The destruction of money

Money is a created thing. We create it by issuing loans or by authorizing government expenditures in fiat currencies. But what happens then? If we can only create money, how does money not become worthless over time? Obviously, we must also destroy money.

The destruction of money happens in two ways. First, a lender can absolve a borrower of a debt. This is the opposite of making a loan. The debt is written off and the money it created (or the remainder) is destroyed. Second, a government can collect taxes in it’s fiat currency. This is the opposite of authorizing an expenditure, and destroys the money that is collected.

Money isn’t a cycle that begins and ends with some kind of revenue source. Using money is a cycle that begins and ends with some kind of revenue source, but only for people, businesses, and governments that don’t have the power to create money. All of the profits are just re-cycled into another “Use Money” cycle. Most of the costs are likewise re-cycled. And only a small amount of the costs are for taxes or forgiveness, where they are destroyed.

So these operations need to balance their costs against their revenue and optimize that balance to create profit or savings. Not enough revenue is ultimately fatal because they can’t create money. (Although, when lending is cheap, it might seem like they can as long as they can keep the investment pumping in to supplement revenue. see: Uber, etc.)

Banks and Monetary Sovereigns live by a different set of rules because they have more power in the domain of money. Because they can create money, they use money differently.

Instead of worrying about balancing and optimizing revenue and costs to yield profits, these operations need merely to manage their exposure (for banks, their ability to payout depositors, for governments, cost-push inflation in the real economy caused by not enough resources available for the demands of the economy (not to be confused with demand-pull inflation driving up the cost of resources that are available)).

In the case of inflation caused by there not being enough resources for the entire economy — not enough workers, not enough land, not enough raw materials — the inflation is an early indicator of a supply issue where no amount of money can buy a way out of the problem. If you have no iron, and there is no iron to buy from anyone, you can’t make steel, etc..

In all other cases, inflation is an indicator that the buyers are either disadvantaged (i.e.., price gouging is happening, usually to a good that they buyer can’t live without), or the sellers are unwilling to sell at the price the market is seeking (i.e., labor, unoccupied real estate, etc.).

These can both be widespread, or they can be localized. When localized they create bottlenecks that can be maneuvered around with technology, innovation, incentivization, or optimization.