End Of The Finite Asset Model

India, Monday, June 8, 2020. India’s rise from the COVID-19 economic downturn is dependent on several factors. Chief among them is money supply. Money supply and monetary policy are outside of parliament’s responsibilities. These belong to the Reserve Bank of India (RBI). India looks up to the RBI to enable the economy’s rise from the COVID-19 economic downturn.

The world of central banking changed when President Richard Nixon of the United States of America (USA or US) pulled the plug on asset-based money creation. President Nixon pulled the plug on gold-based money creation. He did this on August 15, 1971. India looks up to the RBI to use the post-1971 monetary tools.

Central banks have had these tools in their toolkits since 1971. In the main, the RBI should take advantage of the fact that the end of the gold standard ended the finite asset model of money. Let me write this again: the end of the gold standard ended the finite asset model of money.  

Money is not an asset

Money is not an asset. It is up to us to find out why and how. Money is an ‘I owe you’ (IOU) issued by a central bank. This IOU is the Indian rupee (INR) in the case of India. The RBI issues the INR. The value of the INR is guaranteed by the central government or union government of India.

Let us peer further. The INR currency note has a promise made by the governor of the RBI. The promise boldly says that the governor of the RBI will pay a sum of some rupees when we give away the IOU. What we get back is another IOU. This is the beginning of a chain of IOUs. We can do this forever. Give an IOU. Take an IOU back. We will neither get gold nor USD.

The RBI’s IOU is what we regard as an asset. It yields nothing further which is an asset. Let us go to the higher authority that guarantees payment: the central government or union government of India. We can give away an IOU and get another IOU. We will neither get gold nor USD. Or, we can pay our taxes and realise the value of the IOU.

Money is a construct

Money is a construct. Money is a token. It enables us to pay our dues to the government because the IOU’s value is guaranteed by the government. But this is the most trivial property and utility of money.

The colossal power of money is driven by our common acceptance of money as a means for transacting with one another. The canteen at the College of Engineering Guindy (CEG) makes fine dosa. The cashier will accept the INR we give. Then the kitchen will give us a dosa.

The canteen uses the INR we pay to buy flour, edible oil and cooking gas. The canteen uses the INR we pay to employ the cooks and the support staff. The canteen uses the INR we pay to meet its electricity dues. It pays taxes too.

Where do we get our money from? We get our money from people who buy our services. We get our money from our employers. Our customers and employers get their money from their customers.

Gigantic exchange of effort

Money facilitates the colossal transfer of human effort from humans to humans. It is mindboggling in scale, scope, depth, expansiveness and inclusiveness. 

On its own, money is not an asset. However, to earn money, we need to expend our physical and intellectual effort. We could be cooks making dosa at the CEG canteen. Our physical effort, attentiveness and knowledge are rewarded when we earn our incomes.

We could be professors at the CEG. Our intellectual effort is rewarded when we earn our incomes. We could be teaching-research fellows at the University of Iowa, Iowa City, USA. We teach. We research. We pass on the findings to practitioners.

Our students then go on to work for the Indian Space Research Organisation (ISRO). They build rockets, they launch satellites, and they make spacecraft that go to Mars. Our engineers get paid for their physical and intellectual effort.

We are the real assets

Money enables us to realise the potential we have as human capital. We are the assets. All of us are assets. We are the nation’s assets.

Construction crews build hospitals. They earn their incomes. Doctors, medical support teams, nurses and medical technologists render life-saving services. They earn their incomes. The hospital becomes an asset thereby.

Humans – we humans – are at the centre of a universe of activities performed within hospitals, schools, factories and malls. Human effort is exchanged on a colossal scale and at the speed of light. Money gets exchanged on the same colossal scale and at the same speed of light. That is funny. Light cannot have two speeds or velocities.

Now, this will not be funny. Money cannot have a speed or a velocity that is different from the speed at which human effort is exchanged. Velocity is a vector. Speed is not. Moreover, money cannot have a scale or intensity of exchange that is different from that at which human effort is exchanged.

