The Weiner Component #120 – The Shrinking Economic World: Interdependence

Seal of the United States Federal Reserve Syst...

English: Clockwise from top-left: Federal Rese...

English: Clockwise from top-left: Federal Reserve, Bank of England, European Central Bank, Bank of Canada (Note: Uploaded for use on Wikinews) (Photo credit: Wikipedia)

Logo of the United States Tennessee Valley Aut...

On the one hand each nation today tends to be strongly nationalistic seeing itself as a unique entity while on the other hand each of the national and regional groups are also strongly interdependent. When any one nation is adversely affected economically then all the others are also negatively impacted. A prime example of this would be the late 2008 bursting of the U.S. Real Estate Bubble whose effect was felt throughout the major industrial nations for at least seven years.

We are today in the 21st Century and interdependent; either we all prosper or we are all undergoing stages of recovery from different levels of recessions. This situation seems to be intensified in some of the 19 nations that make up the Eurozone, which is actually a smaller version of the overall economic world. Whether they survive as an economic unit or not depends upon decisions they will make in the next few months

Most countries have a central government bank like the Federal Reserve in the United States or the European Central Bank for the Eurozone but there is a wild card in all these countries or regions and that is the private banks. To some extent they are limited by the National Banking House but mainly they operate for profit in a Market Economy environment. These banks are motivated by profit and their lending policies can create money or shrink the expenditure of funds within an economy.

An example of this would be in the U.S. after the Real Estate Bubble burst in late 2008. The major banks had recently been bailed out of bankruptcy by the Federal Government with loans and were expected to have a loose money policy to enhance economic recovery. The private banks, however, became ultra-conservative, essentially hording their monies and considerably slowing down the rate of economic recovery.

These banks as they exist today are necessary for the functioning of any National economy.  But, mainly, they exist for profit through fees or the interest rate they charge on their depositor’s savings and checking accounts.  The banks are responsible for the flow of money through the entire economy. Their CEO’s or presidents take home salaries in the millions of dollars while the government banking houses like the FED or ECB take home salaries that are in the thousands of dollars. These private banks are necessary, yet they pose a contradiction within the Free Market system.

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The economic system of a nation works simply. It always seems to follow the following

model.

IMG

                                  THE NATIONAL BUSINESS CYCLE MODEL

 

The above model is continuous.  The duration of each cycle can vary from a relatively short period of one to several months to a number of years.  The Great Depression of 1929 lasted until the Second World War, ten to twelve years before recovery was completed.

All of this operates in a Market Economy where the forces of the Market or Free Enterprise determine what is happening.   And what causes the Market to operate is the goal of profit.  During a period of prosperity many businesses that are doing well want to expand and do better.  They generally borrow money from the banks in order to do this. There may in addition be a shortage of labor and wages will be bid up raising the costs of production. Eventually more is produced than can be sold, be it manufactured items or food products; prices drop, there is overproduction, people are laid off, unemployment rises.  The economy moves into a recession which can lead into a depression or if it misses that then directly into the recovery stage, and the cycle eventually begins again with a level of recovery.  This pattern has been endless lasting at times for months and at other times for years, or for some period between the two. And always it has been propelled by profit

This is, of course, a simplification of the many forces at work within each economy during the business cycle but it is essentially the root that powers the economies, the wild card that the Central Banks can never really totally control.  And when one country is affected it is like a virus that then spreads and in different degrees affects other nations.

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It can be and has been argued that a planned economy controlled by central planners in the government, as it was in the Soviet Union, never worked. They were always beset by bottlenecks when production stopped while the factory waited for some necessary part to be produced and shipped to them before they could finish their product. This did occur prior to World War II when the Soviet Union was undergoing its 5 Year Plans that were to turn it into an industrial nation.  And if we check carefully we will find that it did also occur in countries with the Market System.

It can also be argued that this is a form of socialism which is by definition bad and has never worked.  But if one examines the history of socialism he or she finds that it is a late 19th and early 20th century form of utopianism, which in many cases also had religious overtones. They were reaching for a state of being in an early industrial society where everyone could live happily and fairly ever after.  We are looking at a state of being that could not, with the limited resources that existed then, really exist at that time in history.

