Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown

Caibin ZhuJim TruongKazuki KiyomiyaLinke JiaYile Ye

For most societies throughout the history, the supply of money was essentially inelastic.

Today, money is nowhere a commodity, and its supply is entirely elastic.

Inelastic Money & Elastic Money

Inelastic vs. ElasticWhy has the world moved from inelastic to elastic

money? Is a system of elastic money superior to one of

inelastic money?

The Fundamentals of Money

Money is the medium of exchange.

Barter Economy

Double coincidence of wants

The Origin of MoneyCertain goods came to be accepted in

exchange

The most fungible good is called “money.”

An immediately useful medium of exchange

Goods that could be used as moneyGold and Silverqualities that were ideal for a medium of exchange: durability, portability, recognizability, divisibility, homogeneity, scarcity.

Goods that could be used as moneyGold and SilverNow people had demand for gold and silver as monetary assets.an additional element of value independent of their use-value------exchange value

Use-value V.S. Exchange value

Use-value V.S. Exchange value Money has no direct use-value.

The Effects Of Money Injections●Money Injections without Credit Markets●Money Injections via Credit Markets

Money Injections Without Credit Markets

1. Even, Instant, and Transparent Money Injection● affects the price level and nominal prices

● no impact on the production and resource location

● do not promote new economic activity

Money Injections Without Credit Markets

2. Even and Nontransparent Money Injection● Producer interpret the situation correctly no change in consumption and production● Producer misinterpret the situation give up some investments GDP raise temporarily change of resource location and income distribution permanently

Money Injections Without Credit Markets

3. Uneven and nontransparent Money Injection●Promote GDP statistics●Change the resource location●Change the distribution of the economic

ownership ●Beneficiary -- the money creator

Money Injections via Credit Markets●Consumption

-poor countries : focus on need of present consumption -rich countries--focus on investing capital stocks

Money Injections via Credit Markets●Interest Rate

-related to the population’s time preference -poor countries: lower time preference lower interest rate - rich countries: higher time preference higher interest rate

Fallacies about the price level and price level stabilization

● The price level and monetary stability

Price level is not an accurate indicator● A historical perspective on price level stability

Commodity money system was more favorable in the past

● Why would commodity money be unstable?

Incompatible with a market economy

The Policy of Stabilization

“Ceteris Paribus”

3p=2q=4r=1s=0.5t=2.2u=2v=2m

4p=1.5q=4.3r=0.8s=0.7t=2u=2.5v=2.5m

History of paper money: A legacy of failure ●China, America, England, France,

Russia and German●All result in lower purchase power

of money and lead to inflation●Abandoned and returned to

commodity money

Beyond the Cycle: Paper Money Collapse

Fully flexible money introduced in 1971

Banks bigger but riskier

Full nationalization of money and credit

Paper Money and the StatePurchasing power negatively affected

Allowed to run deficits

Over 50% employment for economists

Market EconomyRequires cooperation of individuals

Everyone should see benefits from it

Current PoliciesKeynesian and Monetarist

GDP is an important factor

Author urges for Laissez-Faire

The EndgameCurrent policies useless in recession

Misallocations of capital increasing

Illusions of wealth created

A Return to Commodity Money

Monetary asset… is not simultaneously somebody else’s liability. cannot be created out of thin air by privileged banks to

enhance their profits from exaggerated lending activity.

is not a tool of ongoing economic manipulation and a source of expanding state power.