Universe of infinite assets

India is an infinite universe of human capital. Our money – the INR – cannot have a speed or a velocity that is different from the speed at which our human effort is exchanged. Our money – the INR – cannot have a speed or a velocity that is different from the speed at which we plan to exchange our human effort. There is a present tense here and a future tense here.

Moreover, our money cannot have a scale or intensity of exchange that is different from that at which human effort is exchanged. Our money cannot have a scale or intensity of exchange that is different from the scale at which we plan to exchange human effort. There is a present tense here and a future tense here too.

Infinite asset model

Money is an asset only after humans have put in effort to create goods and services. Else, money is inert. We are familiar with Boyle’s Law, Charles’s Law and Gay-Lussac’s Law. These laws do not belong to monetary economics and public finance economics. But they serve admirably well to understand how monetary economics and public finance economics work. In particular, when consumer price stability and producer price stability are important joint objectives, the three gas laws enable us to build better monetary and fiscal models.

We had to include fiscal models. We have to include fiscal models. Why? Government is an active participant of our economy. It employs millions of citizens. It produces value. Employees of government produce value. That is how government justifies its role as a tax collector.

We pay government for its services. Government’s production of value is usually associated with (1) spawning, (2) enabling, (3) supporting and (4) regulating the economic activities of households and businesses. So, we pay taxes.

Government fits in perfectly and snugly in the economy as an active participant. It produces and provides governance services. It is part of the human-effort exchange. Government too needs money. Government pays out money. Government is part of the exchange of money.

Our money – the INR – cannot have a speed or a velocity that is different from the speed at which our government – a singular proxy for the union and state government – exchanges its human effort with that of households and businesses. Our money cannot have a speed or a velocity that is different from the speed at which our government seeks to exchange its human effort with that of households and businesses. There is a present tense here and a future tense here.

Our money cannot have a speed or a velocity that is different from the speed at which our government plans to exchange its human effort with that of households and businesses. There is a future tense here.

Our money cannot have a scale of exchange that is different from the scale at which our government plans to exchange its human effort with that of households and businesses. There is a future tense here.

Nothing cheap and sly

The business and economic media went berserk when they felt or smelt that the RBI had created and issued money to fund the activities of the government. They were red in anger and pale in curiosity. It was as if an underage girl and an underage boy had held hands at the bus stop. Terrible!

There is nothing sly or cheap when the RBI creates money to fund government. When tax inflows decline, how else would government (1) spawn, (2) enable, (3) support and (4) regulate our economic activities?

This money is an IOU. It is an asset in the books of the RBI. It is a liability in the books of government. Households and businesses are the beneficiaries of this transaction. Everyone gets to real work with the only real asset that we know – human capital.

Households and businesses engage in production and consumption. We pay taxes. The government pays back the RBI. The asset and liability entries are reversed. Period. Net-net, the economy has gained.

Mindset change

Money is a construct. It used to fit the properties of a finite asset model until 1971. Money does not any longer have to fit an outdated model. Money is a construct. And, we should not force ourselves to surrender to a monetary model that died 48 years ago.

Money is a construct. It fits in well with the infinite asset model where we are the assets. Citizens of India are the human capital and assets. We need to exchange our human effort – both physical and intellectual. We need as much money as needed – that tautology is here with a purpose – so that we can be at our productive and creative best.

Our needs are different now than they were in January 2020. 'Our' here refers to households, businesses and government. We urge the RBI to regard money in its infinite-asset model form.

We urge our lawmakers to amend any laws that retard the speed at which we exchange our human effort. We urge our lawmakers to amend any laws that shrink the scale at which we exchange our human effort.

We promise to deliver (1) high growth, (2) low risk, (3) high employment, (4) better income equity and (5) price stability. This is a better IOU than the continuous-loop IOU on a currency note.