The Modern Keynesian crowd believes that the increase in the money supply can perturb the economy and awaken it from its sleep as the consumer becomes stimulated again and again by more money to spend. This act in turn (they believe) triggers an increase in the money velocity (the rate at which money gets spent on average) which then triggers more economic growth as businesses began to produce excess goods for consumption based on the implicit optimism displayed by the consumer's current spending - a sort of mass feedback illusion if you will. This will also necessarily force people to work harder and longer to increase their economic output so they can earn future money plus interest to pay for the goods they already spent. They are now the busy bees whose existence is tied exclusively to the illusion of growth under such a system - work harder, spend more, get more. In their minds, recessions only occur when one nefarious group or malevolent force in the Universe interferes with this infinite growth lending cycle - a credit contraction for instance. However the cycle itself, from their point of view, is sacrosanct.
The Libertarian /Von Mises thinks this recursive nature of interest based debt generating even more interest based debt causes the economy to go into overdrive followed by sudden recessions that harm the economy overall. Society is further traumatized by the unpredictable boom-bust economies that prevent them from knowing when to grow their business vs. when to contract which result in hoarding patterns and malinvestment. They furthermore see that money itself is largely illusory and subject to the change of the whims of the people and the governments that represent them. Therefore, one should fix the money supply without interest. This is most often argued to be a gold-backed or precious metals backed economy with a fixed supply of money (i.e. allocated gold).
The modern Greenback Movement (aka Bill Still) takes the Von Mises Crowd as yet another illusion and insists that in addition to having sound money, the governments must never borrow from anyone but themselves. Then the government can decide for itself if more lending is needed or if debts should be forgiven or not based on the money supply. Furthermore a taxed population should never have to pay taxes to private individuals/corporations/groups who loan the money into existence to begin with - certainly not with interest attached to that money. Indeed the Government should be the sole creator of money and private companies should compete for that money in an open market where they bid on projects that reflect the needs of the people as deemed by a representative democracy.
Even this however does not go quite far enough into the true nature of money and how it should be managed. These additional properties required of true money are even more elaborate than this for it to be capable of sustainable economic growth. They are:
- That it be perceived as a means of exchange or "currency" that reflects, to some degree or another, a valid point of reference on a supply/demand state space of any fully enumerated market basket item of goods in an individual's mind. Such a basket of goods contains all conceptual items of value in the mind of the consumer/producer along with their corresponding price per unit or portion of ownership of that item per unit of currency.
- That the money be relatively liquid meaning "transportable". This means that the money need both be divisible and easily converted and "swapped" for the item of interest - however the latter comment implies a necessary infrastructure accompany it. Modern money relies somewhat on the infrastructure of the economy to deliver goods in a reasonable time frame of the transaction itself. Without this liquidity orders will freeze as it fails to deliver the goods in time for their usefulness to have any positive impact on the economy without a serious delay in productivity. In this scenario consumers will also retract their non-local orders to include only basic necessities that they can predictably and reasonably wait for at a moderate price and are within a reasonable physical distance from them. Therefore true liquidity requires infrastructural investment to ensure certainty of delivery for non local goods. Certainly if a global economy is to continue to grow or even sustain itself this infrastructural arrangement must be constantly operating and present.
- That the money be capable of changes in its own velocity as required by the economic needs of its users. In other words there should be no practical limitations to the change in the velocity of money - it should be able to ramp up or down according to the needs of the economy. People should not be impeded by force from spending due to interest rates which slow money velocity down unless the money velocity has exceeded certain agreed upon thresholds and raw goods are disappearing faster than they can be replaced. Only movements in reality-based supply-demand state space should be responsible for controlling the money velocity. Therefore the government should be objectively, openly and using good science, involved in the dissemination of economic indicators such as current, best guess supply demand relationships and negative utility information (i.e. potential product harm to the public well being) so the public can decide how best to spend their hard earned money and producers understand what prices are needed to support that demand.
- That the flow of money be steady-state, non-ergodic, aperiodic and with no net accumulation in any direction (i.e. should not be representable as a directed acyclic graph or DAG). Stated in layman's terms this means that the money ideally should never have a net flow in any one direction either from the lenders (i.e. governments and banks) or the consumers (private lending and payroll). Ideally, accumulation need only reflect the degree to which future purchases of a market basket of goods can be budgeted into the current system, not for personal or collective hoarding, force, fraud or coercion by any party. When the flow of money becomes ergodic (i.e. independent of initial conditions, it always tends to the same form/state where by it is accumulated by smaller and smaller groups), it necessarily loses its ability to budget itself and becomes disconnected from reality as no one is able to accurately price anything since it is unclear exactly how much money there is and how much of it is being accumulated vs. spent. Of course there will be an initial directed flow once the money is lent into existence but this should be followed immediately by random percolation of the money throughout the economy with the corresponding growth and construction of actual goods.
