays for goods and services when it spends (and also the collateral it demands when it lends – see comment below by Warren Mosler).

In this context, it is necessary to clarify what counts when it comes to determining the value of the currency. In the MMT view, the difficulty of obtaining the government’s fiat money depends on the non-government sector’s net financial assets relative to its net saving desire.

The focus on net financial assets is important because the credit-creation activities of private banks, usually conceived as endogenous money creation in Post Keynesian theory, create and destroy demand deposits, resulting in expansions and contractions of the broader money supply (usually defined as currency plus deposits). However, a private loan always creates a corresponding private liability, and so creates no change in the level of non-government net financial assets. The endogenous money circuits are characterized in MMT as ‘horizontal’ transactions (i.e. transactions between non-government sector participants).

Net financial assets can only change as a result of ‘vertical’ transactions between the government and non-government sectors. Most notably, government expenditure injects high-powered money into the monetary system and increases the net financial assets of the non-government sector; taxes destroy high-powered money and reduce net financial assets.

Not all policy operations by the government sector alter the difficulty of obtaining money. Specifically, most central bank operations leave the amount of non-government net financial assets unaffected, since the amount of high-powered money its operations create or destroy is typically offset by an inverse change in other non-government financial assets. (The exceptions are the ‘fiscal components’ of monetary policy.) For example, bond sales and purchases exchange one financial asset (reserves) for another (government bonds), leaving the net financial assets of the non-government sector unaltered. In these cases, the difficulty of obtaining high-powered money has not changed. To obtain any high-powered money created in this manner the non-government sector has had to run down financial assets previously spent into existence (via government deficit expenditure).

In contrast, fiscal policy almost always alters the amount of non-government net financial assets. Budget deficits increase, and budget surpluses decrease, the net financial assets of the non-government sector. So, in MMT, it is fiscal actions of the government (and any ‘fiscal components’ of monetary policy) that govern the value of the currency.

When there is a balanced budget, the amount of high-powered money injected into the system exactly matches the tax liability of the non-government sector, and there will be no build-up or drawing down of non-government net financial assets. But, ordinarily, the non-government sector wishes to net save (i.e. it typically demands more of the government’s fiat money than is necessary merely to meet its tax obligation). To the extent the non-government sector succeeds in net saving, a budget deficit of equal magnitude will occur as a matter of accounting.

To the extent the budget deficit is brought about by intentional non-government net saving, it will not create an inflationary impulse, because this portion of the currency on issue is demanded as a form of saving rather than a source of spending power. However, if the budget deficit exceeds the non-government sector’s desired level of net saving, there will be inflation and a reduction in the value of the currency.

The ‘right’ level of government deficit expenditure, from the perspective of MMT, is the amount just sufficient to enable non-government net saving intentions while still purchasing all the output it is possible to produce at current prices (i.e. without causing inflation). If deficit expenditure is below this level, unemployment results. If deficit expenditure goes beyond this point, there will be inflation and a decline in the value of the currency.

This aspect of the modern monetary theorists’ approach is explained in an excellent book chapter by Pavlina Tcherneva:

Wray concludes that ‘unemployment is de facto evidence that the government’s deficit is too low to provide the level of net saving desired’. In a sense unemployment keeps the value of the currency, because it is a reflection of a position where the ‘government has kept the supply of fiat money too scarce.’

But we still need to clarify what exactly is meant by value of the currency. In MMT, the value of the currency is defined as what must be done to obtain it. Tcherneva writes:

For example, if the state required that to obtain one unit of HPM [high-powered money], a person must supply one hour of labour, then money will be worth exactly that – one hour of labour (Wray, 2003b: p. 104). Thus, as a monopoly issuer of the currency, the state can determine what money will be worth by setting ‘unilaterally the terms of exchange that it will offer to those seeking its currency’ (Mosler and Forstater, 1999: p. 174)

A government that sets a minimum wage defines the value of the currency in terms of an amount of minimum-wage work – or an amount of ‘simple’ labor time. If the minimum wage were $10/hr, the value of $1 would be 6 minutes of simple labor. More skilled labor can be considered as a multiple of simple labor – ‘complex’ labor. For instance, a high-skilled worker who received $60/hr would take 1 minute to obtain what required 6 minutes of simple labor. The value of $1 could be expressed as 6 minutes of simple labor or 1 minute of complex labor. If a generalized increase in prices (including wages) occurred, and the minimum wage increased to $15/hr, the value of $1 would fall to 4 minutes of simple labor. So inflation represents a reduction in the value of the currency.

