Friday, 22 January 2016

Blog 28 "The Economy is Slowing ! The Economy is Slowing "!






Blog  28   "The Economy is Slowing!"Money flow 4.jpeg

So what is "the economy?" 

Economics is "the science of the production and distribution of wealth." (Concise Oxford Dictionary). The World Book Dictionary defines the economy as "a system of managing the production, distribution and consumption of goods and services."  
All well and good.  A "science" (in a British dictionary) and a "system") (in an American dictionary). That could be food for a blog in itself. But not today.

The Cogs Blog, dedicated to making things clear and comprehensive to speakers of simple English, explains it a little more fully. The economy covers everything that is bought and sold for money - from the colorful slippers on your feet to the coffee, and its cup, at your elbow; the work of the machine operator who made the chair you are sitting on; the time of your travel agent booking your holiday in Cuba; the cost of  your hearing-aid, and the work of the sailor whose ship brought you the new batteries for it from the other side of the globe. And don't forget the bank lady in the smart dark suit who approved the loan to pay for your Cuba trip. She still has to pay for the suit.

Total money involved in my example, say, $5,000, in six or seven transactions.

Note that in every one of these transactions, money changed hands. Every dollar of that money is totalled up to give the economists, politicians and other interested parties, that Gross Domestic Product (GDP) figure.

Now, imagine for a minute, first that you had no money, nor credit, but you got all those things by "borrowing" them. No money was involved. So no effect on the year's GDP figures, even though a lot of goods and services changed hands. I put it to you this way to make two points (not about your personal honesty).
  1.  GDP figures, on which governments' and investors' decisions are frequently made, do not come directly from heaven. Therefore they ought not to be worshipped.
  2. For most of the transactions in the economy, however, money is a requirement.

Point 2 is the important one. Let's go from there. Suppose for a minute that you do have $5000 tucked away. It is in a jar behind the microwave. So long as it stays there, you are depriving the economy of money for six or seven transactions involving numerous people, for every week of the year.  Over a year that would amount to $250,000? And if a million other people in the country felt insecure and each put $5000 away toward their security?  $5,000,000,000 -  5 billion withheld from the economy. Finally, imagine the banks, at the same time, in the same fearful state of mind. They would be calling in loans, not in mere $5000's but, let's say, $50,000's. That is a minimum of $50,000,000,000, for each bank, each day, taken off the table.

Has the depression mentality set in yet, dear reader?

So do we look to the government? The bankers do. What should the national state governments do to pull their people out of a slump?

The second New Internationalist xxx Economic Myth to be Junked xxx  reads: "Deficit reduction is the only way out of a slump." Deficit reduction means the government should spend less money - or raise more taxes. But does D.R. put money into the economy? Not likely.

But governments exist to spend money. (Think about that.)

What most governments did in the 2008 recession, on the advice of shaky banks, was to borrow money from the banks and then give it back to the banks "to prevent a major crash." The debt still remains on the government books. And interest is being paid on it. Are banks smarter than governments? Seems like.

Since our aim is to simplify, let's have a diagram, in preparation for the next blog,



This diagram is pretty messy, but it shows four things you have already met. In the big box upper left, you have a government, and an economy, with participants and priorities. In the other two boxes, a bundle of banks (upper right). Note their five activities.  In the lower right, corporate shareholders, who represent the owners of wealth. Note also that banks create 98% of the money supply (as loans), and governments create only 2% (as cash).
The arrows show the major streams of money flowing among these four participants.

Flowing Money will be the topic of the next blog, with emphasis on   m o v  e   m   e    n     t      ---)-    ----)-     -----)-      ------)-