When central banks print additional money, they are diluting the value of each existing unit that is in circulation. It is embezzling of wealth by dilution similar to when the bartender dilutes the booze.
The author notes that when the Chinese manufacturer takes his dollars to the bank to exchange for Yuan and the Chinese central bank prints the money to make the exchange. This is clearly deliberate dilution of fiat money.
The Federal Reserve (and all other fiat central banks) has been doing this exact thing since the day it started printing money. Worker compensation is directly tied to productivity which increases on average at between 2% and 3% per year. If the central bank did not increase the money supply, over time as the economy grew through improved productivity, each money unit would become valuable. This means that the general level of wages and prices would slowly drop even though this did not mean anyone was getting less poor. In fact, everyone would be getting more wealthy. they would be working fewer hours for the same goods.
There are a lot of participants in the economy who prefer the currency to have a stable value over time. So, as the value of the currency units become more valuable due to increased productivity, this gives the central bank a reason and excuse to create additional money in proportion. This dilutes the value of the currency and gives the appearance of a constant value. What has happened is that for every percent the economy grows, the central bank can expand the money supply in exact parallel and the added money is used by government for its purposes. The beauty of this stealth tax is that nobody sees what government is doing.
The scheme of fiat money, when coupled with an income tax on the changes in values of capital goods like land and securities, is the grandest scheme of theft in all human history. When coupled with deficit spending upon the good credit serviced by all future earnings of all citizens, it operates to also place the entire country in debt serfdom from which escape is forbidden. This is identical to when Pharoah purchased his citizens in exchange for food. We have allowed ourselves to be sold into servitude to government in exchange for “benefits” at our own expense, with our own money, income and assets.
But, happily, we can call for a Convention to revoke the authority of the Leviathan State to continue this outrage. We will do so when we realize the existing Federal Government is more a threat to our liberty and well being then what damage a Convention could produce that would also pass ratification of the surviving states.
The formula of:
Growth (gross domestic product) = consumption + investment + government spending + net exports
is straight from Keynes. One implication is that government spending of one dollar has the same effect on the GDP as the private sector spending one dollar.
Let me ask: How often does government go to the store and spend one dollar but gets less than one dollar of end-use value? The news is full of stories of government waste, where government pays millions of dollars for stuff that sits rusting in a warehouse because of some bureaucratic mistake.
How many of you go shop to find more than one dollar of value for each dollar you spend?
On balance, private business must gain more than one dollar of value for each dollar it spends. That difference is profit.
But when your economic theory says that one dollar of government spending is just the same as one dollar of spending from the private sector, then a wasteful government project has the same economic effect as a well run project. Digging holes and then filling them up is just as important as building a needed highway bridge. Giving money to Solyndra has the same effect as anything else.
But a key is also that each dollar comes from somewhere. If it was borrowed, the cost of servicing the debt comes from somewhere. And that somewhere is only the private sector, which is using all the dollars it has to make a profit. So, when government takes a dollar from WalMart in taxes, because WalMart makes a 3.47% profit on each dollar, unless government puts that dollar to work in an activity that earns greater than 3.47% profit, we are actually less prosperous, and wealth was actually destroyed by the government, even though the money was spent digging holes and filling them back up.
Austrian economists understand this. Keynesians cannot and don’t want to.