Saturday, July 16, 2016

Modern Money causes Inequality

Philipp Bagus explains that our monetary system favors those who are already-wealthy at the expense of those who are only beginning the wealth-building process.

Since the costs of money production are close to zero in a fiat money system, where both central banks and other banks may create money, a continuously rising money supply can be expected. Therefore, prices tend to increase steadily. In such a system, it does not make much sense to save in the form of cash, in order to buy assets such as a house later. It is rational to indebt oneself early in order to purchase a house before it is even more expensive and pay the debt back in depreciated currency. Since assets such as property, bonds or stocks may serve as a guarantee or collateral for new loans, and as such as a means to become a first receiver of new money, in our fiat monetary system asset prices tend to rise relative to prices of goods and services, i.e. wages. This is one reason why it takes ever longer to purchase an average house by saving an average income. This is also a reason why it is easier for the rich to stay rich and more difficult for the poor to become rich in our fiat money system than it would be in a commodity money world.
While the super rich, the financial industry and big business profit from their fast and direct access to the newly produced money, the working and middle classes, have to cope with rising housing, energy and food costs. Due to rising living costs and high taxes, it becomes ever more difficult for the working and middle classes to save and invest in financial markets.
In short, our monetary system leads to redistribution and there is a tendency for wealth and income to flow to the rich.

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