"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.

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

Blog  28   "The Economy is Slowing!"

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      ---)-    ----)-     -----)-      ------)-

Blog 27 Ten Economic Myths to be Junked

Blog 27  Ten Economic Myths - A Series  


What makes the garden grow? 
Water. 
Yes, smart answer. How did you figure that out? 

So what makes the economy grow? 
Austerity, and Debt Reduction.  
Sorry, dead WRONG! Even the International Monetary Fund has changed its tune on that one.

Think "water" and "flowers."

                                                              MONEY
 NATIONAL ECONOMY

Substitute "Money" and "National Economy" for water and flowers.

Footnote:  It would be best to use government-created non-debt money,  rather than borrowed money, of course.

The next three or four blogs will be devoted to "The Big Story" in the December 2015 issue of New Internationalist.  NI is a British journal, established in the 1970's, The journal's title has a renewed relevance in these days when globalizers are getting closer to supplanting the national states with a really, really big government, bigger than any nation, and too big to be democratically responsible.

The cover title of the article is 10 EconomicMyths that we need to junk.

Some Background

The greatest war in the world, as we write, is not the war between men and women, not the war between Russia (or China) and America, nor the war between Muslims and Christians*, but the war between global corporations and national states
However, safely bunkered between the productive corporations (the manufacturing, mining, agricultural and other "real-economy" corporations), on the one hand, and, on the other hand, the public economies of national states (taxing and spending mainly for societal necessities), there is a third always smiling but mighty player. Like a colossus, with one foot on either side of the battleground, supporting, for a price, both sides, stands the almost non-productive financial corporations, the banks.

Why are they able to do this? Because of their power of CREATING money to lend - to all parties. Ever noticed that it is not just national states that have large debilitating debts, but that most corporations have big debts on their books, too? And money goes where money is - from borrowers to lenders. Banks are the happy creators and lenders of almost all f the world's money,

So in this global war, it is important to distinguish THREE parties, each with a separate agenda: global corporations, national states, and banks.
Of course, behind the scenes - in a bunker built of corporate stock certificates,  are the real rulers of the world, who own the corporations, including the banks.  In the shorter term it matters not to them who wins or loses. They know that, no matter what, it is better to be a lender than a borrower, and that when times are tough, cash is king - and very useful for buying up fire sale assets.  

Small print disclosure. Your CogsBlogger is a minor member of that class: does no useful work; lives on his rents. But maybe can see the way to a better construction of the world's economy.
So next blog will continue to look at New Internationalist's Myths to be junked.

*Footnote:  Christians should read the Koran. They will be amazed to see how much they have in common with Muslims. Both were, remember, derived from Judaism - with just a dash of paganism.

Blog 26 Some Random Thots on the Law of Money

Some Random Thots on the Law of Money


The law of money (Money goes where money is,) works at global, national, state, even municipal, levels.

The two most obvious mechanisms are interest-bearing loans (the basic step) and capital gains on assets (a little more chancy, but sometimes very effective). 

1. Interest-bearing loans.

It must be understood that there are two classes of people: (net) lenders and (net) borrowers. Net lenders lend more than they borrow. Net borrowers borrow more than they lend. Simple distinction?

Charles Dickens, whose father spent some time in debtors' prison, put it this way: "The different between a happy man and an unhappy man is two shillings. The happy man lives one shilling below his income. The unhappy man lives one shilling above his income."

So how to work the law of money? Take the next dollar you earn. Put ten cents of it in a box and leave it there. You can spend the rest. Do that for every dollar eyou ever acquire for the rest of your life. Whenever your box gets full, take the money out and lend it to a bank by depositing it in an interest-bearing account. Never borrow.

You have now become a happy net lender on the way to becoming an owner of slaves - because over time the borrowers become slaves of the lenders (The bank will be your "courteous enforcer").



Be wary, though, that you, or your bank, are not too harsh on your borrowers, because at certain times in the history of nations and economies, it becomes dangerous or even fatal to be a too-successful lender.

I trust that you see, nevertheless, that the law of money makes it better to be a lender than a borrower.

2. Capital Gains on Assets

This means buying assets at low prices and selling them at higher prices. The assets can be property, or stocks, or commodities, or currencies, or works of art, or...  Now, Hold it right there. Don't get over-excited at all those opportunities. Just a caution. Whenever you are a buyer, there is a seller, who may be smarter than you. Whenever you are a seller, there is a buyer, who may be smarter than you. Maybe you might just stick to lending money at interest for a while.

Buying corporate stock for dividends is a hybrid sort of process. Approach with caution also.

