If you go to a small 100 person closed economy, it is easy to see the effects of counterfeiting.  Once a week, everyone brings the product of their labor to a central market place and then they do trades with currency.  Services are ordered at this time.  If there is counterfeiting, people will see the effect very quickly because that person is not bringing ‘things of worth’ to the market place.  
 People will readily see the unfairness of the counterfeiter acquiring ‘things of worth’ and not suppling goods and services.  Let’s take away or call it even, the concept of people saving and spending their saved currency, to make this concept more obvious.  People are working hard to earn their currency and the counterfeiter is not.
  As the great Walter Williams stated:  money is the representation that you served your fellow citizen, so it can demand service in exchange.  Someone just printing up currency from a printer is not serving their fellow citizen and thus mocking and destroying the currency as a medium of exchange because they are not producing anything of value on their side of the exchange. 
If the counterfeiter ‘gets away’ with this for a while, the effect will be more money than ‘things of worth’.  Some of this can be hiding with saving for a while, however if the saving level is steady, meaning people adding and spending from savings is equal, major effects are seen quickly within a small population.  Normally on trading day all the goods and services traded are exhausted.  
This means that every person bought the same dollar amount as they sold.  If you sold $100 dollars of grapes, then you bought a little of everything you needed to equal $100. The effect, when counterfeiters add dollars and did not provide any goods or services, is extra money, equal to the amount of counterfeit. 
If you have backed dollars as in the Haley2024 monetary policy, where there is stored wealth to back up the dollars, a quick audit will reveal there are more dollars than the value in the store room.  The counterfeit dollars will be identified and the product taken from the counterfeiter.  If we have fiat currency without the dollar being backed up, the percent value of the currency drops equals the old amount divided by the new higher amount of money.
In a one hundred person economy, and a single trading day, this devaluation becomes obvious quickly.  Because there is extra money left over on trading day, people would have to provide more labor for goods or services to fulfill the demand.  If counterfeit currency added an extra 10 percent on the monetary base, people would work an extra ten percent more and still only receive the same amount of ‘things of worth’ for themselves.  
This extra labor is being done for the counterfeiter at the expense of extra work for all the other producers.  Human nature will want the status-quo, of the days before the counterfeiting, of getting a certain amount of goods and service for the amount of ‘things of value’ they bring to the trading day, and sellers will raise their cost to achieve the old status-quo.  
Human nature means everyone does the same and prices rise that ten percent.  If the counterfeiting continues, the prices will also continue to raise at the same rate of counterfeiting.  The counterfeiters are in reality stealing the labor of others.  If someone chooses not to do the extra labor, they will acquire roughly 10% less goods and service for their labor they do.  That 10% goes to the counterfeiter. 
Currency that does not hold its value because of the theft of counterfeiting does not make for a useful saving instrument.  People dissuaded from saving, leads to many ills, such as the lack of capital needed for capitalism and not having savings for your retirement.  An unstable dollar is also very problematic for long term contracts for obvious reasons, which leads to reduced long term planning and economic growth.    
Just because the Federal Reserve (FED) does it, does not make it OK or moral.  The FED adding more dollars though QE or price controlling the interest rate lower than  market prices, which requires adding money as well, cause the same damaging effect to the economy.  
 We do not just have 100 people, rather over 300 million and 20 times that around the world.  Much of this can be hidden within not just thousand, but millions of financial instruments.  Much of these are hidden away and very difficult for anyone to have any understanding of how much worth is out there.  Something is only worth what someone is willing to pay for it, and people change constantly how much they value things.
All this being said, the economy is way too complex for anyone to understand.  However this small closed economy gives us the understanding of the cause of inflation, or better said the devaluation of the dollar.  We currently (2015) see similar damaging effects to our large economy and we need to understand the causes. 
The FED ‘states’ they are going to pull the money back out in the future, however that does not stop the damaging effects from happening.  In fact, if the damaging effects ripples through the economy with enough time, the value of the currency changes, the bad effects realized and pulling the money back out will have its own bad effects. 
 The bad effects do not get reversed.  Pulling the money back will create all new bad effects.  The value of the money changing is the cause of the bad effects.  Stability is the best.  Long term contracts, including employment can be awful for one side when the value drops and the other side when the value goes up.   It is very hard to lower wages of employees to match higher currency values.     
The left and the Keynesians will look at the extra work that needs to be done with the extra money and will rejoice that more jobs are being created and the 'economy growing', they totally miss the theft of real worth coming from every dollar, either paper or digital.  The left misses that they are changing the value of employment contracts, mortgages, and retirement accounts.
The left misses the point that long term business plans are hampered by unstable money.  The left misses the fact that the devaluation is often hidden until a 10 to 20% jump is realized and markets are highly negatively impacted.  The left misses the cause of the bad effect of lower saving rates.  The left misses the catch 22 dilemma created when easy money started investments that cannot produce the income at market rates. 
The left misses the low interest rate pushing up housing prices which harm the poor the most.  The left misses the fact that an economic crash which always comes from QE created bubbles hits the housing market heavy and drops housing prices, putting many middle to low income houses underwater (meaning the loan is higher than the value of the house). 
The left misses that middle to low income people lose their jobs based on wild swings in housing prices due to jobs in that sector of the economy.   The left misses the fact that large layoffs due to the wild swings push up mortgage foreclosures, leading to more catch 22 effects, when housing price fall greater due to a glut of foreclosures and thus more layoffs in the housing sector and the spill over in many other sectors as well.   
The left misses the FACT that Billions of people are holding many trillions of dollars that have no intrinsic value behind it.  Saving is theoretically a store of value that can be turned into goods and service.  Fiat money is missing that VITAL aspect of a good currency. 
 


Comments

09/23/2015 1:35am

The left misses the fact that an economic crash which always comes from QE created bubbles hits the housing market heavy and drops housing prices,

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12/07/2015 5:43am

I really appreciate this blog is very informative; I have come to know here many news points about interest rates.

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    Bill Haley

    Bill Haley started Haley2024 in the spring of 2013 in an effort to do his part in restoring freedom to America

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