16.2 The amount of saved money does not represent their value anayway

If somebody is still thinking such concept of periodic capital tax as too excessive, maybe he will change his mind after thorough analysis of what value have the saved money at all.

Classical theory is saying that money is caring value over in time. Well they do, but only very weakly.  Everybody who had at the bank 100 $ before 10 years and today can say there is a huge difference what he can buy for them. The difference is of course inflation. The state (FED) is injecting new money to maintain economy moving and so value of money in time is declining.

There is also another reason, why saved money have value significantly lower then spent and this applies even without significant time factor.

Let´s talk an example of orange orchard producing 100ks per year at price 1$ per piece.
If 25 people have buying power 4$ annually and they decide to spend it all for these oranges, everybody will get 4 pieces and all production is sold.

However if they decide to save halve of their buying power (2$), only 50 pieces will be sold and at the bank there will be deposits amounting 50$.  The rest 50pieces will not be sold and they will rot .

The second year buyers decide to use their savings and to make orange feast. So they try to buy 150 oranges for their standard salary 100$ (25 x 4$) + 50$ savings.
But they soon discover that orchard is producing only 100ks (and this is just the better case, it could very well be that halve of it was disinvested as there was no demand for its output).
So 150$ is now chasing 100 oranges and resulting buying power 1$ in this model went down to 0.66$, respectively 1 orange now costs already 1,5$ instead of 1$ and of course buyers will not get the desired amount.

It is very simple example but is clearly descripting how useless is to hoard savings and how quickly they are losing their value even without thinking where is the addition of necessary buying power coming from. But there must be some source.

Now let add this source complication:

Let´s say that orchard owner wants to achieve profit of 10%, that is he plans a sales of 110$, 10$ above his costs, represented by 100$ wages.

Profit = sales – costs (wages)                                        10$= 110$ - 100$

If the source of this profit is going to be government debt, then for each year there is to be any profit recorded the government must borrow 10$ from profit maker and distribute it to orchard workers, who represent all agregate demand that is there.

So after 10 years the orchard business made 10 x 10$ = 100$ of profit and
government debt is ( for simplification without interest) the same amount 100$.

The orchard is still producing just 100 oranges annually worth 110$. If the business owner wanted to buy for all his profit oranges as well, together with usual customers wielding regular buying power of 100$ the outcome would be 200$ available buying power against 110$ production. One orange would cost now 200$ / 100 pieces = 2$ against ordinary 1.1$ as expected price.

That is an inflation of nearly 82%!  So the accumulation of profit is practically pointless as the accumulated profit did not guarnatee the availability of real products needed and buying power is seriously aroded. The scope of this erosion describes following chart:

Obviously, if the profit of the first year would be fully (100%) taxed; there would be no decline at all.
The very same result will be achieved if the source of additional buying power will be monetary policy:

The only difference is that there is no government debt that needs to be repaid. The total amount of new money in economy is the same as with debt = + 100$ and the real decline in buying power of 1$ is the same, in line with accumulated profits.

Monetary easing process

While in the debt option business profit is transformed to government bonds, that is if company is to continue to make profits it has to use its previous year´s profits and invest them into government debt which is in turn redistributed to citizens and so supplement their buying power. After 10 periods of 10$ profit per year and its subsequent reinvestment the company now owns 100$ worth government bonds.

If the FED would provide the funds directly to the government, there would be no need for government debt and the business profit would consist solely from new FED´s money without the need of them being reinvested into government bonds. The profit would be represented by real money and not bonds, just needing to be converted to money

When the debt becomes too big and nobody is willing to finance it any longer, there comes the magic of monetary easing:

Central bank (FED) buys government bonds from businesses thereby converting them to real money. The government debt remains, but it changed hands and is now owned by central bank. In effect, after monetary easing the final business position is the same       as if the FED would provide the money to government directly.

The only difference is that there is still the debt of government (now against the FED) but it will never be repaid. The government simply have no money for that and never will have. It would mean taxing previously achieved profits at 100%, which is not going to happen. But the central bank compared to private business have no problems in revolving that debt for eternity. They understand that this is the way of maintaining the economy spinning and they will never lose the nerves and say no to the government.