What we are considering now is a state of being that is utilitarian; that is a possible and logical outcome to what is the most efficient course of action today. Most industrial nations have from some to many aspects of the society that are operated by the government for the public good.

In the United States, for example, there is Social Security, Medicare, and Affordable Health Care to name some social programs.  One can even quote the Tennessee Valley Authority (TVA) which serves only a section of the country supplying water and electricity sold by the Federal Government.  Even some municipalities will sell water and/or electricity to their residents.  These are all social programs run for the public good rather than for profit.

Most industrial nations have many more social and industrial programs that cover their citizens from the cradle to the grave. Their taxes are high but their protections for their citizens are far more extensive than those in the United States where many of these programs cost the citizens far more than these other industrial nation’s people pay for them in taxes.

The problem as it exists in the United States and many other industrial nations is that most of the major banking houses are too big to fail.  They keep a goodly percentage of the cash flowing through the economy.  If they were to disappear by going bankrupt through bad speculation or otherwise then the nation or nations would go into a deep depression.  The banks are in the business of making large profits with their depositor’s money, which generally is insured by the Central or National Government, but their executives make decisions that could lose that money as happened toward the end of 2008 when the Real Estate Bubble burst.  The governments bailed out most of the banking houses like the Bank of America.  The banks were needed for the economy to keep functioning.

If we, as individuals, invest money foolishly we can lose our investment but if the banking houses do it the National Government using taxpayer money will have to pay for the loses. They seem to have an advantage over the rest of the society, a very unfair advantage.

In the March 4, 2015 edition of the Los Angeles Times there was a short article dealing with the J.P. Morgan Chase bank.  They were to pay 25,000 thousand homeowners $50 million for failing to properly review payment-charge notices sent to these homeowners in bankruptcy.  The bank acknowledged that it filed about 25,000 payment change notices without a proper review.  They were signed in the names of employees who no longer worked for the company or who hadn’t reviewed the filings.

If we do a review of the major banking houses from 2009 to the present we find that all of these banks paid fines to the Federal Government of multimillions of dollars for various nefarious and outright dishonest practices with virtually no one going to prison for any of the illegal activities.  Outside of a fine there has been no legal penalty for banking houses instigating illegal activities.  In fact even after the fines were paid the banks, in most cases, still made a profit on these activities.

Are there solutions to these problems?  The banking practices as they now work are completely out of kilter with the needs of society.  In fact in many instances they seem to go against the interests of the general public.  A simple solution to this would be in the United States to expand the powers of the Federal Reserve which would allow them to deal directly with the general public.

The Federal Reserve divides the United States into twelve Federal Reserve Zones. Each has a main Federal Reserve Bank and ancillary banks.  The zones could be expanded to also include Federal Commercial Banks that would deal directly with the public

There are many advantages to this. The Federal Reserve can exercise its power more rapidly over the overall economy as it continually adjusts the business cycle and national cash flow, keeping the economy in a healthier state.  The contradictions in the system disappear with the Federal Banks serving the people for their benefit and not for profit.  It makes for a far healthier economy and the negative shifts in the business cycle should be massively reduced in a positive direction.

As to the concept of interdependence we need a consortium of the heads or leaders from each of the National Banks who would meet regularly and have the power to deal with the problems that affect all the member nations.  They can work toward international levels of prosperity for all the member nations.

Is all of this possible in today’s world?  The major nations are presently cooperating in the direction of ending national flare-ups.  They are cooperating in attempting to wipe out the terrorist group ISIS and other terrorist groups in the Middle East and North Africa.

Setting up an international economic consortium would just be another step in this direction.  Currently there is the G-20, an international forum for the governments and central bank governors from 20 major nations.  It attempts to address issues that are international in content.  Collectively the G20’s nations account for around 85% of the gross world products, 80% of world trade, and 2/3ds of the world’s population.

They have been meeting annually since 1999.  Actually under other names they have been meeting since the end of World War II.  The leaders of these nations confer together and can bring home recommendations to their individual governments.  If the individual nations were to give up a percentage of their sovereignty the group’s representatives could meet more often and they could be given power to implement their economic recommendations as acts of international law.

