The supply of money is intrinsically linked to assets and capital, revenue and expenditure, due to the requirements of solvency and a balanced balance sheet for banks and all organisations, including government.
When money is lent to entities on the basis of their future revenue and asset values (whether to government, organisa-tions or individuals) then levels of risk and predictability are involved. The greater the risk taken in lending, the greater the money supply. Whether price inflation results, depends on what borrowings are spent on and what prices are measured.
In the lead up to the 2008/09 global financial crisis (GFC), the money supply increase was ‘invested’ in houses, stocks and derivatives (unproductive assets) and this is where the price inflation took place. So, except for house costs, it did not figure in consumer price index (CPI) measures of inflation.
Unfortunately, many householders were lent more than their predictable net worth over the period and could not pay back. When mortgage sales brought down the value of houses (their greatest asset) more people were caught in less and less solvent positions. Mortgage repayments were also linked to financial markets by the derivatives on them. These ‘assets’ became worthless, undermining the solvency of the investors in them who also had interests in other markets, so reducing demand and assets values in those markets and the solvency of other investors.
Time, knowledge and ideas make unpredictable the future value of assets and revenue from production – hence the risk in lending. However, there is a tight relationship between the money supply and the assets and revenue of all entities, because accounts must balance, and organisations, governments and people must be solvent.
If there is a lesson from the crisis it is to lend and borrow for investment in productive assets that produce revenue, which includes people, although they have no book value as an asset. The difficulty in investing in people is knowing who will produce revenue. The solution is to invest in those producing a service or a product. Some production will make little revenue, many will make some revenue, and some more will make much revenue.
Do not, however, lend for investment or consumption of assets and goods that do not directly support production, such as houses bought for investment (not living), stocks unlinked from asset value, luxuries, and derivatives – as these purchases inflate prices and expand money without expanding production.
Private banks are mandated to make profit. They will not take the risk to lend to all people trying to produce. Rather they will lend to those that already have large assets. Bank loans are also inflexible, they are either repaid or not, so banks do not get the benefit of lending to all producers, because they earn no more if the product generates much revenue or some.
Investment funds that take a stake in business ownership are more likely to invest in new ventures, as when a product generates great revenue they will share in it. However, they only invest in businesses and are motivated to select only those likely to produce great revenue, excluding those that may earn a satisfactory revenue or little.
Governments on the other hand are best placed to take the risk of funding production to all people, and build it into policy. Governments can fund individual productive ventures because they also always share in those ventures which produce income or profits (via taxes). By coordinating this funding with taxes, principally by collecting half of all incomes and profits and distributing them via a shared base income, the greatest number gain fulfilment from contributing and total production grows.
Money is the tool to facilitate transactions in trade so people can select what they need, and the means to share wealth so everyone has the opportunity to contribute.
Money is tied to direct investment in productive activity, as what is spent by businesses on materials, stock, and rent is subtracted from earnings before profits are made.
But the pursuit of money will not achieve fulfilment. Those pursuing wealth serve those who have wealth, selling their skills and ideas to employers that own the use of them. In this respect, the undesiring of wealth, employing their own skills and ideas to produce their own products (no matter the meagre return), can be happier than those who have wealth but desire more.
[Excerpt from The Common Purpose Manifesto]