Another question to consider is the connection, if any, between the value of the currency and productivity. Productivity improvements will mean that the entire money supply will buy more real stuff (goods and services), and it also means that 6 minutes of simple labor will produce more real stuff than previously, but if money wages remain constant, obtaining one dollar will still require the same amount of simple or complex labor, implying no change in the value of the currency. So there is no direct relationship between productivity and the value of the currency. There can be an indirect relationship. If workers are able to win wage increases alongside the rise in productivity, there will be a reduction in the value of the currency. This does not necessarily mean we are all getting less real stuff for $1. It simply means that $1 corresponds to an expenditure of less labor power. Therefore, the difficulty of obtaining what is necessary to meet tax commitments (fiat money) is reduced. There is a decline in the value of the currency. Provided the rate of inflation is less than the rate of growth of nominal output, there will be an increase in both nominal and real income, yet a decline in the value of the currency. This explains how it is possible for the value of the currency to decline over time to the point where it becomes a tiny fraction of the value it had, say, a century ago, and yet real living standards (society’s command over real stuff) has grown enormously over the same period.

One reason the value of the currency may be a difficult concept to grasp is that it is a monetary phenomenon. As we have seen, changes in real measures, like productivity, don’t directly affect the value of the currency, even though they do mean that the entire money supply, whatever its size, buys more real stuff.

To see this point more clearly, imagine – to take a hypothetical scenario – an economy with a constant (non-expanding) labor force that operated continuously at full employment in which all distributional changes occurred through price adjustments at constant money wages. Under this scenario, as productivity improved over time, the trend in prices of individual commodities would be downward (individual commodities would become cheaper to produce), the trend in real wages would be upward (because constant money wages could purchase more real stuff as prices fell), but the sum of all prices (Marx’s ‘total price’) would remain constant and the value of the currency would also remain constant (since constant money wages would mean that the difficulty of obtaining the currency for meeting tax obligations – a certain simple labor-time commitment – had not changed). In sum, as productivity improved, one dollar would buy more real stuff, but the value of the currency would remain the same.

Under this hypothetical scenario, no extra fiat money would be required over time to purchase full-employment output, because the same amount of money could always purchase it, whatever real stuff it comprised. There would still need to be budget deficits whenever the non-government sector desired to net save, because a portion of the income produced would not be spent, making it necessary for the government to fill the gap through net expenditure (we know this has happened in the hypothetical scenario because the economy has delivered continuous full employment). But the appropriate level of deficit expenditure would create additional fiat money just sufficient – and no more than sufficient – to offset the intended net saving of the non-government sector and maintain full employment without altering the value of the currency.

Of course, in reality, there is inflation and unemployment (as well as a growing labor force), so the amount of high-powered money expands to accommodate higher prices and money wages (and also varies with output and employment). To the extent prices and money wages rise, there is a reduction in the value of the currency. If government expenditure is too low relative to the tax obligation, unemployment occurs, whereas if it is too high, inflation and a reduction in the value of the currency results.

The fact that in the real world we do not typically observe constant money wages, a constant value of the currency and a falling general price level – in contrast to the hypothetical scenario described above – suggests that inflation is the way in which incompatible real income claims (e.g. between the wage demands of workers and the profit aspirations of capitalists) are resolved. It could be, for example, that a perception of insufficient competition in product markets leads workers to suspect prices will not fall sufficiently to deliver satisfactory real-wage growth at constant money wages. It could be, to take another possibility, that workers attempt to gain improvements in their share of real income relative either to capitalists, other workers, or other income groups (e.g. pensioners) through nominal wage increases. Equally, it could be that firms with market power succeed in raising prices above competitive levels. Or more likely, any combination of these factors plus many others result in rising money wages and prices over time, and a reduction in the value of the currency. The relevant point for present purposes is that this conflict or negotiation over income distribution is ultimately resolved in a monetary way through the rise in money wages and prices (i.e. inflation), with the real distribution of income – as well as the value of the currency – emerging in the final wash-up.

Now, the government as monopoly issuer of the currency can exogenously set the price it pays for goods, services, and financial assets. This gives it the capacity to exert strong influence over the general price level through its spending and taxing decisions. At a minimum, it is only necessary for the government to set one price to anchor the value of the currency and the general price level.

One method of doing this that is consistent with the modern monetary theorists’ approach is for the government to introduce a job guarantee at minimum wage – and only minimum wage – to anyone who is without a job and wishes to work. A job guarantee, from this perspective, is an effective way of achieving numerous things simultaneously.

