The lodestar of inflationism

Robert Blumen:

“Financing is not funding. Finance is a means of keeping track of who has agreed to fund what, through contractual arrangements known as bonds, notes and equity shares. While promises can be multiplied without limit, the ability to keep them is finite. A financial promise can be cancelled with other financial promises, but at the end of the line, if real goods are to be produced, then a real means of funding must be provided. The creation of more finance (promises) can never replace the creation of more real means of funding.

…The lodestar of inflationism is the search for a way to create more real funding out of paper. Antal Fekete's attempt to resurrect the Real Bills Doctrine is one such proposal.

…The root of the error in Fekete’s doctrine is the confusion between finance and funding. Real Bills do not fund anything. The result of monetizing more bills is merely an increased quantity of paper claims to the same pool of funding.

…According to Fekete’s scheme, banks should monetize his beloved Bills. To monetize a bill means that a bank purchases the bill with new money substitutes that it creates out of nothing. (If the bank purchased the bill using its own capital or funds that had been loaned to the bank for investment purposes, then no monetization would occur).

…When a bank monetizes an asset, they have created purchasing power for the bank out of nothing. The problem with the monetization of debt (bills or otherwise) is that the bank is able to make withdrawals from the subsistence fund with its new money without having made any prior deposits to the subsistence fund. The creation of credit without savings represents unfunded consumption, an “exchange of nothing for something”.

…The fundamental question under investigation has always been the same: can the creation of additional paper instruments contribute to the production of more wealth? The answer must always and for all time be no, at least not until the day that paper promises can transmute themselves into real goods.”