The author, Niu Wenxin, attempts to make a case as to why China has an absolute need for all the money that it has been printing over the past years, and that it is a sign of health and growth for an economy to be in need of so many yuan to conduct its business.
“For example, a company bought 20 mu of land from the local government for only 100,000 yuan at the time of its founding more than 10 years ago, and the investment was included in the GDP that year. After the company goes public, the market value of the land rises to 200 million yuan, which demands 50 million yuan in new money supply…
“If the central bank does not issue the 50 million yuan, the 200 million yuan in market value will be just a bubble. This explains why China’s money supply has grown faster than GDP, and been on a steady rise…
“China has had to issue much more money than developed countries in order to recover from the global financial crisis because its economic structure is different from that of developed countries…”
Unfortunately, the author completely misunderstands and misconstrues the concept of money, the derivation of its value, and the consequences of inflating the supply of money in an economy.
Money gets its value from the fact that it is desired to be received in trade for the goods and services a person produces so that it can consequently be exchanged for the final goods and services that a person desires.
It is a commodity in itself, just like iron, rubber, cars, or computers. What makes it different from all other commodities is that the key desire for obtaining it is for use in exchange rather than for use in consumption or production.
But the market price of money is determined by the same laws of supply and demand as every other commodity being exchanged. Increasing the quantity of money only serves to dilute its value in exchange and will only serve, in the end, to raise the amount of money needed to complete an exchange. Hence, monetary expansion leads to price inflation.
Contrary to the argument the author puts forth, that the land purchased from the government at 100,000 yuan gains value and requires the government to issue 50 million yuan in new currency, the land in question has had a significant increase in its valuation because of the increase in the money supply by the government. Continual money production results in a depreciation of the yuan, which results in a rise in the number of yuan required to make a given purchase.
A given amount of money is desired precisely because of the value it has in exchange, with that value in exchange determined on the market through the effects of there being a precise amount of money in existence. It is valuable precisely because it is scarce.
Money is never a “neutral” commodity, where adding or removing units from circulation has no effect on how people value it. It is not like a bond, where each note has a given, guaranteed value, but more like a share of stock in a company, where doubling the amount of shares in existence halves the value of the respective unit of stock.
Further adding to the increase in value of the land is the premium added to the purchase price based upon the expected rises in prices because of an expected depreciation of the yuan in the future. What this means is that prices, especially for durable goods and land, are often given a value that is higher than the value in a stable money market, as the buyers and sellers try to compensate for the government’s involvement in the market.
Finally, by pouring money into the banking system, interest rates get pushed down, which means the capitalised value of the land being exchanged, which is based on a lower rate of interest, is increased.
Money, whether it be paper or a “hard” currency like gold or silver, is the one exchangeable good in the world that having an increased amount of confers absolutely no benefit to society. More corn, more steel, more cars, more apartments, and more clothes are all improvements in the standard of living, as there is an increase in the amount of final goods available for people to use in their daily lives.
More money doesn’t provide anything more for people to consume directly or use in production. It simply provides more material to be used in exchange for the already existing amount of goods available.
Money isn’t used or consumed in any process. In fact, most paper currency came about because it was easier to exchange paper receipts for warehoused hard currency than to transport around weighty bags of coin or bullion for every exchange.
Money, eventually, didn’t even need to be present to facilitate a transaction, as the bank notes representing the money became more and more accepted in exchange. More money cannot bring about more of the goods and services that we need every day.
China has the distinction of being the first in the world to develop printing and paper money, a concept that was considered a marvel at the time to Westerners, especially Marco Polo, who brought back stories on how the people of Cathay used the novel form of currency in their everyday transactions.
The period of roughly AD 1000 to AD 1500 was the heyday of paper currency in China, as the use of paper currency covered seven dynasties, from the Northern Sung, who extended the initial developments in paper currency by the Tang dynasty with the founding of a “bureau of credit cash,” through the Southern Sung, the Ming, the Ch’ing, the Mongols, the Chin, and even Szechuan.
In each case, except where the Southern Sung dynasty was conquered by the Mongols, abandonment of the currency was the final result. Paper currency stabilised by government edict eventually led to government inflation to finance its operations.
And government inflation of the money supply eventually led to a breakdown in the value of the currency, increasingly rapid price inflation, price and commodity controls, black market use of alternate commodities for purchases as people rejected the paper currency, and, eventually, complete abandonment of the paper currency by the government as unworkable.
After roughly AD 1500, except for minor issues of paper notes, which failed often in the same year of issue, the Chinese eschewed the printing of paper money until the nineteenth and twentieth centuries, when increasing trade with the Western nations encouraged an adoption of their methods.
The Chinese were the first to develop printing and paper money. They were the first to experiment with inflation on monetisation of a country’s debt. They were the first to experience rapid price inflations which led to rejection of paper currency by the populace. And they were the first to have the wisdom to reject the use of paper, and essentially fiat, money as being contrary to the health of an economy.
The modern money theory being advocated, as represented by the article by Niu Wenxin, shows that the siren song of money printing is often too hard a melody for a government to resist.
- China heads back to the ’90s in economic reform drive (chinadailymail.com)
- China’s surging money supply could raise commodity and housing prices (wantchinatimes.com)
- Printing Money Is Cause of Inflation in China (theepochtimes.com)
- Paper money is pouring out of central banks everywhere – so why is gold slipping? (mining.com)
- The Consequences of a Strong Dollar (ritholtz.com)
- It’s Going To End Badly (theinternetpost.net)
- Here’s a Healthy Currency Most People Have Never Even Heard Of (financialsurvivalnetwork.com)
- US Monetary Watch, Monetary Inflation Decelerating? (financialsurvivalnetwork.com)
- Monetary Watch, Euro True Money Supply Trends Suggest Another Deflationary Scare? (safehaven.com)