In today’s baseless monetary system labor cannot save its wages because banks may issue infinite credit that raises the general price level (GPL) above where it would naturally gravitate. If left to its own devices, prices would naturally fall, not rise, due to population growth, innovation, economies-of-scale, and productivity improvements. This would benefit all wage earners because a lower GPL would make wages more competitive vis-à-vis the goods, services and assets available for purchase. Affordability would rise for all economic participants, and would be especially beneficial to those at the lower end of the wage scale.
Obviously this is not the monetary system we have, which is premised on continually rising prices and policies that seek to ensure that. The current monetary regime issues credit and creates systemic debt. In this system asset price growth can outpace wage growth for long stretches of time. Asset prices, however, may be driven higher by the availability of credit, not rising demand or productivity. The debt build up that goes hand-in-hand with the credit build up creates a drag on demand and productivity. Unemployment rises. Debt cannot be serviced or repaid easily through wages.
Central banks must ultimately dilute the purchasing power of their currencies by manufacturing more currency with which debtors can repay their debts or with which creditors can extend new credit to debtors so they can roll over their debts. Any saved wages lose their purchasing power if held in that currency. This gives incentive to laborers not to save in the currency in which they are paid. Rather, they are forced to speculate in financial asset markets (directly or indirectly).
Lee Quaintance & Paul Brodsky
pbrodsky@qbamco.com
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