So lend money at interest. The more income you can make by lending your money at interest, the more money you will have to lend at interest. and the more money you have to lend at interest, the more money you have to lend at interest, the more to lend at interest, to lend at interest, at interest. It''s what lenders call "the miracle of compound interest." Borrowers have other names for it.

Let me finish with another caution. You will also be happier if you keep the value of money in perspective - as a means, not an end.

Pursuing money can become like feeding a food addict until he/she looks like an explosion about to happen...
Let me say it again: money, like food, is a means to an end, a means to something else, not an end in itself. Keep your eye on the something else, whatever it may be.

Now, that's a lean thot to meditate on.

Son, what do you want to be when you grow up?

I want to be the 1%.

Well, that would give you only 99 slaves.

.

Debt, Deficit, What's the Difference?

debt-deficit-debt-deficit-debt-deficit-

Blog 25
The  "Balanced Budget." Does Nobody Know the Difference Between Debt and Deficit?






First, let me introduce what has exuberantly been called "the miracle of compound interest." Here is a true story to illustrate it.

In 1974 a nation-state, which we will not name but call Nation X, had accumulated a national debt of about $20 billion. Debt means money you owe. On money you owe, you have to pay interest. So one item in their budget that year was "Interest on Debt".

Over the next 20 years, they had a small number of annual deficits that rang up another $30 billion in debt. That is, in those years the government spent $30 billion more than it took in. That is the definition of deficit; spending more than you take in. To pay the bills in the deficit years, the government borrowed enough to balance the books for the year.

So in the year 1994 the total national debt of Nation X was roughly $600 billion.

Let's look at that.

Debt at start, 1974............................20 billion
Deficits added 1974-1994................30 billion
        Total Debt 1994.....................600 billion

How's that? Did I get it right? You say 20 plus 30 does not equal 600? But it did. And by what is called "the miracle of compound interest."
I should note that only lenders call it the miracle of compound interest. Borrowers, like the government of Nation X, are entitled to call it the curse of compound interest.

The circumstances in the 1980's were, admittedly, unusual. Interest rates rose to over 18%. So the compounding of interest - that is, interest on the non-payment of interest on accumulated interest, on accumulated interest, on accumulated interest, year after year, made a small addition to the national debt for Nation X of $550 billion.

In short, for 50 billion borrowed, Nation X is on the hook for about 12 times that amount. How was that made to happen?

Well, in they mid-1970's, unbeknown to most people, the lending class had become unhappy with "negative interest rates". (Negative interest rate means that the rate of inflation is higher than the rate of interest of, say, government bonds.) Thus inflation eats up a lender's profits. So a concerted effort was made, starting in the US, but engaging major lenders everywhere, to teach the national states a lesson. Interest rates were ramped up. Lenders loved it. (That includes lenders in Nation X.)

The point of looking at these figures now in late 2015 is that conditions today are eerily similar. Inflation and interest rates are close to equal and have been for some time.

To calculate what a new twenty years of deficits, high interest rates and debt-building would do for Nation X's little $600 billion debt -- well, let's just say that it's beyond your poor blogger's computing skills. But $600 billion times 12, I think, is a mere $7,200,000,000,000. Boggles the intellect, doesn't it?

Poor Greece. Poor Nation X. Who's next?

We can't move in there, Dad.It's going to collapse.

Afraid so, son.

So why do "democratic" politicians only talk about deficit-vs-balanced budget, and never mention the accumulated gross debt? Because it is too complicated for the people to understand, they say.

Bah, humbug! We are smarter than they think.

Maybe it's just too difficult for some politicians to understand. Some certainly do. But I think they may be quietly muzzled- "because it is too complicated for the people to understand." 

 Feel free to copy this blog and send it to your local representative.

Blog 24 One More Poke at the Canada Election

 Blog 24  One More Poke at the Canada Election

Some observations which, I promise, will quote you no percentages, give you no stats, mention no numbers of any kind. Well, grant me just one. At the end. If you persist in reading that far.


The Canada election was a considerable triumph for democracy, "the rule of the people."
Seniors are still the most faithful voters. They have lived long; some do not like change. Political cartoonists might want to call that the gerontological factor in elections. Young people, especially those burdened with college debt, or "thriving" on two or three part-time jobs, are more likely to welcome, or demand change. This election seems to have brought them to the polls, and we all got change.

By a large majority the youngest of four candidates was elected Prime Minister.

The defeated PM, whose fascist credentials you can review in Blog 8, "Canadians are using the "f-word", was decidedly defeated by the demos - the people - who rejected his anti-democratic,anti-government policies, and were probable put off, too, by what they perceived as his ill-concealed, haughty contempt for them.

