Universal Income Credit: Money Creation and Inflation | Walter I Baltzley

ABSTRACT

This paper discusses how Universal Income will avoid inflation if done properly. It explains the fundamentals of Macro-economics—how the volume of money interacts with the level of productivity to determine prices. It applies those principles to show that Universal Income is unlikely to cause inflation in the context of globalization and automation.

Universal Income Credit: Money Creation and Inflation

INTRODUCTION

Will Universal Income cause inflation? This is a difficult question to answer—it is kind of like asking whether eating food will make you FAT. The answer varies. If done right, we can eat as much as we want and not gain weight. Otherwise we have problems. To understand how Universal Income can avoid inflation, we must first review the fundamental s of Macro-economics.

However, to avoid inflation, knowing the principles are not enough. We must apply them to our rapidly changing circumstances. We need to account for the effects of technology and globalization. We also need to account for population growth and demographic shifts. These are major forces that influence whether or not we experience inflation.

Once we understand the forces that influence inflation, we can estimate the impact of Universal Income. We can weigh the benefits against the risks and get a realistic picture of what to expect depending on how Universal Income is done. We can demonstrate that the risk of inflation is minimal.

Macro-Economics Made Simple

Most people hear the words Macro-Economics and imagine some guy in a black robe scrawling what look like hieroglyphics on a blackboard. They think it is some complicated thing that is impossible for the average person to understand. However, macro-economics is really simple, and can be summed up in a single equation: MV = PQ

  • M = How much money in circulation
    V = How fast the money gets spent
  • P = Prices of Goods and Services
    Q = Quantity of Goods and Services

When one side of the equation increases the other side has to also. If the amount of money (M) increases, then either the quantity of goods and services (Q) must increase, or prices (P) will rise. This is because if the amount of goods and services do not increase, sellers will start to run out, and buyers will start bidding for those that remain.

The same effect can also be achieved if suddenly the quantity of products and services (Q) were to suddenly decrease. Again, when products and services become scarce, people start bidding for them, driving up the price. Thus we see that inflation results when the supply of money exceeds our ability to produce goods and services.

Money, Inflation, and Deflation

Increasing the money supply (M) can have one of two effects on the economy. On one hand the quantity of goods and services (Q) might increase. Companies could ramp up production and sell more products; entrepreneurs could start new businesses; innovators could create new kinds of products and services to sell. In other words, economic activity could increase. However, this only happens if there is unused capacity in the economy—idle labor and resources—and if the money is made EQUALLY available to both producers and consumers. Producers will NOT make more if they lack the means to produce it, and if consumers do not have money to buy it. If economic activity does not increase, we have inflation.

Conversely, if production (Q) increases, but the supply of money does not, then consumers will be unable to purchase the new goods and services. Thus companies are forced to either lower prices or decrease production. We either experience DEFLATION or RECESSION. Recession can be briefly offset by borrowing, but unless new money is created it can spiral downward into a DEPRESSION.

Thus the amount of money (M) and the amount of production (Q) need to be kept in balance in order to maintain economic stability. Too much money, and we get inflation—too little, and we have a recession. Also, money has to be available to both producers AND consumers. In our current situation we need to create money and give it to consumers.

The Great Recession

Currently we are experiencing a global RECESSION. The primary reason for this is because of two major forces: Globalization and Automation. These two have expanded our productive capacity (Q) tenfold—resulting in soaring corporate profits and rock-bottom prices. However, they have also resulted in high levels of unemployment over a period of several decades—creating an extreme imbalance in the money supply between producers and consumers.

Producers are flush with cash, but rather than hiring more people, they are instead improving efficiency and consolidating their industry. They outsource to take advantage of cheap labor elsewhere, and automate to reduce costs. They buy up their competitors and reduce production. However, this results in higher unemployment and lower consumption. They are stuck in a recessionary trap.

The government’s “solutions” so far have been (1) To give even more money to producers in hopes that they will create jobs, and (2) To redistribute wealth through social welfare programs. The first creates new money, but strengthens the imbalance and accelerates the problem. The second creates no new money and cannot provide enough to stimulate demand without choking off production.

