The development of the Value of a Money Supply Theory is in pursuit to breakdown the economic dislocations, asset bubbles, production, and pricing issues that plague current economic circumstances. The development of this theory is not necessarily to provide a solution to economic issues, but to provide an analysis of the problems within the current system (mainly meaning the present day US economy). A thorough understanding of a system, including the limitations and inadequacies, should provide an excellent backdrop to developing solutions to current and persistent economic problems. You can’t provide appropriate solutions until you understand and honestly address those problems.
As indicated in the title, this is Part 1 of many other parts to follow. Furthermore, the blogs on the Value of a Money Supply Theory are essentially working thoughts in the development of a final theory. I am putting my thoughts out there on this subject so that I may clearly articulate my ideas and critique those thoughts myself openly, as well as get feedback from other people like you.
With that background, I shall begin the development of the Value of a Money Supply Theory…
The purpose of money is to provide a medium of exchange of goods and services to provide a store of value to be used at a later date (the later date could be minutes, hours, days, weeks, months, years, and so on). The use of money is an efficient and effective process in comparison to the barter system. However, regardless of the use of money or the barter system, human beings work together in a group to make their lives easier and better to live, and an appropriate system must be in place to provide the best possible outcome to maximize the output of production of goods and services to fulfill the demand of human beings for every day life.
Since the purpose of money is a store of value to be used a later date, it is therefore logical to theorize that the value of a money supply is the anticipated goods and services expected to be produced in the future. Since people accept money as a medium of exchange to use at some later date, the value of the money supply is compared directly against the anticipated future production of goods and services.
The Value of a Money Supply Theory is similar to the fundamental stock valuation method of stock equities, which is a valuation of the anticipated discounted cash flows of a company. Meaning, the valuation of the anticipated discounted cash flows in a stock equity valuation determines the value of a company, the valuation of the anticipated future production of goods and services of an economy determines the valuation of the money supply.
Plainly speaking, with regard to the concept of money (taking a more general approach and no theory analysis), money is a belief, faith, trust, and an unspoken/undocumented contract between individuals and the group of individuals as a whole. The concept of money is not complicated, but the interaction of individuals and the group complicates the theory of money and corresponding value. This is clearly demonstrated through the power of the crowd in combination with governmental policies and a strong central bank using a fractional banking system, which can generate enormous distortions in the value of the production of certain, and maybe all, goods and services, which will then correspondingly distort the value of the money supply.
With that brief background, we have the following graph:
The production of goods and services line demonstrates that as the value of goods and services increase, there will be a drive by individuals in a business capacity to provide an increase of production of goods and services. The money supply line is horizontal due to the money supply is equal to the future anticipated production of goods and services. At the point where the money supply equals the future anticipated production of goods and services, is the necessary supply of money to provide economic equilibrium. Therefore, the over or under supply of money provides distortions in the production of goods and services.
At this point in the development of the Value of Money Supply Theory, the graph above is applied to an entire hypothetical economy. In order to provide a simplified approach of the theory, let’s assume for the moment that the hypothetical economy has no exports or imports. In other words, this is a self-contained, self-sufficient economy. Obviously, this is not how economies operate and haven’t operated for many centuries, but this assumption in the meantime provides clear guidance and reflection when applying the theory in a more involved and complicated scenario.
It is extremely important to understand that this graph is constantly evaluated and readjusted by the economy as a whole on a daily basis and is based on future expectations to arrive at economic equilibrium in the future. Furthermore, the shape of the anticipated future production of goods and services line is derived from the capacity of the workforce and technological innovations in tandem with the current stage of development of the economy. In the earlier stages of economic development, with a less productive workforce and little technological innovation, the steeper, and possibly vertical, the anticipated future production of goods and services line will be. As an economy develops, the anticipated future production of goods and service should flatten out.
The anticipated future production of goods and services line demonstrates the capacity of individuals working together privately as a group in an economy to improve their lives and make living easier. Government units and central banking policies drive the point where the money supply intersects on the anticipated future goods and services line. Therefore, governmental and central banking policies control the horizontal money supply line and where it intersects the anticipated future production of goods and services line.
If government units and the central bank over shoot the money supply and arrive to high along the anticipated future production of goods and services line, there will be overproduction of goods and services. Of course, this overproduction will not occur pro-rata, or in any economic logical money flow to all sectors. Which means the money supply will overly percolate to the favored sectors by government and central bank policies and further complicate distortions of the production of goods and services.
This overshoot of the money supply will probably not be discovered for months, and maybe years. But, when the overshoot of the money supply is discovered by the market, there are enormous shocks to the value of assets, which is typically felt in the economy as asset deflation.
The graph above demonstrates that large changes in the money supply can have enormous ramifications if government and central bank policies do not clearly arrive along the proper intersection point of the anticipated future production of goods and services estimated by individuals that have developed the anticipated future production of goods and services line.
The inspiration to develop the Value of the Money Supply Theory is my general analysis and thoughts of the economy and not being able to reconcile the inflation of the supply with technological advances that produces greater efficiencies and effective processes. Since human beings work together in groups to be more efficient and effective in living easier and better lives, when this is not accomplished, a thorough analysis is required. I expect the development of the Value of the Money Supply Theory to demonstrate that the proper management of the money supply and government policies is extremely important in the U.S. being successful in an every increasing competitive and changing economic landscape while meanwhile achieving the goal of human interaction to make life better and easier for everyone as a whole.
Meaning, the anticipated future production of goods and services should drive the intersection point of the money supply, which then determines the required amount of money to drive the necessary economic output and production.
I will wrap it up at this point, but there is a lot more to come. Please check back for further developments. Also, please provide your thoughts.
Disclosure: No positions
Disclosure: No positions