"The Economy is Slowing." Part 2

Blog 29  "The Economy is Slowing,:  Part 2

Blog 28 had a diagram representing money moving through four zones. It named the functions of each zone.

1 Government     (tax and spend)

2 The Economy    (produce and exchange goods & services)

3 Banks
    i.    create money;
    ii.   lend money;
    iii.  collect interest on money lent;
    iv.  pay taxes;
    v.   pay dividends to shareholders

4 Shareholders, who own the banks and other corporations, and  receive dividends. They also pay the unavoidable taxes.

Now I have made the point that money to keep the economy moving can be injected by both governments and banks.

Elsewhere I have made the point that bank-created money carries a burden because interest has to be paid on it. The banks do not create the interest; it has to come out of the economy. So government money goes further and stays in play longer because it has no interest strings pulling it back out.

                   No, this is not a chicken with a house over its head. Read on.



Let's take another look at that word "moving".  It makes a significant point about money in the economy.

For this I like to picture a fancy cuckoo clock, with little figures popping out every quarter-hour, displaying a little hip action to entertain you. In my imaginary clock, however, there is a knob to turn up the speed of the actions. Turn it on high, and watch those figures dance through a whole week on the clock - in half an hour!

Money is like that speed-knobbed cuckoo clock. So if you need money to make the economy go, you have two things to consider: the total amount of money available, and the speed at which it changes hands.  In the jargon of economists the second is called "velocity".)

You can have a lot of money out there, but if it is not being spent  back - whether it's the puny jar behind the microwave, or the billions of dividend dollars/yen/francs  which the richest of the earth's citizens divert from the real economy to buy up more wealth-producing assets -- well, it's a losing battle if the real need is to prime a slumping economy.

The usual, and wrong,  process of trying to escape a dismal slump is to turn to governments and plead for public austerity. The right response of government on the other hand, is to pour money directly into the real economy in a way that promotes a rapid exchange of money ("velocity"). For example, by direct lending/granting of money to young people to buy and furnish new houses. What governments are usually bribed, bullied or bamboozled into doing, however, is to give banks money (taxed or, usually, borrowed). and beg the banks to lend to young people to build and furnish houses. This is the slower and costlier ("private") way to do it.

Same option with government direct spending to build or repair bridges, highways, harbour facilities, power lines - where most of the wages are quickly spent and circulate throughout  the economy.

Why have governments around the world gone further and further into debt over the last forty years?. Because of Myth #5: "The private sector is more efficient than the public sector."

We must ask, "More efficient at what?"  Not at moving the economy, keeping workers fed, highways paved and hospitals and schools open. No. But - because of those little financial devices  called interest and dividends - the private sector is better than government at extracting money from the productive economy.

It is time to see that governments are more efficient in achieving the goals of public good. Look for that in Blog 30.

A little hint: the next blog will make a short observation on privatizing public services, with a glance at the New Zealand experience and the Ontario provincial government's current sale of shares in its publicly-owned hydro-electric company.

Till then, turn your lights off and go to bed early.