The Cogs Blog

  

Blog 9   Global Birdseye 1

As the law of money now operates not just locally and nationally, but on a vast global scale, here’s a thought or two about the econopolitical moon’s eye view, starting with.

The mini and the maxi.  I have just returned from New Zealand. Went to Christchurch again. What a change from 2013. Instead of an earthquake-devastated cityscape of damaged buildings and wreckage-cleared downtown blocks from the 2010 and 2011 earthquakes, the dominant feature in 2015 was a forest of cranes — rebuilding. There were jobs aplenty especially in the wreckage-removal, design, and reconstruction trades. 

But here’s a tourists-eye mini observation: accommodation has not kept up with the inflow of workers and money. So you have a classic local example of the law of supply and demand — lodgings, from hotels to backpackers hostels, fully occupied, and more expensive than in 2013. 

A macro economic feature demonstrated in Christchurch, on the other hand, I assume, is the great growth in the economy. Growth That’s a good thing, isn’t it? Growing the economy, yes. If I were a number-cruncher economist, rather than a mere historical observer, I could be producing statistics to prove how good the earthquake had been for the the city. 

And surely it would be tempting to conclude that the two or three hundred people who were unfortunate collateral damage of the earthquake are a small price to pay for the current prosperity of the survivors, and for the great new, earthquake-proof city which is being created.

Money is certainly moving, from the taxpayers (municipal and national) to the shareholders of the many companies engaged in the reconstruction.

Would you call that the movement of wealth from borrowers to lenders? Hey, that’s the law of money!. Money goes where money is.

Just a thought.

Well, I might add one more thought to anticipate the next blog. What other human activity is an even bigger and longer-lasting destroyer-creator than an earthquake, and transfers even more wealth? Look around the world, and see what you can see. Think “collateral damage.”

Till the next blog. Just breath deep of the good air around you. 

Blog 8 Canadians Are Using the F-word!

                                    

 

 Blog #8    Canadians Are Using the F-Word ! 

No, no, not that F-word! 

A recent article in the CCPA  MONITOR, by respected Editor Emeritus, Ed Finn, used a more daring F-word. Title: “Fascism spreading in the U.S.  Will it spill over into Canada?” (Nov 2014, pp 38-39)  Highly recommended reading.

The word fascism came from classical Latin, fasces, which meant a bundle of sticks that was carried before a magistrate as a symbol of power. But the 1930’s regime of Benito Mussolini in Italy put the word into the vocabulary of modern political scientists. 

Finn recalls his own occasional use of it in recent years, then paraphrases fourteen points defining a fascist regime from Laurence Britt, and concludes that “there is evidence of all of these traits thriving in the US, and it’s clear some of them - especially the glorification of the military, suppression of unions, disdain of intellectuals, and obsession with crime and punishment - have greatly increased in Canada, too.” I would have added fraudulent elections, or the attempt thereat, given a recent Canadian scandal about telephone calls directing electors to false polling centres. And maybe something about the use of government money for political propaganda..

I did use the word myself in a privately circulated piece in 2011 when the Conservative government in Canada got their majority. I concluded that future Canadian historians would probably call this period neo-Fascist.

I will take another tilt at this topic in the next blog. Hope you will forgive me for a temporary shift from money to politics, but they are as closely meshed as a set of bevel gears.

Blog 7  Four Ways to Derail The Law of Money train.

First, a short digression: why do we buy what we do not need? This would best be dealt with in a friendly discussion circle, but it does relate to the law of money and the growth imperative. 

Remember those 20,000 pairs of additional shoes our company made and sold last year? Who is wearing them? Previously shoeless people in central Africa? Hmmn. No. Most of them are just on the closet floor with ten other pairs. Now, the average human being has only two feet to put shoes on. So why does she, or he, need ten (or twenty, or more) shoes taking up closet space? Think about it. It is part of the explanation why in rich western cities near me the houses in each new subdivision are larger than the last lot. Why? Because people  need more room for their excess stuff. I think we are getting on to something bigger here than shoes. 

Why do we buy more things than we need?

Tick your choice of the right answer

/A    Because we have the money.

/B    Addiction. We get a high from shopping.

/C    Because the media have relentlessly burned this message into our bunny brains until it has become a subconscious song: 

“Buy and you will be happy.”