Balancing the Money Supply

The only way out of the recession trap is to balance the money supply between producers and consumers. In our case, this means creating new money and giving it to consumers—which could be achieved with Universal Income. Most people will take this money and spend it; some will invest the money; others will seek education; a few might purchase capital to start their own business. All of this results in economic expansion.

Most of this expansion will continue to be outsourced and automated. However, this does not pose a problem so long as (1) Consumers continue to receive Universal Income, and (2) Production increases along with the money supply. In addition, Universal Income allows people to seek education without incurring huge amounts of debt, making them more productive later on. Also, with their base needs met, people can accept lower salaries, and thus be able to compete better with others in foreign countries. If people really like what they do, they can even work (produce value) for FREE.

Universal Income creates new money (M) and puts it into the hands of consumers. They then make purchases or investments which encourage a corresponding increase in production (Q). This process continues until the maximum productive capacity of the economy is reached. This means that every plot of land would have to be developed, every worker fully employed, and every resource exhausted before we would have inflation.

Avoiding Inflation

Universal Income by itself is unlikely to create inflation. This is because we are currently operating below capacity, our capacity increases every year due to globalization, and the efficiency of production increases due to technology. Once again, I reiterate the macro-economic equation: MV = PQ:

  • M = How much money in circulation
    V = How fast the money gets spent
  • P = Prices of Goods and Services
    Q = Quantity of Goods and Services

Although our POTENTIAL capacity is increasing, producers are not using it because consumers do not have money with which to buy their goods and services. Once consumers have money, they will begin to tap that potential and increase production (Q). So long as the money supply (M) grows at the same rate as production (Q), we do not experience inflation.

In addition to this, Universal Income has anti-inflationary measures built into it in the form of a minimum contribution requirement. This means that in order to receive Universal Income, a person must produce value for society. This may take the form of employment, volunteerism, or education—all of which increase the quantity of goods and services (Q).

Fractional Reserve Lending

The greatest inflationary threat to Universal Income comes from Fractional Reserve Lending—a process which allows banks to create up to THIRTY TIMES as much credit as they have on deposit. At one time banks were limited in how much money they could create in this fashion, but recent changes in the law allow them to lend nearly an infinite amount in this fashion. This was partially responsible for what led to the 2008 banking crisis.

Because Universal Income is created digitally, it needs to be deposited into a bank account. Thus the bank can then use that money as the basis for issuing loans. This in turn could expand the money supply at a rate that is far greater than expected, leading to inflation.

Fortunately, there are several ways to prevent this “multiplier effect”. The first is to limit the number of times that banks can lend out money by increasing reserve requirements. Another is to increase interest rates, which makes it more difficult for banks to get money from the Federal Reserve, and forces them to hold more money (lend less) in order to cover their day-to-day transactions. A third method is to raise lending standards, making it more difficult for people to borrow. We could also require that Universal Income NOT be considered when calculating a borrower’s ability to pay. All these would prevent banks from using Universal Income to multiply the money supply and create inflation.

CONCLUSION

It is unlikely that Universal Income will cause inflation. This can be demonstrated using the basic macro-economic equation MV = PQ. The only way for inflation to occur is for the money supply (M) to grow faster than production (Q). Currently, production is growing very rapidly as globalization opens labor markets worldwide and automation increases efficiency.

Right now businesses are forced to operate at UNDER-capacity because consumers do not have enough money to buy existing supplies of goods and services. Go to any Walmart and you will see stores full of products, and only ONE checkout lane open. Walk through communities, and you will see empty homes that nobody can afford to live in. If you know where to look, you will also find abandoned factories, warehouses, malls, mines, and farms.

Universal Income would create new money (M), and put it into the hands of consumers. This would allow them to purchase more goods and services and encourage increased production (Q). In addition, the minimum contribution requirement ensures that those who receive Universal Income continue to be productive and create value (Q) for society. All of this balances the economic equation and avoids rising prices (P)—in other words we avoid inflation.

The real inflationary threat comes not from Universal Income, but Fractional Reserve Lending. Thanks to the government, banks can now lend more than THIRTY times the amount they have on deposit. This is poses a real danger. However, there are a number of ways we can limit the risk—tightening banking regulations, increasing reserve requirements, and/or raising interest rates.

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