The the Wall Street Journal Anna Hirtenstein reported last week that US businesses “are sitting on record amounts of cash.” According to Newspaper reporter, the number is 6.84 trillion.
For Keynesians, such a number is a bit unsettling. Keynesians believe that unspent wealth signals a lack of spending, which apparently explains why they are so determined that governments tax wealth. Figure that politicians exist to spend. Keynesians worship at the altar of consumption. Their economic theory is confused, while their alarmism is exaggerated.
Savings or “stocks” of cash do not subtract demand in the first place. Businesses don’t hide their unspent money in a safe; rather, they cash it in for an interest rate. Banks don’t store money either. To do so would be tantamount to rushing quickly to insolvency. Banks pay deposits precisely because they can lend the collected funds at a higher interest rate than that paid to the depositor.
What is encouraging about unspent wealth is that even though some of it is transferred to those who are willing to pay an interest rate in order to get goods and services now (we are borrowing money). money for what it can be exchanged for), for others, unspent wealth serves as Capital. The frugal, whether individuals or businesses, are economic growth personified. When not spending all of their money, it exists as capital for entrepreneurs and businesses looking for the funds to bring their business visions to life. There is simply no innovation, and no growth or job creation that comes with it without saving first. The Keynesians have it upside down.
At the same time, they’re not the only ones who are a little confused about the money; “slow-motion” money in particular. You see, there are those who believe that by lending money the banks are playing the role of forgers. Such a belief is mistaken about what money is. People mistakenly believe that banks, by lending the money they “rent” to savers, are “multiplying” the money in a counterfeit fashion.
In their rendering, a bank takes $ 1 million from company A, only for the bank to lend $ 900,000 to company B who then cash it in, only for another bank to direct 90% of the funds of the company. Company B to Company C. Pretty quickly $ 1 million is just over $ 2.7 million, when the infamous banks multiplied the dollar. Except that such reasoning does not stand up to a basic examination. Which calls for a parenthesis; although known to those who read this column with any regularity.
The simple truth is that no one buys and sells with cash, nor lends or borrows with it. Money flows represent the flow of goods and services. Money is only the arbiter. It is an agreement on value that makes possible the exchange between the real producers. We all work for money, but we really work for what money can be exchanged for. When there is broad agreement (or trust) about the exchangeable value of money, the actual exchange is abundant. In other words, the successful Microsoft seller is able to use the proceeds from the sale of software to buy a house on Mercer Island precisely because the owner of the house on Mercer Island is convinced that these dollars will buy corresponding market products.
Ditto for savings and loans. No one wants – say – $ 1 million in cash would deposit it in a bank if the $ 1 million deposit could soon turn into the woefully devalued millions and tens of millions of dollars that roam the United States and the world. If the money were really “multiplied” as some mistakenly assume, there would be no savings to speak of. Which means there is no multiplication in the first place.
If anyone doubts it, all he has to do is conduct his own experiment on the model of companies A, B and C, only he can do it with friends at a kitchen or restaurant table. Better yet, conduct the experiment without needlessly imposed reserve requirements on banks. Friend A only becomes a “bank” to draw $ 100. Friend A lends Friend B the $ 100, only for Friend B to lend them to Friend C. Voila! $ 300 created out of thin air according to multiplier theorists. In fact, there would still only be $ 100. When we lend money, we lose the use of it. The multiplier theory implies that we can lend $ 100 while having $ 100. No, such an opinion is not serious. We could definitely borrow $ 100 from someone else by showing them our $ 100 loan, but then that person would have $ 100 less. Multiplication is a myth.
Yet some wise people believe that the savings that terrify Keynesians to represent unspent wealth are actually terrifying because they signal inflated wealth. Banks should ‘store’ money rather than lend it out, seems to be the mantra of ‘money multiplier’ theorists. Except that if banks were warehouses, savers pay them an interest rate.
More specifically, the markets work. The markets are informed. The money multiplier theory literally suggests that instead of increasing capital formation in exchange for an interest rate, savers empower banks to literally inflate the value of the dollar. With their own savings.
It all comes back to business. Supposedly, they have $ 6.84 trillion in cash right now, which means they are lending trillions right now. If the multiplier theory had even a glimpse of truth, corporate cash stocks would be a signal of the world’s most valuable and best-run companies, literally sitting idly by and watching their precious wealth wiped out by “counterfeit” bankers.
Not really. If money was in a constant state of gutting because of saving, no one would use it in the first place. And there would certainly be no savings. If anyone really needs the truth that the “money multiplier” theory brings new meaning to the conspiracy bunk, just point it at corporate cash stocks measured in billions of dollars. billion.