Monetary, financial and fiscal things

In economics matters as anywhere else, in all disciplines of knowledge, it’s important to well appoint things to design them, distinguish them and avoid fallacies and confusion.

There is a domain of the economy where the confusions and contradictions abound, it’s about who is accountable to the currency finance and the budget. The currency was invented by men to facilitate trade in goods and services, such as so an instrument for the exchange of resources. But money is not wealth. Wealth, it’s the set of goods and services to meet our needs. And the goods and services are specifically produced to meet our needs, when producers have turned to consumers demands. Although the currency addresses the need to Exchange, we trade in fact the goods and services. It’s therefore an intermediate need.

The financial question consists to respond to the need to transfer the consummation power in the future in the best conditions, knowing that this always involves a risk. Robison Crusoe on his island is confronted with this crucial problem if he wants to survive while nobody helps. If there are 1000 grains of wheat, it will be decided to eat 80 for immediate consumption but it will be soon realized that, if he wants to eat tomorrow, he must saw 20 grains. And to sow (i.e. invest) must be previously doesn’t consume, so save 20 (20% saving rate). In the modern economy, it belongs to the banking system and the financial market to solve this problem, i.e. to reap the swings households to secure then steer it towards more productive investments. It will be noted that for Robison alone in his island, the issue of the Exchange doesn’t arise. He hasn’t got any money. Therefore he lacks money to solve the problem. On the other hand, there is a financial issue to solve: Stock and rescue the 20 spared grains (protect them from renders and bad weather) and choose the best land for sowing in the aim to draw maximum performance. Because he wants to be able to eat tomorrow, he must invest today. This is called inter temporal arbitration in the heart of the financial problem.

Finally, all economic agents, be they households, companies and the State must manage a budget which is to make its necessarily limited revenue expenditure. In others words, each of the agents must make choice under budget constraint; Being free and sovereign, this is not to say to everything you want to, but be able to make choice given the constraints; The differences between adults and children, is that adults have to make choice, and making a choice that is the definition of a rational behavior in Economics [1]. This is not because your account is register in a bank the bank is to manage your budget. It’s your responsibility to bring revenue is the same way yours then to use them the way you want to as long as accounts are balanced.

Certainly, if you are constantly discovered at fall in the debt, one day a bailiff will come and seize your property. It is almost the same for the State or for companies. A company that is losing its customers without reading loses the confidence of the shareholders or its bankers until the day when it is key to the door.

The budget constraint is therefore necessary at all because it is registered in the economic laws; European Treaty or not, this is the “golden rule” applied to the state. In France, it is that it feels the need to include a rule so basic and so obvious in the constitution and that there are opponents to cry at loss of our “sovereignty . A sovereign State is free to do whatever it wants of the public money which is responsible as long as it respects the budget constraint. Given the magnitude of our samples, the French State has a considerable body of public money. But it is up to politicians to make the trade-off required. Do not know how the choice i.e. prioritize priorities, is to lose its freedom and sovereignty, as for a business or a household; For example, a State that  is unable to control its public deficits at the fall in the debt is at the mercy of its creditors; Being sovereign , is to be responsible for. And it is not the banks that are responsible for the debt. These are politicians who have failed to make the choice, wanting to meet everyone, feed the inflation of public expenditure. They did not take their responsibilities.

Then, it was believed for a long time in France that State was above economical laws, what was only applied to ordinary mortals (enterprises and households) and that it could therefore escape the budget constraint, cleverly maintaining a confusion between the monetary and the fiscal. Keynes himself didn’t defend the idea that a policy of revival by the budget deficit could be supported by a policy of monetary easing. In brief, if State revenues were insufficient to finance ever increasing public expenditures, it was enough to increase the money supply (windsurfing ticket). Yet, since 16^th century no one ignores the mechanical link between the quantity of money and the level of prices. The any artificial increasing of the money supply (What Jacques Rueff called “False rights”) brings a rise in the general level of prices (inflation) in sort of what the State gives you with its right hand; inflation takes it of you with left hand.

That is why economists of the 20^th century qualified inflation as “disguised tax”. Similar to the tax, inflation operates a levy on households’ consummation power in belittling the currency value. Of course, we were told for years, in the aim to justify the inflationist reflex that inflation encouraged people to get into debt because they would pay in “Monkey’s money”. But inflation is like that rat that eats Robinson’s grains; it eats up saving, badly needed investments. However, to be able to borrow, people have to risk their savings. Inflation, which plunders the lenders, comes destroying the confidence necessary to the good functioning of financial transactions. Finally, above strictly economic consideration, inflation is the sneakiest tax, precisely because it’s a disguised tax; it escapes any democratic control and is never vote in the parliament. It needed centuries to conquest democracy i.e. the fact to give people right to mission its representatives for controlling the use that was made of the money that had been collected as a tax, because public money is first private money. But it’s not because it becomes a public good that it could miraculously escape economics laws, including budget constraints.

Every time in history, all countries who forgot these essential truths, lost their economic rand and finally their sovereignty and their freedom.

[1] Having been, during my studies, a “pawn” in a college of a beautiful neighborhood of Aix, I had the occasion to notice the educational damage in children who had all the pocket money they wanted, their parents being unable to say “no” to them. Transmit a heritage to the children is not enough; you must above all give them an education.