EDITOR NOTE: Let’s try a little thought experiment. Imagine an isolated and self-sufficient island society where everyone freely produces goods that are consumed by fellow neighbors--food, clothes, houses, etc. Suppose this society uses rare seashells for “currency” and there’s a total of around 10,000 shells circulating in the economy. What will happen if, mysteriously, 100,000 pieces of these seashell currency pieces wash up on the shore? It shouldn’t make a difference, right? That’s because the “real” wealth of the economy is in the production of goods, not the seashells. But what might happen if only a segment of this society discovered the extra shells (again, currency), enough to perpetually replenish their store? First, off, they’ll end up buying and consuming more than everyone else. Even worse, they may stop “producing” simply because they have enough currency. What happens when that money circulates and larger segments of society stop producing, despite more and more money trickling in? Then the entire wealth of the island is based on “currency” and not production. It’s a financial economy now, but one that doesn’t have enough goods to go around as production has slowed. What will happen to prices? And what will happen to that society? The only solution to ensure that society remains productive and self-sufficient may be to ”enforce” it by means of a central power--that is, systematic and physical coercion. The island may be productive, but “freedom” is lost. Back to our world, does this analogy say anything about our money printing and government stimulus?
Originally posted on George Gammon