First, by setting the price of one hour of simple labor (the minimum wage level), it exogenously determines the value of the currency.

Second, the minimum wage then provides a nominal anchor for other wages and the price system. For instance, the level of the minimum wage can be expected to have some influence over wage levels applying to complex labor, through its effects on the relative bargaining power of workers and employers.

Third, the job guarantee ensures full employment without itself being inflationary. It is not inflationary because the job-guarantee provider never bids against employers in the broader economy (whether public or private) for labor. If demand for labor rises in the broader economy, the job-guarantee provider does not permit itself (or, if provision is private, is not permitted) to compete on wages.

Fourth, the job guarantee stabilizes prices (and fluctuations around the value of the currency) by putting a floor on demand during downturns while automatically withdrawing demand when private-sector activity recovers. The expenditure associated with the job guarantee is non-discretionary and varies immediately and inversely with demand in the broader economy. In other words, it acts as an automatic stabilizer.

In the absence of a job guarantee, it is difficult to achieve full employment with low inflation because some sectors hit supply constraints before others as demand and economic activity approach the full-employment level. This is why orthodox economists and policymakers intermittently re-estimate ‘full employment’ as occurring at various high rates of unemployment (such as a 5% , 7%, or even higher NAIRU) to define the problem out of existence. Without a job guarantee, aiming for full employment (2% to allow for frictional unemployment) would cause price pressures in overheated areas of the economy.

In contrast, a job guarantee could achieve higher overall employment with less, but more targeted, government expenditure. Private-sector spending power (and government spending) could be lower for any given level of employment. There would still be a need for discretionary fiscal policy to ease inflationary pressures during booms (higher taxation or cuts to other forms of government expenditure), but this could be carried out alongside full employment, rather than an inflationary limit being hit well before this.

Although critics frequently claim that true full employment is unrealistic, something like this was actually achieved in numerous countries in the post-war period up until the early 1970s. Unemployment averaging 2% alongside low inflation was not atypical throughout the period. This was achieved by governments acting as employer of last resort, essentially providing an implicit job guarantee.

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21 thoughts on “Value of the Currency

  1. very good!

    couple of comments. productivity determines what ‘all the dollars’ can buy- the total output, and not necessarily what ‘a’ dollar can buy.


    “This scarcity depends on the size of the tax obligation relative to the government’s expenditures.”

    Yes, but the price level is ultimately a function of prices paid by govt when it spends and/or collateral demanded when it lends.

    And yes, today bank deposits are accepted as payment for taxes, and necessarily so with deposits carrying fdic insurance.

    therefore bank assets must be highly regulated to ensure price stability.

  2. Thanks for the points of clarification, Warren. Much appreciated. I’ve had some difficulty with this topic, and your comments have helped to clear a few things up for me.

  3. Hi Peter,

    I’m currently trying to explain some of this on the Wiki ( in rather crude layman terms (because that’s all I would be able to handle). I would kindly like to ask for a little bit of help, if you have time?

    My idea was to argue as follows. First, the typical MMT stuff about the net saving desires, government deficits and unemployment could be explained. Then, I thought that this could be juxtaposed against the often argued strategy that the government budget should be balanced. The initial/attempted net saving will then cause sales to drop.

    1) One argument says that this should be fixed by cutting prices and wages (to save sales and jobs)

    2) Another idea would be ever increasing private debt (which can “support” a growing economy, but only for a while – ultimately debt-to-income levels will rise to unhealthy levels, making households vulnerable etc, and further along they will not be able to service their debt).

    Regarding number 1), do you think it would suffice to argue that this could cause a “deflationary trap”? I was thinking I could explain it with something like this:

    However, the idea that wage cuts across the board can solve the unemployment problem on an aggregate macro-economical level is a fallacy of composition. Consider for example a growing economy, which historically is the norm. Some private sector desire to net save is then also the norm. (For simplicity, assume roughly balanced foreign trade). Initial private net saving would cause decreased sales for firms. If prices and wages were cut across the board in order to save sales and jobs, workers’ income also would decrease and thereby total spending power in the economy, causing sales to decrease further. Continued price- and wage-cuts would instead result in continuous deflationary pressure with ever decreasing nominal prices.

    Whether such an economy would work is uncertain. Classical deflationary traps could occur. (Due to the increasing value of the currency during deflationary episodes, agents tend to desire to increase their hoarding of net financial assets instead of spending and investing all income, causing sales to drop and thereby adding further deflationary pressure, resulting in an unstable spiral). The result could be the economy grinding to a halt.