In addition there is the United Nations which has operated on various levels since 1945, the end of the Second World War.  In part it has been politicalized but that can be changed and it can be brought to operate as a world union

The tools for all these changes already exist. All that is required is that they are positively developed.

German Logo of the ECB.

German Logo of the ECB. (Photo credit: Wikipedia)

The Weiner Component #64 – So Called Economic Prosperity & Economic Disaster

English: Monthly changes in the currency compo...

English: President Barack Obama confers with F...

English: President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia)

Economic growth has been increasing at a phenomenal rate; with the United States in the last quarter of 2013 reaching a point where there was a surplus, more money coming in in taxes than was being spent.  Dr. Ben Bernanke, the then chairman of the Federal Reserve felt that it was growing too rapidly.  Apparently complete economic recovery with a 6 ½  to 7 percent unemployment level does not really denote a healthy economy.  This would mean that we have an excess surplus percentage of the population that exists within our so-called healthy economy.

The question is how can you have economic recovery with 6 ½% to 7 % of the population still actively looking for employment?  And what about the group that has given up looking for work or those that are underemployed?  While we don’t know the exact numbers of these people they could make up another 6 ½ to 7 percent, or for that matter, the number could be greater.

Can we truly have prosperity with 10 to 14 percent unemployment and underemployment?  If we look at the statistics the amount of money available in the country, the GDP, has increased exponentially but the distribution of these massive funds have been and are in the process of changing with a greater and greater percentage going to the upper echelon of society and a smaller and smaller percentage going to everyone else.  General wages have essentially stayed the same or risen very slowly with prices rising at a slightly more rapid rate.  People are finding that their incomes, which may be slowly rising, are buying less and less each year.  This situation is reminiscent of the 16th Century when inflation existed for a 90 year period.  Wages remained essentially the same but the value of money, which was gold coins at that time continually decreased in value; that is, every year it bought less.

The 16th Century was the time that Spain looted the gold supply from the New World, the Americas, and yearly brought to Europe shiploads of gold that were almost immediately turned into coins and circulated throughout the continent.  As the amount of gold in circulation rose the value of the money dropped.  A small group became fabulously wealthy while the rest of society suffered without having an inkling of what was causing their misery.

We are essentially in the same position today.  A small group, the upper earning percentage of the population of the United States, is seeing their incomes explode while the bulk of the population is being pushed slowly economically downhill.  The country is recovering, both from the Real Estate Debacle of 2008 in terms of the amount of currency in circulation and seeing a growth of funds beyond that point, but the distribution of those dollars is giving that money to the upper echelon with a fractional increase to the general population and the high unemployment level continuing.

This is a scary scenario for the welfare of the country. We have more money available in the general society but a goodly number of people are excluded from any part of it.  The minimum wage remains at $7.25 an hour and we still have unacceptable levels of unemployment throughout the country.  As a note of irony we have couples working in the U.S. at the minimum wage level and still having to apply and receive Government aid in order to survive with a family of four.

The country seems to be returning to prosperity and misery at the same time.  Recovery would be better at a slower pace with unemployment decreasing as economic recovery is increasing.  Massive changes are necessary if overall economic health is to come about.

We are currently living in a society where the bulk of the population has no real understanding of economics.  They see everything in terms of their household budgets.  They see the government spending money it supposedly does not have, therefore throwing the country deeper and deeper into debt.

This, common sense approach, is all nonsense.  Most people still think of money as gold.  This is untrue.  There is nothing behind the dollar but the word of the government.  It prints and issues money as needed.  It also, through it many agencies like Social Security and Medicare and otherwise owns at least fifty percent of its own debt.  In 2013 the Federal Reserve turned over, well over seventy billion dollars to the Treasury.  Most, if not all of this, was interest from the National Debt which the Federal Government owes and owns.

Recovery would be better at a slower pace, but whether or not it occurs, changes are necessary if massive economic health is to come about.  We have to decide whether all people have a right to a minimum level of economic functionality or if one group deserves to have all the benefits that society can provide and the rest deserve to persist as best they can.  Actually if nothing is done the latter will occur.

