Voima Weekly #41 – Growth Through Productivity or Money?

The image illustrates how money supply growth can lead to a redistribution of purchasing power. When M2 grows, the relative share of existing money within the total money supply declines. However, new money does not reach everyone at the same time. It typically flows first through the banking system, the state, large institutional actors, creditworthy borrowers and asset purchasers. The effects appear later more broadly in prices, housing, energy, the real value of wages and the purchasing power of savings. EMU M2 provides one perspective, but a better benchmark would be global money supply growth, because capital, assets and purchasing power move across currency-area borders in today’s system.

Real economic growth does not come from adding more money into the system. It comes from society’s ability to produce more value with the same, or a smaller, amount of labour, capital, energy and time.

If the freed-up time, capital and expertise move into new productive activity, society’s real capacity increases. The same people can serve more customers, and the same amount of capital can produce more. The same energy can generate a greater outcome. Quality can improve, unit costs can fall, and customers’ purchasing power can even strengthen, because the same money buys more or better goods and services.

This is genuine productivity growth¹. Productivity growth moves resources toward the places where they can create more value. At the level of individuals, companies and industries, however, it can feel like a zero-sum game: some companies lose competitiveness, some jobs disappear, and some people have to change roles or learn new skills. This is why productivity growth can, at the same time, increase society’s overall capacity and cause real pain at the individual level.

Productivity growth reveals where labour, capital and expertise should be directed. It also exposes which structures can no longer carry their weight. This is often painful, but necessary renewal.

Increasing the money supply works differently. When new money is created mainly through debt², additional purchasing power enters the economy before a corresponding increase in real productive capacity has necessarily taken place. For a while, this can hide the fact that certain activity is no longer genuinely profitable. Old structures can be financed for longer, losses can be pushed into the future, and inefficiency can be sustained. From the outside, the system may appear to function, even though in reality an increasing share of activity depends on new debt rather than improved productivity.

Whether real productive capacity improves or not, increasing the money supply always involves a redistribution of purchasing power.

Under the gold standard, the amount of money was ultimately constrained by a scarce asset: gold. In today’s credit-money system, the money supply grows primarily with credit creation. When a bank grants a loan, it simultaneously creates a new deposit — in other words, new money enters the economy. This is why money supply growth is not an exception in the current system, but a normal mechanism: money is created when households, companies or the public sector take on more debt.

Because the current system operates so extensively on debt and credit, a significant contraction in the money supply would be economically and politically painful. It could weaken solvency, push down asset prices, increase bankruptcies and force rapid adjustment. This is why the system has an inherent pressure to maintain the growth of credit and the money supply.

This can be seen in three practical ways. When the state spends more than it collects in taxes, the difference is financed with debt. That debt becomes someone else’s income, deposit or receivable. When the banking system expands credit, new deposits ,and therefore new money — are created in the economy. When the central bank keeps interest rates low, provides liquidity or buys bonds during crises, it eases the financing of the debt-based system and prevents sudden market discipline from unwinding debt structures too quickly.

In 2008 this was done because the banking and credit system was freezing. During the Covid crisis, it was done because the state shut down large parts of the real economy and replaced lost income streams with borrowed money. In both cases, new debt and central bank support acted as a bridge over the crisis. At the same time, they reinforced the basic logic of the current system: when the system faces a major shock, the solution is seen as additional liquidity, additional debt and money supply growth.

This brings us to the essential question. If there are 100 units of money in an economy and the money supply is increased by 10 percent, there are now 110 units of money. The old money’s share of the new total is only 100 divided by 110, or approximately 90.9 percent. This does not mean that every price immediately rises by exactly 10 percent, and the M2 of a single currency area does not tell the whole story. In reality, one should also look at global money supply, money velocity, credit conditions and where the new money actually flows.

But it does describe the basic logic of purchasing power dilution: old money now represents a smaller share of the total money supply. Even more importantly, new money never reaches everyone at the same time. It enters the system through a particular door: the banking system, the state, large institutions, creditworthy borrowers, asset purchasers and politically selected targets. Only later do its effects appear in wages, prices, rents, grocery bills, energy costs and the everyday lives of ordinary people.