    It is unclear whether proponents of balanced government budgets understand these concerns.

    Thoughts? Too simplified? Should the wording be stronger? What are the errors? Or is it reasonable?


  4. There is a third idea and it is the current plan. The idea is 1) to reduce worker bargaining power to permanently suppress wages to the level desired by capital, 2) to decrease the government contribution to through “fiscal discipline,” thereby 3) forcing workers to borrow from the private sector to maintain lifestyle, and 4) providing enough private credit to keep workers in debt peonage.

    This is quite obviously a scenario that will lead to financial instability and risks debt-deflation. Not to worry, say capitalists. Government will bail us out to save the capitalist system.

    Sound familiar?

  5. Hi Hugo. I think you express the argument about wage cuts well, and in the right degree of strength. Wage cuts won’t reduce unemployment unless they somehow happen to reduce the net saving desire of the non-government. In some situations wage cuts might turn out to have this effect. Other times not. The point is that there is no general, systematic effect ensuring that lower wages translate into higher employment. Scenarios such as the one you describe, in which wage cuts are unhelpful, seem the more likely in my opinion, especially in a balance-sheet recession. But it is an empirical question. For an individual nation there is the hope of export led growth, but this cannot be the solution for all since globally net exports cancel to zero.

    If you haven’t seen them already, you might like to read these two posts by Bill Mitchell at billy blog:

    What causes mass unemployment?

    Unemployment is about a lack of jobs

    Unfortunately, I think the grim picture painted by Tom is accurate. If the elites really wanted to eliminate unemployment they could do so relatively easily and quickly. But mass unemployment and crisis provide them with a big opportunity to drive down wages, cut back social expenditures and grind down general living standards, and they seem hellbent on making the most of it.

  6. Thanks, Peter!

    Ok, I should maybe mention then that the effects of the wage cut strategy is an empirical question. The deflationary trap scenario is just one possible outcome. The wage cut strategy /could/ lead to decreased net saving desires.

    (I’m curious to know, though.. how? What is the rationale for believing that? Ah, wait, you mentioned export led growth as an example of what wage cuts could lead to — the rest-of-the-world decreases it net saving and starts spending. Ok!)

    I had missed one of those billyblog articles (Unemployment is about a lack of jobs), thanks for that, I’ll take a look at it!

    Yes, Toms comment is an eye-opener.

  7. Michael Hudson observes that historically, virtually all blow-ups have resulted from the elite, even the most enlightened ones, failing to raise wages in line with the required level of effective demand to support the system, as well as overlooking the corrosive role of debt. These combine into not only an economic explosive situation but also a politically explosive one when “the great unwashed” could not afford to eat.

  8. Tom,
    I don’t get how low wages can be a problem. They leave total aggregate demand the same, simply the owner class has a higher share of it. This would lead to more production being geared towards the luxury goods, but it should not depress the GDP but simply change its composition.

    Am I wrong?

  9. Low wages are not a problem economically, since much of the consumption is by people that have the money to spend. No surprise there. So yes, a country can operate its economy on mostly spending by the well-to-do, to whom income and wealth flow.

    In fact, it is the case through most of the Third World. The political question is whether the people at the bottom will put up with if they have the ability to change it. In most places in the Third World, people haven’t experienced anything other than subsistence living, don’t have any political power. Moreover, a revolution is difficult to pull off against modern technology and probably won’t happen unless the people at the top let wages fall below subsistence, so that a whole lot of people fell they have noting to lose. This is happening in MENA.

    The situation in the developed world is different. People are used to better times and they have the political means at the ballot box to change things. So the ruling elite realized that it needed to co-opt the bottom by creating a middle class. In fact, it is good for business and a lot of rent can be gleaned, too. Henry Ford is often credited with this transition, having realized that his workers needed to be paid enough to buy his cars. That was before widely available consumer credit, of course.

    My theory is that there are two major factors involved in the present thrust to concentrate wealth at the top at the expense of the middle and bottom, thereby expanding the bottom. First, the ruling elite of the West was genuinely frightened of “communism,” and in the US “socialism,” too, although socialism was more widely tolerated in Europe. Keynes and FDR were actually conservatives whose goal it was to save Anglo-American capitalism from a real socialist threat during the Great Depression. That ended when the Berlin Wall fell and the USSR disintegrated, seemingly proving that capitalism was the only viable option. Then the feeling of need to co-opt the lower echelons began to recede from the minds of the elite and their appetites grew larger.

