Money to the people - Farmers Law and Fractional Banking

	Money to the people
	For a sustainable economy

Farmers Law and Fractional Banking

For Mu > 1 there will be a constant growth in money supply. Banks will keep on creating new money. Prices do not have the tendency to drop, because of the inflation of the money supply. If prices do not drop, the consumers are worse off after the debts have been paid off, because the purchasing power of the money left is less than before.

If the public pays the banks 10 and is left with 40, instead of 50 before AND prices have risen, productivity increases (P) should be even more, to compensate for money inflation. In formula 1, we assumed that due to productivity increases, prices would go down. If money is printed, such as with fractional banking, the purchasing value of money will go down: prices will go up, due to money inflation (Pm). Under a goldstandard, there is no money inflation, so Pm = 0.
In formulae this works as follows:

Pm + R * Mu < P * M/Ms (6)

If all is saved (and invested) and nothing is consumed, the productivity gains should be higher than under the goldstandard, because Mu > 1 and Pm > 0. If productivuty increases not as much, the consumers are worse off than before, and the investments were not executed properly for the public at large. It seems that in a fractional banking world, we have to work harder to maintain our wealth.

Because more money is invested the productivity gains probably will be higher, especially in first instance. This will most likely result in a boom period. However, pressure is there for a continuation of higher productivity gains. Reason: Because money and debt is constantly being created, almost exponentially, more and more debt and interest needs to be repaid.

This is what the Austrian School theory is about in terms of inefficient allocation of capital. Growth in terms of money supply and production remains higher for a longer period as well. The preference of consumers to consume less nowand save more in order to be able to consume more in the future is exaggerated by the investors.

But similar to under the gold standard, there comes a time that Ms/M gets so high, that the productivity gains gets less. If this point is reached, companies prefer to invest less. If the productivity declines then :

Mu will probably not go down : even if banks expect no further productivity gains, they will keep on lending out. It is not too risky to make bad investments, because in case of default there is a central bank to support the banks.During the 2008-9 crisis governments who nationalised banks even demanded banks to continue lending out, to support the economy.
M1 can go down: if the people at large realize that productivity gains in the future will be lower, they may prefer to consume more now and save less. However, lowering the Ms only has an impact if the multiplier is fairly small. Please note that
- the increased consumption will compensate for the lower investments, however, due to the multiplier, it may be that the increased consumption cannot compensate for the lower investments.
- consumers may be inclined to withdraw their savings. However, in case borrowers start defaulting there is a risk that banks are not in a position to back deposits to the consumers.
If the interest rates go down. new investments in projects with lower productivity gains can still occur. What happens to the interest rate cannot be told for sure, but in a fractional banking world with government interference, central banks will probably lower short term interest rates. If banks decide to increasie the spread to compensate for the risk, new additional investment will not take place.

Given that prices will have increased the people at large are worse off. Under the gold standard new investments would not occur at a certain stage. In a fractional banking world, because there is not a proper ceiling on how much is invested, too much money is invested for too long.

Under the gold standard, the economy would cool down sooner. Under fractional banking, the economy has to keep on growing.The system cannot cope with economic contraction, because of the leverage in the system. If only a portion of the borrowers default, banks and people savings are at risk. That´s why economists and politicians start getting nervous when the economy does not grow.

The only way for the economy to grow is to keep on investing and consuming at lower productivity rates. Please note, unemplyoment will structurally increase after various booms and busts, because capital is not allocated efficiently. At a certain point, debtors will not be able to repay bank their debts, Banks are in danger, because if the public at large request back their deposits/savings. Governments and the suddenly not so independant central banks will support banks, by creating even ore debt money The longer this support lasts, the stronger the bust and the higher the chances of imploding of the financial system. A credit crunch of some sort results.

Please note that my formulas are abstract and full of assumptions. Farmers Law is meant to illustrate the point. Please compare this to the way we have been taught Keynes at High School with the X, Y and multiplier effect. There are many ways to improve and finetune the theory. Hopefully, the public at large will improve my reasoning and formulas. Hopefully, the next generation will be taught proper economics at school.