It is possible that people of all ages deplored the personal attack ads, which are relatively new in Canadian elections. The approach certainly did not work for the governing Conservatives, who started their banner TV ad early in the long election period, and ran it madly until the last week. Maybe they just chose a bad angle of attack, with the slogan, "He just isn't ready." Rather clever if you look at it closely: the target was the Liberal leader, whose first name was Justin (Justin, just isn't. Get it?) I didn't get it either until I began writing this blog. But by the end of a very long campaign, a majority of voters, perhaps encouraged by the ad itself to think about it, voted that Justin, ready or not was better than the other guy, Steve Harper. So Justin Trudeau was duly voted in as PM.

  Is he ready?
  Ready for what?

For what is perceived as a declining economy, he offers deficit budgets in the short term - and stimulation through government spending on infrastructure, etc.

If he gets good advice and transfers government debt to the Bank of Canada to cover those deficits (instead of borrowing from foreign private bankers), then a deficit or two, well spent, is a very good move at this time in world history.

Can he act against the will of the big lenders - the safely-established upper level of the economic pyramid? A government can't afford to run deficits, goes their mantra: it must reduce taxes (theirs) and cut expenditures (on everybody else). In oner words the rich lenders say, take less taxes from, and pay more interest to, us. And, somehow balance the budget. Then leave it to us. That's what we elected you for.

Austerity, that is. It remains the buzzword around the world. Readers of this blog probably know by now why it is absolutely the wrong policy, that what national governments should do in times when money is needed in the economy is put money, debt-free money, into it. Then, in boom times, manage the national finances to reduce debt.

Speaking of the debt, and nobody does, the interest on the national debt is now the third-largest item in any Canadian government's budget. Think about that. The debt has soared since the mid-1970's* when the governments of much of the developed world were persuaded to turn over their borrowing to private lenders instead of taxing and creating money to fuel their own national economies. Poor Greece.

*Justin Trudeau's father, Pierre Elliott Trudeau was Prime Minister at the time.

But Canada has an almost unique power to buck that wrong-headed policy, since its Central Bank is actually owned by the government. That's right. the Bank of Canada pays all its dividends to the Finance Minister. No, not to his personal account. (That's happens only in more advanced dictatorships.)

But that's the topic for the next blog, which may have a few figures  Tentative Title: The Balanced Budget. Doesn't anybody know the difference between the words deficit and debt?

Blog 23  Canada Votes. What For?


What's the name of that political party? The NDP?

Oh yes, the New Democratic Party. Incidentally, the party is not that new. It was founded in 1961, when its current leader, Tom Mulcair was about age seven. Its predecessor was  the Cooperative Commonwealth Federation - the CCF.

Now there is a name to capture a political following.
"Cooperative." Yes, that's the Canadian way. Just the opposite of "Competitive," the quintessential American way.

And "Commonwealth," now there is a term worth longing for in these days when the 1% own most of the world's wealth. The word gained currency in England in the 17th century after King Charles I,  executed in 1649, was unable to continue his full duties as a monarch.  From 1649 to 1660 they called Britain a Commonwealth.

And "Federation." From the Latin word,  foedus, - a treaty or an ally - the word might be defined as a treaty or union agreement. We could do with a little more unity in the world in 2015.

Then there's the neo-fascist Conservative Party of Prime Minister Harper (See Blog 8, "Canadians are Using the F-word.)  Personally, Harper is a smooth ideologue whose worst crime historians will probably identify as his 31-year investors' protection treaty with China. It is a treaty that may just change the face of Canada during its term. China's biggest export is, arguably, people. The Chinese, I learned on a recent visit, call westerners "Big Noses". I hope that when they are a  dominant majority in western countries they will treat their visible minority better than the Big Noses have treated some of their own indigenous visible minorities.

I also hope the election does not confirm the view that Canada is a hotbed of bigots and cowards. But that is what "The Harper" is betting on.
Still, in a nominal democracy - government by popular vote - people do get the kind of government they deserve.

So, whom would I vote for ? Undoubtably the Green Party. Now be careful. Don't say, "That a would be a wasted vote. They can't possibly win," because I would have to reply to you personally, 

"Oh, you must be a horse-race voter. You don't have any idea of what the issues are or what the parties represent, or promise. You vote just so that you can have the warm fuzzy feeling of being on the winning side. How pathetic! Did your mother not love you, dear?"

I might add that if I voted for anyone other than the one I perceived to be the best candidate, I would be wasting my vote. And, if I was having a bad day, I might further add, "If you smartened up a bit and voted for the best candidate, too, you might see better governments elected."

Well, back to the law of money next week, with a more temperate tone, I trust.