    Secondly, with globalization, the domestic market became less and less important as capital could access low cost production abroad and also sell into foreign markets. Now some of the multinationals derive a major share of their profit from external operations and they get tax shelters, too. This is a winning combination for them.

    Add to this the “perks” of workers in the developed world (benefits and protections) that are absent in the emerging countries. Moreover, there is little need to share profit with the domestic workers when it can generate leveraged returns through equity prices, which are commensurate with ROI. Capital flows to where it can get the best risk-weighted return, and Wall Street runs on quarterly reports and beating analysts’ estimates.

    So looking at it economically it might seem quite viable to have an elite that does most of the spending as well as saving. But that results in increasing inequality and greater political and social turmoil. As we are seeing in the US and also in the UK and Europe.

    The previous solution was to allow the middle class to maintain lifestyle through lax lending, which generated a lot of rent for FIRE. But that has ended with a bang when private debt became unsustainable and the Ponzi imploded, and it doesn’t seem that the US is going back there soon. People are using what credit they have now to mangage cash flow.

    In summary, I don’t think we can consider economic matters independently of political and social implications. The right (Tea Party grassroots) and the left (progressives) have figured out that this is not working for them, and they are demanding change. On the other hand, the elite, which controls the political system as well as the economic one, is either oblivious or believes that it can dupe enough voters into voting against their interest to keep them in power. I suspect the latter, since this is very cleverly manipulated, pitting different factions of workers against each other. A major base of the GOP in the US is low-wage white workers, for instance, who are dumb enough to fall for wedge issues based on “God, gays, and guns,” and “Low taxes, small government, strong military, and traditional values.” Of course, there is the left-bashing, too, to whip up frenzy, as well as all the ploys to engender fear.

    It’s all about share of the pie. The slice of the upper 10%, 1%, and 0.1% has gotten bigger and bigger, while the share of the lower 90% has shrunk over the past several decades. The sad thing is that if MMT principles were put in place, the pie itself would grow bigger, and there would be more for all. By not realizing that and acting on it, the elite is risking killing the goose that lays the golden e.g., as they did with housing. I see declining middle class wages and increasing debt, along with the fat cats feeding off rent and the government trough, as incendiary. The US is becoming politically and socially unstable. While the plan may work economically, I don’t see a promising future when the next crisis hits and a lot more middle class people get shoved to the bottom, with the safety net frayed. There is already a lot of rage that is not showing up in the mainstream media, except in an orchestrated way. But the outrage is growing.

  10. Thank you Tom, I get it. I agree with the description, but I think people are able to take a lot of pain if they are persuaded that There Is No Alternative, which I perceive the System to be very good at.

  11. ” I think people are able to take a lot of pain if they are persuaded that There Is No Alternative, which I perceive the System to be very good at.”

    This is what the ruling elite has to get right, or they are in trouble, as the governors of Wisconsin and Ohio are learning, for example. The danger from that side is overreach that invites a reaction. This is the dynamic that the US is in right now politically.

    I would also say that the grassroots (not astroturf) Tea Party is a manifestation of this to some degree, although their economics is bullocks and the policies that they are pushing so hard would sink the economy straight away. A balance budget amendment would be a re-do of Prohibition, so to speak, and we know how that worked out.

    Warren points out that what this is about is transferring access to real resources in greater proportion to the upper echelon. Income and wealth inequality is in real terms inequality in distribution of real resources, as in a feudal society where the vast majority serve the rulers. Laissez-faire capitalism (neoliberalism) tends not toward greater democracy but toward the neo-feudalism of debt-peonage. “I owe my soul to the company store.”

    On a global scale, this is a form of “eliminationism,” resulting in the death of many at the bottom due to famine, and even at the lower and middle levels for those who cannot afford proper healthcare.

  12. “Eliminationism has to be the approach of any economic policy that uses unemployment as a buffer.”

    Right. That is my point in the moral argument I have offered along with the economic one of it’s not being an efficient use of resources.

    Universal health care as a right also falls under eliminationism. Many other things that fall under negative externalities, as well.

    There is a mind set that thinks that since real resources are scarce, humans are necessarily in competition for them, and small groups cooperate and coordination to gain advantage. Natural selection and adaptability determine whose DNA will survive in this struggle for domination of access. This is pretty much the philosophy of Ayn Rand that is now sweeping conservative circles, which sees this struggle as if not evolutionary (many of the proponents don’t accept evolution) at least the most reasonable way to proceed under the circumstances into which humanity finds it self thrown.

