From: wlsmith@valve.heart.rri.uwo.ca (Wayne Smith)
Subject: Re: Bank of Canada and printing money.
Organization: The John P. Robarts Research Institute, London, Ontario
Distribution: can
Date: Sat, 12 Dec 1992 01:41:52 GMT


(I'm just borrowing the subject line, hope that's ok :)

I think we can look at the economy, the debt, the gov't, in many different
ways as we try to figure out just what our current condition is, and why
it is, and how to fix it.  Here's my 2 cents...

I had a look today at some M1, M1a, etc, money supply figures.

The amount of circulating currency (coinage, dollars, etc) is about $15
billion.  That actually amounts to $555 per person (assuming 27 million).

There are various M1a, M1b etc. figures (about 5 more) that deal with 
bank accounts, and other places where money is stached, in various forms.
This ammounts to $220 billion (including the M1 supply).  The last M1x
figure is the GNP, which in not a static number, but is noted as
dollars per year.  It is about $550 billion.

Now I think that the GNP is the sum of all monentary transactions that
took place in Canada during the year.  If this is true, then we could
say that every possible canadian dollar (all $220 billion) circulated
2 times during the year.

Now I'm just an arm chair economist (right now I am sitting on my     
couch at home, keyboard on my lap, but I digress :), but I propose
that a strong economy is one where the *velocity* of money is high.

Ok.  So we know that the avarage weekly canadian wage is $550, but 
exactly how many people are included in that statement is not known.
But we know that the GNP is $550 billion, and $550 X 52 = $28600.
So, $550 billion divided by $28600 is 19 million, which is not too
far off in thinking that out of a total population of 27 million,
there are about 19 million people actually working, and their average
income is $550 per week.

Since I have a bio-physics background, I like to think of the country
as a body, and money as red blood cells (or the circulatory system),
and people are the cells of the body.  There are cells that are "not
important", and get fed by a marginal blood supply, and there are
cells which are part of vital organs (heart, brain) that get fed a
rather rich supply (due to design).  I could go on, but you get the
point.

The *faster* the blood (money) circulates, the more active and healthy
individual cells (people) can become.  A combination of more red cells
(dollars) and a faster velocity also lead to a healthier "body".
This is only true so long as the carrying capacity of each red cell
(value of the dollar) does not decline.

But what we have in this country is an increasing diversion of money
throught the gov's hands, which acts to slow down every monentary
transaction, sometimes to the point where the transaction doesn't 
even happen.  This can be likened to a situation where there is a
negative catalyst that acts on the heart (to slow down the speed of
the circulation) or to reduce the efficiency of the transport of
oxygen to the cells; both result in a "starved" cell.

Now the gov't has found it necessary to intervene in every transaction
and grab "a piece of the action" because, well, it needs the money.
This is where the biological analogy breaks down, because the introduction
of money from foreign sources has no analogy.

I would argue that a debt that is satisfied by a loan does not lead to the
creation of "new money".  Inflation leads to the creation of money, and
a measure of the rise and fall of the per-capita money supply is *the*
real indication of inflation.

I would argue that a self-sustaining world economy is one where the 
per-capita currency stays constant, but the total amount of currency
grows as the population grows.  If the value of an individual piece
of currency changes, then more, or less, of that currency is made available
to make up for inflation.  Perhaps the action of increasing the supply
leads to inflation, but it is a way for a gov't to increase the amount
of money in circulation, and hence hope that the increased supply makes
it down to the individual.

So here lies the conclusion...
Our gov't is trying to increase the GNP by making more money available,
instead of making our current supply circulate faster.  Increasing
our GNP by incurring debt is a death spiral, and we are now in a vortex
that I think is beyond escaping.  Increasing the velocity of our
current money supply is a "home-grown" solution, and it incurrs no
foreign debt, but an increasingly larger part of our monentary circulation
is circulating though fewer and fewer channels, the gov't being the
largest, and that trend has too much inertia to stop...