- That the velocity of said money stipulates the limitation of growth and is the truest reflection of the aggregate psychological state of consumers as opposed to the sheer volume of money. If the veloctiy and exchangeability of money is of no limitation, the economy can grow as fast as our minds, machines and physical bodies can build it, eventually almost as fast as we can imagine it. Granted, for sustainability purposes we may never want such an economy on steroids but my intention here is only to show how an ideal form of money would be useful under the most demanding circumstances.
Because these large pools of money sit on the side line, they then become permanent accumulators that can effectively distort, in any direction, the cash value of a given item in the market basket of the consumer's mind - artificially suppressing prices in some areas and inflating them in others. The less the consumer is involved in this process the better for the government and corporations who attempt to subsidize that which they deem must be cheap and penalize that which they deem must be expensive. This is done also through Bernaisian manipulation of the masses so that they too feel the need to consume certain items while eschewing others as well as Keynesian manipulation of the currency. This means that what ideally could be built now will likely be postponed indefinitely or at least until the system crashes. I dont believe the central banks will be successful in this endeavor forever however for the following reason: The natural state of any money system - i.e. a system that it is in its lowest energetic state (i.e. requires the least amount of external "force" to self-perpetuate) must be the system I just described for reasons that are purely mathematical and thus irrefutable - the economy can not grow indefinitely and the forces required by the centralized bankers to keep the current system in its current form are themselves unsustainable and futile. Manipulating the money supply and consumer sentiments alone to drive the economy has practical limitations and requires powerful forces constantly overseeing it. In the end though these forces become completely exhausted in a hyperbolic effort to micromanage every aspect of the economy and thus ensure it will crash totally and be replaced by the more natural system I have described with or without economic intervention - the only real question is how long they can sustain their efforts. Let me state my hypothesis openly and succinctly again for you to examine:
The velocity of money determines the growth cycle not the money supply. More precisely it is the change in the velocity of money that determines the growth cycle of the real economy - increasing velocity is a sign of economic expansion where as decreasing velocity is a sign of retraction. Furthermore, the velocity of money can be determined entirely by the consumer based on their real needs and desire to spend either globally (if the infrastructure allows it) or locally (if constrained). What is needed is money and infrastructural investments to ensure that the money velocity is adequate for the rate of exchange required to ensure sustainability (or if desired growth). In other cases where the infrastructure is inadequate we must let the price discovery mechanism itself be the sole determination of market utility.
For instance if the accumulators become too large and reduce the money velocity to effectively zero as money becomes hoarded, then and only then should the government begin lending and at negative interest to parties most likely to increase money velocity again - yes this does include the concept of "free money" but guess what? We are already there as the central banks are currently discussing such policies - the only issue being who they are lending to. The greater the accumulation of cash by institutions and individuals, the more negative the interest to those who want to continue to expand their businesses in the now depressed economy. In this scenario the accumulators are encouraged to begin spending down their own "money supply" by the negative interest as their money will be worth less and chase fewer goods in the future vs. spending it now. Likewise when the economy and money velocity is too high for productivity to keep pace, positive interest rates can be re-introduced so that savings are encouraged and savers begin to accumulate money again instead. In fact a mathematical formula relating the money velocity to the interest rates with the central or mean rate hovering around zero should be formulated, discussed and improved every year by cutting-edge economists trained in a variety of disciplines. In this way, the rate of inflation is kept relatively constant. Likewise, all forms non-essential derivatives or futures contracts would be banned - in other words the only legal derivatives would be for agricultural, mining and mineral goods. Derivatives trading based on stocks and bonds should be illegal as would naked short selling as these encourage money accumulation and price distortion. Hoarding money itself would not be illegal but when the money velocity is low, it will simply not be in the owner's best interest to continue to hoard vs. converting them to goods now before the money is worth less. Likewise when money velocity is so high that it becomes unsustainable, accumulation would be rewarded for a period of time in the form of higher interest rates until the system can catch up again to a steady-state equilibrium.