    This involves some of the most basic issues that thinkers have debated for millennia, going back to the ancient Greeks in the West. The Randian “solution” has consistently been rejected as based on the the erroneous and simplistic thinking that humans are just animals like other animals struggling for survival as best they can, not realizing that evolutionary principals underly. However, humans have far greater control over their destiny through superior intelligence reflected in a vastly more complex neurology that gives them the ability to see the big picture and participate in shaping its future.

  13. A few weeks ago there was a story in NY Times or Daily News. A client withdrew $400 cash from the ATM at bank in the Hamtons and threw the receipt in the garbage bin. somebody found the receipt – the balance of that checking account was $100 million.

  14. “Productivity improvements will mean that the entire money supply will buy more real stuff (goods and services), and it also means that 6 minutes of simple labor will produce more real stuff than previously, but if money wages remain constant, obtaining one dollar will still require the same amount of simple or complex labor, implying no change in the value of the currency.”

    Let’s speak in terms of **real** wages. Bear with me, as I will proceed step by step, so that if I make a mistake somewhere it’s easier for you to identify where the mistake is.

    If money-wages remain constant and the value of the currency doesn’t change, then **real** wages remain constant. In other words, individual workers get to acquire the same basket of goods as before.

    Let’s assume employment didn’t change (after all, **real** wages didn’t change either).

    This also means that, in aggregate (i.e. summed up over all workers) workers keep their **absolute** share of GDP.

    But, GDP is also employment times productivity. As employment didn’t change but productivity improved, then there is a greater GDP.

    In this case, aren’t capitalists achieving a **proportionally** greater share of GDP? (i.e. workers are getting a **proportionally** lesser share of GDP?)

    Likewise, an increase in productivity means a greater output per hour (of work paid). But, as **real wages** remain unchanged, doesn’t this mean capitalists are getting a higher profit? Or, paraphrasing Paul Krugman, aren’t they capturing as profits the whole increase in productivity?

  15. Are prices are a part of that too?

    Is there a post that collects up the formula (trends?) for the general case (?) of relations between all of the economic parameters like productivity, real stuff, wages, simple labour, employment, currency value, GDP, prices etc?

    Or is it all still being worked out or completely nebulous because of the human factor?

  16. Magpie, jrbarch: Good questions. Thanks. By coincidence, I implicitly addressed this topic in a more recent post, A Short Note on Currency Value, in which I mentioned that inflation occurs if the combined change of money wages (currency value) and the markup exceed the growth rate of productivity.

    Relating back to Magpie’s comment, he wrote:

    “If money-wages remain constant and the value of the currency doesn’t change, then **real** wages remain constant. In other words, individual workers get to acquire the same basket of goods as before.”

    It is not clear here that real wages will remain constant. When they do, Magpie’s outline of the effects is correct. But various things could happen to prices. Basically, if the markup increases in line with productivity while money wages remain constant, the value of the currency and prices will remain constant as real income and the capitalists’ share in income increases. If the markup rises less sharply than productivity, prices will fall, real wages will increase, and workers’ will share in the extra real income made possible by productivity improvements.

    The comments are insightful. I’ll put up a new post on the topic, working through the various scenarios.

  17. “Not all policy operations by the government sector alter the difficulty of obtaining money. Specifically, most central bank operations leave the amount of non-government net financial assets unaffected, since the amount of high-powered money its operations create or destroy is typically offset by an inverse change in other non-government financial assets.”

    I don’t quite understand…

    The Central Bank operations do “exchange” one kind of asset to another, but it does alter the difficul of obtaining money. A treasury is an asset that cannot be used to pay taxes, even when it has the “same value” of notes/coins in my balance sheet. If I have a lot of assets in my balance sheet but they are all long term bonds and treasuries, I would be very worried about the taxes that I will have to pay next week…

  18. True, Andre, other financial assets are less liquid than cash, but an individual saver who suddenly wants to spend can trade these other financial assets for cash in order to spend. Or a loan could be taken out using the financial asset as collateral. The individual’s capacity to spend depends on his or her overall financial position, not just cash. Likewise, the potential for inflation to originate from the demand side (too much spending) rather than supply side (from higher costs) will depend on the level of NFA relative to the desired non-government surplus, not cash per se. (For instance, there has been plenty of cash around since the GFC without creating demand-side inflationary pressures.)

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