Sep 25

What if we create money without control?

Surely many of you ask yourselves , if we have a problem of lack of money , and are the central banks of the states responsible for issuing and create money in the states ( in our case, is the ECB that issues the euro) , why not create money directly and just one stroke with all the problems ?

This should not consider frivolously, and we have to take into account the consequences of such measures , which contrary to what you think , instead of creating wealth for citizens what would cause that poverty in this country is accentuated .

The law of supply and demand

You know the law of supply and demand, in the sense that the more demand there is , the higher the price of a product or service, and conversely , the lower the demand the lower the price . If we think of a product from a company that sells not necessary, it is logical that the company will lower the price of that product to boost demand .

If families have more income , the greater its purchasing power , and so they consume more , thus the demand for products and services will increase. Companies , therefore, decided to raise prices to increase profits , or in some cases to get to satisfy all the demand . If we extrapolate this to all businesses , there will be a general increase in prices, known as inflation.

If we inject money into the system , and assuming that this wealth is shared out equally among all citizens , neutralize the effect of inflation this infusion of cash , so that the purchasing power would be virtually the same . But we are talking about an ideal world in which there would be a fair distribution of wealth, and practically not talk about poverty in the proper sense of the word , in practice this is not so , and never distributed equally among all families .

Thus , most people do not receive a proportional , but rather lower. Therefore can not offset the general increase in prices , which will reduce their purchasing power, and therefore the overall poverty . That is, if we increase the money supply , which will occur paradoxically is increased overall poverty in a country.

What is that limit ?

The best way to explain this is a bit of economic history. Several years ago , the money in circulation was backed by a lot of gold in central bank reserves . At that time, some of the gold was equivalent to an amount of money in circulation in that particular country , for example , could amount to $ 1,000 an ounce gold . At that time the money was worth , and the corresponding value was backed by gold at the central bank .

If we increased the money supply without increasing the amount of gold in central bank reserves , the money lost value, which also made them less competitive with other coins issued by countries.

Today , money is not backed by any assets , such as gold. Simply , we as consumers assume as valid payment method , and both metal coins representing the piece of paper representing the notes are perfectly valid means any transaction of exchanging goods or services between a company and a consumer.

Anyway, it seems logical that the money in circulation should be supported by all the goods and services that workers are capable of producing . That is, in this case, the abstract concept representing GDP is roughly the limit should be maintained , as above this may result in inflation and therefore the coin could lose value .

It is for this reason that the monetary authorities should have controlled the money supply, as it is called , and in this way have controlled inflation and thus prevent general impoverishment of an entire country .