Today money is a tool of the Federal Government used to effect economic health within the society.  There is no gold behind the dollar.  The Government prints what is needed for the society to function.  Its value is based upon the word of the Central Government.  The amount in circulation in the United States is controlled by the debt limit which is set by Congress.

Also the amount of money in circulation is determined by an inflation factor.  If there is too much money available, more money than goods and services available, then the value of the money decreases.  If, on the other hand, there is too little cash circulating in the general society then the value of the money increases and deflation occurs.  The Federal Reserve monitors this and attempts to keep a proper balance.

To the individual, the members of Congress, money has value.  It provides for their and their family’s needs.  If the members of Congress apply this position to National Expenditures then they are actually shrinking the economy and exacerbating negative conditions, tightening government spending and adding to unemployment.

It is an interesting conundrum.  Applying “common sense” family budgetary rules to the running of the United States could possibly bring about a recession or depression.

The basic principle, which is a hard one to comprehend and accept, is that consumption is as important as production.  Without consumption there is no need for production.  By allowing an ever increasing majority of the National Income to go to the upper percentage of the population there is less and less money available to the rest of the population.  Consequently the amount of goods and service they can consume is continually decreasing.  The system is working against itself.

Are we having real economic prosperity or is the country working toward economic disaster?  An interesting question!

 

 

 

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The Weiner Component #31 – Wealth and the Distribution of the National Income

Quarterly Gross Domestic Product (year-on-year...

Quarterly Gross Domestic Product (year-on-year growth in real GDP) and Unemployment Rate (simple monthly average) (Photo credit: Wikipedia)

It is interesting to note that the GDP for 2013 is higher than it was for 2008, which was before the Real Estate Crash; that corporate profits are higher than they have ever been; and that the stock market has reach a higher level than it ever was in 2008 or earlier.  We now have more money flowing through the economy than has ever been during the entire history of the United States.  Theoretically, it follows, that the economy should have recovered from the Debacle, unemployment should be down to 2 ½ to 3 ½ percent, and the overall society should be functioning positively for most of the population. 

This, of course, is not happening.  What has occurred instead is that we currently have, throughout the United States, an overall average of just below eight percent unemployment, with a number of people being underemployed or working part time.  At the moment Congress is putting the nation through the sequester which is making a percentage of the poor poorer, even to the point of limiting food programs for children and many pregnant women of the lower echelon of our society.  Some people may die from lack of food before this Congressional made crisis is over.  As the sequester fully comes into being there will be will be newborn infants among the casualties. (Malnutrition can cause death or improper brain development during the first few years of life.)  In addition unemployment will increase significantly.

 Why is this?  Between 2009 and 2013 there was a significant redistribution of the National Income, money has moved up to the upper few percent of the population, while incomes have stayed the same or decreased for the middle and lower classes.  Where the average compensation package for CEOs of large corporations was eight to ten million a year in 2008, it is sixteen to twenty million a year for these same people in 2012.  Meg Whitman, the current CEO of Hewlett Packard, who was hired several years ago to turn the company around after its stock dropped to 1/3 of its original value, received slightly over fifteen million dollars for 2012.  What would she have gotten if she had been successful?

Since the late 2008 Crash there has been an increase in population and gradually in overall demand for goods and services.  A goodly part of the population and been unemployed and underemployed and they have been able to afford very little.  Yet demand in 2012 and 2013 has increased significantly.  There has been economic growth but a significant percentage of the population has been left out of it.  A goodly part of the upper economic echelon has increased their earnings, taken more of the GDP than they did in 2008.  The economy has grown but a fair percentage of the population has been left high and dry.  

Every tax, including the income tax, in this country is regressive; the more one earns the smaller a percentage of their income is paid in taxes.  If the distribution of income had been on a fairer basis then practically all of the population would have money to satisfy their wants and needs.  The overall spending for goods and services would be substantially higher than it is now and productivity would increase well beyond what it is now.  Profits would rise above their present high level and everyone, including the upper two percent would be earning more that they currently are.  It is an interesting bit of irony that the well to do are actually reducing their potential earning by their own penurious policies.  If they allowed the minimum wage and overall salaries to rise they would be allowing themselves to make greater profits and not only would the general population be far better off but their profits would far exceed their current high levels.

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