That is why increasing the money supply is not neutral, even in a growing economy. It is always also a question of who receives the new purchasing power first and who faces its consequences later.

Economists, newspapers and politicians like to talk about GDP growth. But the first question should be: what kind of growth are we talking about?

In a debt-based monetary system, money supply growth can make nominal GDP growth the normal condition even in an economy that is standing still. If the money supply is increased and the new money enters circulation, economic activity measured in money can grow even if no real new value has been created.

Imagine an economy that produces 100 loaves of bread per year, with each loaf costing one euro. Nominal GDP is then 100 euros. If more money is created and the same 100 loaves later cost 1.10 euros each, nominal GDP is 110 euros.

The statistics show 10 percent growth. But there are still only 100 loaves of bread on the table. The people have not truly become wealthier — only the unit of measurement has weakened.

This is why GDP growth alone is not enough to tell us whether a society has actually become wealthier. The real question is whether there are more loaves of bread, better products, more efficient services, stronger productive capacity and greater purchasing power — or whether we are simply looking at the same economy measured with a larger amount of money.

If the answer is no, then this is not genuine wealth creation. It is, at least in part, an image of growth inflated by the expansion of the money supply. This is where the issue stops being merely technical and becomes moral³.

The quiet pride of the current monetary system is the assumption that a centralised system can allocate purchasing power better than the people from whom that purchasing power is quietly transferred in the first place. That the state, central banks, authorities, large financial institutions and political programmes can use this purchasing power more wisely than families, entrepreneurs, savers and local communities.

That is a strong assumption.

When purchasing power is reduced through inflation and money supply growth, it does not feel like a single tax decision. Nobody comes to your front door and says: “We are now taking part of your savings and transferring it to the system’s first recipients.”

But in economic terms, the effect is practically the same.

At the same time, asset prices can — and typically do — begin to rise. Those who already owned assets, had leverage and had access to financing often benefit first. This is not healthy economic growth. It is more in the nature of an internal transfer of purchasing power within the system — much like taxation. The expansion of the money supply is therefore another form of tax.

In such a system, capital allocation becomes critically important.

Especially in a country where the state runs deficits, obligations are high and the governance model is weak at renewing itself, citizens and companies should not build on the assumption that the system will protect their purchasing power. On the contrary: in precisely such a system, purchasing power is often quietly transferred from those who save, work and carry responsibility to structures that are unable to adapt.

This is why capital must be allocated in two ways.

First, capital should be allocated to scarce and demanded commodities whose value is not based merely on someone else’s debt or promise.

Gold is an exceptionally clear example. Everyone recognises gold as valuable. It is not the currency of one state, the debt of one bank or the equity of one company. It is a scarce, global and liquid asset that has preserved its position through different monetary systems, crises and state failures.

Second, capital should be allocated to projects, companies and equities that genuinely increase productivity. To companies that solve real problems, do things better than before, build new products, expand capacity and create real value. Over the long term, these companies are the true growth engine of the economy.

Gold is not the entire strategy. It is the base balance sheet. It is the part of wealth whose purpose is not to chase every growth opportunity, but to preserve liquidity, purchasing power and long-term operating capacity. On top of that, one can build other things: business activity, equity investments, new projects, growth and risk- taking.

In the corporate world, the same logic becomes even more important. Another company’s productivity can weaken your company’s position. If a competitor can produce faster, cheaper or better, your relative competitiveness weakens even if you have done nothing wrong. That is why a company must first renew itself, improve its productivity and create new value. Second, it must hold its capital in a form that allows it to invest, adapt, buy time and seize opportunities when others are forced to sell, cut back or seek help.

Money alone does not make us stronger. Productivity, correct capital allocation and the preservation of purchasing power do. That is why the role of capital is clear: it must move toward where real value is created — and toward what preserves purchasing power when money itself is being diluted.

– Marko Viinikka
Founder, CEO
Voima Gold Oy

Disclaimer: Voima Weeklies are the personal writings of the undersigned. They do not necessarily represent the official view of Voima Gold Oy or any other company, nor do they constitute investment advice or a recommendation to purchase securities.