/D All of the above

Well, food for thought. Now let’s get on to the law of money blog, but with a more significant topic. 

I promised to tell you the four ways of obstructing or diverting the inevitable flow of wealth from the many to the few. What measures or devices can counteract the law of money?

  

#1   Noblesse oblige. (Pronounced no bless oh bleej)

This is a French mediaeval term meaning that if you have wealth, you have a moral obligation to put some of it back into circulation. It comes from a period in Europe, when land was the principal basis of wealth. Much of the land was owned by the “nobility”. (By 1789, in France, they owned most of it. See Item #4.)  

In the present century, there is still some noblesse oblige. Even some of the super-rich display it. I might name  Soros, Buffet, Gates, in America

#2   Government redistribution.

This is done by taxation; but it must be graduated taxation. That is, “the more you make, the higher thepercentage taken in taxes.”

 A “flat tax” — such as a 20% across the board value-added (VAT) or retail sales tax (GST)— has no effect on the upward flow of money. The richest still benefit and the poorest lose most.

So how does government redistribution work? A social-democratic government levies the tax and then distributes it to the general population via education, and health care (the two big ones), pensions, public utilities, and other subsidies that benefit citizens more equally than the law of money does. They also enact laws enabling workers to organize. (See #3, next.) 

Corporatist-Fascist governments, on the other hand enable the law of money to operate. But I’ll try to unpack that political topic in a later blog.

#3   Free collective bargaining by workers. 

Two parties compete for the profits of a commercial, industrial or financial enterprise: the workers and the shareholders/owners. They are always on opposite sides of the table at feeding time. 

Individually, the owners are more effective than the workers in securing a larger share of the profit pie.   

Workers are stronger when they have the right to bargain collectively. 

Note that shareholders are lenders; workers are more likely to be borrowers. So by the law of money they are at opposite ends of the pipe, when it comes to the flow of money.

#4  Innovative technology, like, this overhead device developed for the French Revolution (1789). 

These devices come into play  when the law of money has reached a certain critical extreme.  The art of politics is to prevent that extreme from being reached. 

Well, this has been a heavy blog. If your mind has gone to mush, try re-reading the Four Ways part later.

But I will return to some of that political stuff in, shorter, future blogs.   

No 6  Growing the Economy

Growth. Growth sounds like a good thing. Unless it’s a bump on the head, or, maybe, economic growth.

For a simplified example of economic growth, think of a shoe manufacturing company which last year made and sold 265,433 shoes - mostly in pairs. (They do have a few one-legged customers.) 

The growth imperative - the need to pay interest on the firm’s existing debt - presses the management to cut costs somehow and/or to make and sell more shoes. They figure they cannot cut wages until the current union contract runs out (“If only we could get rid of the union.”) 

So they have borrowed another $200,000. to extend the factory floor and install better shoemaking machinery.

This year, with the new machinery they expect to make and sell an additional 20,000 pairs of shoes at a profit of $10 a pair - a $200,000 increase in profit. Great work Sampson! Smart management, Simpson. Enough to pay off the debt. Well, not quite. Remember the rent. By the end of the year the loan plus accumulated interest at 5% will stand in the bank’s books at $210,000. Oh well, maybe next year we’ll be able to give a dividend increase to our other creditors - the shareholders. (If we don’t, CEO Simpson will be replaced.)

Still, the company added 20,000 pairs of shoes in new wealth, and made a profit. They also added $200,000 to the GDP figures. Conventional economists are happy to see that. We want to see the economy grow, do we not?

Well, I don’t know. How many pairs of shoes does one person need? And why would anyone buy more shoes than they need? Next blog I’ll digress a little to give a short, suggestive answer to those questions , before going on to the main stuff.

No 5  The Growth Imperative

So almost all money is created as loans, large and small, made by banks. And, you might say, the rent is called interest.

The problem is, banks do not create the money to pay the rent. They create the credit money they lend, but not the interest, which must be paid.

So will some wizard explain, please. where the rent is expected to come from,

It cannot be from the cash supply created by government. There is less and less of that, and banks have long had a dream (nearly accomplished) of a “cashless society”. In a cashless society, every transaction will be made with credit/debit cards, checks, bank-to-bank transfers, and other credit-money devices, all bearing interest (and other charges). 

OK, OK, so get on with it. Tell us: where does the interest money come from?

