A Tract on Monetary Reform
Our economy is slowly dying, it is kept alive artificially. No one is proposing a solution because no one has the slightest idea of why it is happening and many have vested interest in the present system. However an objective observation of the phenomenon can help us understand it and provide us with an innovative solution. Of course we can't solve the problem with the tools that brought us there in the first place and we need a new ideology.
That artificial life means more and more government economic intervention, and will mean a centralized socialist economy in which the Federal Reserve System or some government body will decide what enterprises deserve to receive credit and will be kept alive and which ones will not and deserve to die.
History:
Long-term yields were steadily going down since 1981 when we concluded that should that trend continue, we would reach what is known as a Liquidity Trap, which is what we have now. The Federal Reserve has studied the Japanese crash of 1993 extensively but has not reached any satisfactory solution.
That fall in long-term interest rates (Later coined the Greenspan Conundrum or Bernanke saving glut) is in fact due to a vast increase in the income/wealth gap between the rich and the poor. It is easy to understand:
The poor have a high marginal propensity to consume, (almost equal to 1) as any incremental dollar they earn they use to buy food, shelters, thing they need for their day to day life.
The rich have a high marginal propensity to save (almost equal to 1) as any incremental dollar they earn they save as they already earn more than enough to cover their expensive lifestyle.
As the income gap increases relatively more and more money is devoted to investment and less and less money is devoted to consumption. That consumption contributing to the profits and hence to the return on investments it is easy to understand why these rates would go down.
Contrary to the prevalent ideology, income/wealth distribution does matter, and there is a high monetary value of consumption.
Consequence:
As that income gap becomes so wide that it becomes unsustainable, the marginal return on investment comes down to a level that does not cover the interest rate risk for the weakest of the businesses and more and more businesses must close and go bankrupt. This increases the income gap. The number of businesses that can be financed is now below what existed before the crisis and will continue to go down at a even faster rate:
Our economy is slowly dying, it is kept alive artificially. No one is proposing a solution because no one has the slightest idea of why it is happening and many have vested interest in the present system. However an objective observation of the phenomenon can help us understand it and provide us with an innovative solution. Of course we can't solve the problem with the tools that brought us there in the first place and we need a new ideology.
That artificial life means more and more government economic intervention, and will mean a centralized socialist economy in which the Federal Reserve System or some government body will decide what enterprises deserve to receive credit and will be kept alive and which ones will not and deserve to die.
The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the author's assault upon them is to be successful,-- a struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.
- John Maynard Keynes, "The General Theory of Employment, Interest, and Money"
History:
Long-term yields were steadily going down since 1981 when we concluded that should that trend continue, we would reach what is known as a Liquidity Trap, which is what we have now. The Federal Reserve has studied the Japanese crash of 1993 extensively but has not reached any satisfactory solution.
That fall in long-term interest rates (Later coined the Greenspan Conundrum or Bernanke saving glut) is in fact due to a vast increase in the income/wealth gap between the rich and the poor. It is easy to understand:
The poor have a high marginal propensity to consume, (almost equal to 1) as any incremental dollar they earn they use to buy food, shelters, thing they need for their day to day life.
The rich have a high marginal propensity to save (almost equal to 1) as any incremental dollar they earn they save as they already earn more than enough to cover their expensive lifestyle.
As the income gap increases relatively more and more money is devoted to investment and less and less money is devoted to consumption. That consumption contributing to the profits and hence to the return on investments it is easy to understand why these rates would go down.
The income gap between the rich and the rest of the US population has become so wide, and is growing so fast, that it might eventually threaten the stability of democratic capitalism itself.
- The Christian Science Monitor
Contrary to the prevalent ideology, income/wealth distribution does matter, and there is a high monetary value of consumption.
Consequence:
As that income gap becomes so wide that it becomes unsustainable, the marginal return on investment comes down to a level that does not cover the interest rate risk for the weakest of the businesses and more and more businesses must close and go bankrupt. This increases the income gap. The number of businesses that can be financed is now below what existed before the crisis and will continue to go down at a even faster rate:
Can the right monetary and fiscal policy keep the US out of a recession?
Probably not. Global forces can now override most anything that monetary and fiscal policy can do. Long-term real interest rates have significantly more impact on the core of economic activity than the individual actions of nations. Central banks have increasingly lost their capacity to influence the longer end of the market. Two to three decades, ago central banks were dominant throughout the maturity schedule. Thus, the more important question is the direction of long-term real interest rates.
- Alan Greenspan
At
some point the whole economy will crumble. This would have already
taken place if the governments hadn't done whatever they could to keep
alive the strongest corporations. But whatever is done will not
prevent this sometime in the future.
Causes:
That increase in income/wealth disparity is due to the very existence of credit. That is due to the fact that credit discriminates for the rich and against the poor.
The very poor don't get any credit, or the poor get some with a very high interest rate while the rich get a massive amount at a very low interest rate. (the banks get it at almost 0% interest now.)
While the poor use that credit to consume and postpone and increase their problems, the rich use that credit to buy productive assets and increase their wealth.
Causes:
That increase in income/wealth disparity is due to the very existence of credit. That is due to the fact that credit discriminates for the rich and against the poor.
The very poor don't get any credit, or the poor get some with a very high interest rate while the rich get a massive amount at a very low interest rate. (the banks get it at almost 0% interest now.)
While the poor use that credit to consume and postpone and increase their problems, the rich use that credit to buy productive assets and increase their wealth.
Solution:
We
must get rid of credit and increase consumption, that is the money in
the poor person's pocket.
