This is the third and, we hope, final portion of our analysis of what Dr. Harold G. Moulton called "America's Capacity to Consume." Why are we spending so much time on consumption when, clearly, the problem is lack of production of marketable goods and services and the employment of people to produce them?
Simple. We have to counter the Keynesian obsession with effective demand — the capacity to consume — that has, thanks to academia's and government's adulation of the Great Defunct Economist, distorted monetary and fiscal policy to the point where virtually every nation on earth faces potential bankruptcy as a result of creating endless demand with no provision to back it up with increased production of marketable goods and services — in simple terms, the belief that there is nothing but free lunch, and you can get something for nothing.
Yesterday we saw how when governments emit bills of credit, they are simply adding to existing claims on the supply of marketable goods and services in the economy. This is inflation, or, as another Great Defunct Economist, Milton Friedman, put it, "too many dollars chasing too few goods" . . . or something like that.
That's not the end of it, however. A private sector drawer of a bill of exchange has to demonstrate financial feasibility — "creditworthiness" — in order to discount the bill and use it as money or exchange it for another form of money in order to show the ability to make good on the bill when presented for payment, or be guilty of fraud. The government is under no such constraint. All a government need do to emit a bill of credit and increase its debt burden is to get it through the legislature or whoever holds the purse strings.
Nor does the government necessarily receive anything of value for what it expends. Creating money by emitting bills of credit to spend on entitlements, subsidies in the private sector or job creation in government does not result in the production of marketable goods and services. Consumption of such "services" in which nothing is produced is, to all intents and purposes, potentially unlimited: by creating increasing numbers of government jobs in a frantic effort to generate effective demand that Keynes claimed would solve all problems, consumption of unmarketable and ephemeral "services" that are of no value but cost a great deal can take place without any production taking place, utterly destroying the logic of Say's Law.
Thus, the private sector can only increase its liabilities to finance the production of future marketable goods and services by demonstrating a reasonable ability to produce marketable goods and services sufficient to make good on the bills when presented for payment. The amount of private sector debt, as long as credit is extended only for projects reasonably expected to pay for themselves out of future production of marketable goods and services, is irrelevant. An automatic constraint is built into the system. No claims can be created until and unless there is a reasonable expectation that the claims will be redeemed out of existing or future production of marketable goods and services.
The government, however, suffers from no such constraint when emitting bills of credit. Governments, if limited to their proper function, produce nothing. They borrow when tax collections out of what its citizens produce are insufficient to cover expenditures. Expenditures are not based on the built-in check of the private sector — invest only out of reasonable projections of future production — but on political expedience or necessity for consumption. These are not tied to the ability of the citizens to pay taxes in the future, but on what the government wants to spend.
Consequently, a government can create money by emitting bills of credit backed by future tax collections that may not be approved, out of wealth that doesn't exist and may never exist. By doing so a government has the potential to create unlimited claims not on the present value of existing marketable goods and services, but on the unquantified, possibly even unquantifiable present value of possibly non-existent future marketable goods and services. Giving the lie to the Keynesian theory that "money" consists of a general claim on the present value of existing marketable goods and services and no more, emitting bills of credit allows a government to create an outstanding debt that exceeds its ability ever to repay, spent on activities that produce nothing, and limited only by the government's own ability to spend.
For Say's Law (and a sane economy) to operate, consumption must be limited to the present value of existing marketable goods and services in the economy, and all new money created must finance new capital to produce marketable goods and services. "America's Capacity to Consume" cannot exceed "America's Capacity to Produce" without courting disaster.
The moment that it becomes apparent that a government has manipulated the currency so as to create more claims on future wealth that might not even be produced, confidence in the government — and thus the currency — plunges, with the result that we see now in Europe, especially the "PIIGS," where the desire to take care of everybody by printing money and creating non-productive "jobs" has ended in an impossible situation: the money created is backed by taxes that might never be collected out of wealth that might never be produced, spent on services that produced nothing of value, but which must be redeemed with something of value, or the country will go bankrupt.