First here’s a question: what would happen if every borrower in a country, or the whole world, paid off their loans? That sounds like a great revolutionary idea. But it’s really a trick question. They could not do it, no matter how much they wanted to - because there is not nearly enough money to do it. and what money there, is mostly in the hands of the lenders already.

We are mortgaged well into the future.

The future, however, is where conventional monetary theory finds the solution. To pay the rent on our borrowed money supply, we must in the future create more wealth. 

Okay. How do we create more wealth? Let’s first define wealth.

Real wealth is land and properties, railways and farm tractors, and oil and lumber, it is manufactured goods, it is food, it is automobiles and yachts. It is also the infrastructure and machinery necessary to build more properties, extract and refine more oil, harvest more lumber, manufacture more goods, grow more food.

Creating more of that wealth, it is said, will pay the rent on our borrowed money supply.

You hear about it all the time. To maintain/return to prosperity, we are told, we must “grow the economy”. All stripes of conventional economists report and comment extensively on the percentage of GDP* growth this month, or this quarter. They cheer when the index goes up, frown when it goes down. Growth, they say, growth is the magic bullet.  (*Gross Domestic Product)

Maybe they just do not want to face the alternative. Maybe they are unable to conceive of an alternative.

Think of interest as a tax on the whole economy levied not by governments but by the banking system - a tax which can only be paid with economic growth in the form of newly created items of wealth.

I call that the growth imperative. In the next post, I will try to give an example.

No 4  Where’s Waldo - that interest factor?

Most of our money, the credit money behind a loan or behind your debit/credit card - the money we all do our major business with - is not cash that you can hold in your hand. But it is a loan, a loan of bank credit, for which interest must be paid.

Interest is why the law of money operates, why money goes where money is. 

To explain with two examples: one my size, and then a giant size. 

If I, or you, have $100,000 and you lend it out at, say, 3% interest, you receive $3000 in interest payments at the end of the year. Correct? 

Your borrower still owes you the $!00,000, however. Thirty-three years at that rate and you have nearly doubled your money. (You have had 33 times $3000 to spend at your pleasure.) And your borrower still owes you the $100,000. Good play, Shakespeare! Whatever your borrower has had to do to acquire those interest payments, he/she has been working for you for thirty-three years!

So, financially, it is better to be a lender than a borrower. As that little transaction plays out, wealth has flowed from your borrower to you.

Interest is the simple mechanism by which money goes where money is. It is like icing on the cake.

Example 2. 

Let’s go big. Let’s take the money in the world economy, trillions and trillions of dollars, yen, rupees, pesos - most of it created by commercial banks. Now, in case you did not notice, let me point out a simple, highly significant fact. Those banks create the money supply and lend it to us. But they do not create the interest, our “rent” for the use of the money. So the question is, where does the rent/interest come from if it is not part of the money supply created by the banks?

Come back next week, and we’ll try to figure out where the interest payments must come from. That will be a big blog. Meanwhile, think about it in terms of “growth”. It may be hard to conceive, but my challenge is to put it in clear, understandable language.

No 3   Bank Loan: Endless Investment - for the Bank

Remember the law: Money goes where money is.

So, you have obtained some money from your financial institution - not cash, but credit money. What was the key question you asked before signing, (and signing, and signing) the papers to get the loan? Give yourself a complimentary check mark if you asked, "What's the rate of interest on this loan?"                     

This blog is about interest. We might call it rent. You can live in this $25,000 Loan Street dwelling as long as you pay the interest. Correct? But, no, you say, we have to pay back the principal of the loan.

No, no, and no!

Now this may be a little difficult to grasp, too. The bank does not want you to pay back the principal, ever. So long as you pay the rent, you can continue to keep the credit money. The only reason you would want to pay back the money is to get rid of the rent payments. The advantage of paying back the principal is all on your side.

From the bank’s point of view, when you pay back the loan, they have to write a profitable asset off their books. No loans, no profit. No profit - no dividends for shareholders. The expectation that you will pay off the principal is just window dressing. They created the credit in your account so that you would pay them a rental fee, for as long as you will. It makes simple sense to the lender. When you, the borrower, return the principal of the loan, you stop paying the rent for it. That is to your advantage, is it not?

In the next blog we will jump from the simple money-creation scene in the bank to the big picture of a world economy rooted in that simple scene.