A baker exchanges his ten saved loaves of bread for ten potatoes. The potatoes are now sustaining or funding the baker while he is engaged in the baking of bread. Likewise the bread sustains the potato farmer while he is engaged in the production of potatoes. The respective production of the baker and of the potato farmer enables them to secure goods for consumption.
What makes the consumption productive in this example is the fact that both the baker and the potato farmer consume in order to be able to produce. The consumption of both the baker and the potato farmer maintains their lives and well-being. This is the only reason for production.
The introduction of money doesn't change what was said so far. For instance the baker can exchange his ten loaves of bread for $10 he then uses money to secure ten potatoes. Likewise the potato farmer can now exchange his ten dollars for ten loaves of bread. Observe that, apart from fulfilling the role of the medium of exchange, money has contributed absolutely nothing to the production of bread and potatoes.
So far we have seen that to secure potatoes, the baker had to exchange bread for money and then employed money to secure potatoes. Something was exchanged for money, which in turn was exchanged for something else or something for something is exchanged with the help of money.
Trouble erupts when money is created "out of thin air." Such money gives rise to consumption, which is not backed by any production. It leads to an exchange of nothing for something.
For instance, a counterfeiter has printed a perfect $20 note. Since he secured this money by means other than the production of some useful goods or services, the counterfeiter has therefore obtained the $20 by exchanging nothing for it.
The counterfeiter uses the $20 to buy ten loaves of bread. What we have here is the diversion of real funding ten loaves of bread from a potato farmer towards the counterfeiter. Note that the diversion takes place by the counterfeiter paying a higher price for bread he pays two dollars per loaf. Previously the price stood at one dollar per loaf. Also note that since the counterfeiter doesn't produce anything useful he is engaged in nonproductive consumption.
The potato farmer is now denied the bread that he must have to sustain himself while he is producing potatoes. Obviously this will impair the production of potatoes. As a result, fewer potatoes will become available, which in turn will undermine the consumption of the baker, thereby impairing his ability to produce.
We can see that, while productive consumption sustains wealth generators and promotes the expansion of real wealth, nonproductive consumption only leads to economic impoverishment.
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