The Weiner Component Vol 2 #1 Part 2 The Introduction

Deviations from the long term growth trend US ...

Deviations from the long term growth trend US 1954–2005 (Photo credit: Wikipedia)

Business Cycle

Business Cycle (Photo credit: Wikipedia)

To avoid the vicissitudes of the business cycle and the inequality of the distribution of the National Income, the Gross Domestic Product, we need a new economic model or we have to make intensive changes in our present system.  If we stay essentially with our present model then the government has through a tax and redistribution system to balance incomes. A realistic minimum standard of living has to be set.  Those earning more than this level will have to be taxed on a realistic graduated level.  Those earning less would receive transfer payments from the government to bring their standard of living up to the minimum level which has to allow for a decent standard of living.  With this system, which more or less exists today in many European nations, we can keep the profit system and have all its so-called advantages.  But would this end the vicissitudes of the Business Cycle?

 

The amount of productivity today per working unit/person is constantly increasing.  One individual working continually provides for more and more people.  In order to keep constantly producing goods and services this productivity must be continually used up so more is always needed.  Consumption now becomes as important as production if the economy is to continually grow.  Therefore the consumer whether or not he/she is employed is needed as much as the producer.  This system can only flourish through government taxes and a redistribution of the National Income.  The producers can earn assorted amounts of surplus income which they can spend, save or invest while the unemployed or underemployed population can receive government transfer payments which will allow them to properly consume the necessary goods and services to both keep production going and have a decent standard of living.

 

Of course if we can create a new economic model which would allow for a fair distribution of goods and services without using the profit system then we would be far better off.  But this would probably require a complete change in our overall thinking and value systems.  We would also have to deal with the issues of what to produce and how to produce it without the motivating force of the profit system. 

   

Is it possible?  We would have to separate production of goods and services from money and find another reason to labor other than individual profit.

 

There is a disparity between the use of money as income, a means of exchange, and storage for labor and profits.  The distribution and expenditure of money determines where we are on the Business Cycle.  This, in turn, can throw the economy into recession or depression and cause a breakdown in the production of goods and services and partial or massive unemployment.  The extent of the distribution of money can cause a partial or full cessation in the distribution of goods and services.  They are two separate entities that are tied together in an unwholesome relationship.  If they were separated the economy would be far better off.  The problem, of course, is how to separate them.

 

Generally speaking, the overall public reaction to all of this is to return to the thinking of the late Nineteenth Century: the “safety” of the profit system. This, I believe, President Donald J. Trump will attempt to do; and this, seems to be today, the basic Republican value for economic growth.

 

     MONEY: ITS HISTORY AND USE:  The two entities which keep any economy functioning are self-interest and money.  Self-interest would affect every working individual from owner, entrepreneur, to physical laborer who wants the greatest return he/she can get from their endeavors.  Money is the grease that operates the economy: it is wages, salaries, profits, rents, interest, and dividends.  The spending of money determines demand, production, and also the phases of the Business Cycle.

 

The entrepreneur, factory or store owner will charge the greatest amount they can legitimately and pay his employees the least amount they can get away with.  Thus prices will be as high as possible while money paid to worker will be as low as it can be.  The producer will maximize production to increase profits; the workers will not be able to purchase all the goods and services produced because of low wages and over-production will eventually result.  This will lead to recession, unemployment, business failures, and depression.  Self-interest, which is the major motivating force of the economy, also tends to eventually cause the economy to malfunction into depression.

 

What is the problem?  It is the process of the distribution of money throughout the economy.  Whenever the distribution breaks down the economy goes into recession and depression.  It ceases to operate for the benefit of its members.

 

The use and distribution of money becomes the problem.  What then is money?

 

To understand what it is and its use(s) we need to have knowledge of how money was used both historically and at present.  Presumably, at first, man begins with barter: goods and services were directly exchanged for goods and services.  At some later point in time these were exchanged for their exact value, generally, in precious metals.  Rather than continue using scales to weigh the metal one group of traders, probably the Phoenicians, began stamping the weight on the metal piece.  This became the initial use of money.  The idea was then picked up by other groups or nations and coins came into being: an exact weight of a precious metal with the country or ruler or some symbol stamped on the metal to guarantee its value.  What happens here is that a good is exchanged for its exact value in the metal: equal value for equal value.  This allowed for free trade throughout the Mediterranean several thousand years ago.

 

Money, as it existed at this time, was labor or a good whose value was exchanged for its equivalent in gold, silver, or cooper coins.  Similar worth was exchanged for similar worth.

 

As time proceeded the coins became more ornate.  Rulers images were stamped on the coins, various designs were used.  Different denominations appeared, allowing coins to be minted in different sizes and weights; and also in different metals.  And thus was value exchanged for value, money for goods and services.

 

Of course, into this economic system occasionally various enterprising individuals and/or governments began a process of “watering” some of the coins minted; that is, mixing base metal with the gold or silver, thereby hoping to get more goods and services for less gold or silver.  This process would be done on a large scale by such individuals as the Roman Emperor, Nero; who tended to need more money than he could collect in taxes.  The result was to cheapen the value of the specie bringing about inflation which also resulted in a lowering of overall wages and other disruptive problems to the economy.

 

However, this economic system worked and continued to work successfully as long as conditions in the society(ies) were stable; that is, there is no rapid infusion of massive amounts of gold or if large amounts of money don’t have to be transferred over distant areas.

 

The discovery of the New World by Christopher Columbus brought into Europe, in the Sixteenth Century, massive amounts of gold over a fairly short period of time.  The Americas were systematically looted.  The gold passing through Spain and went on to the Netherlands, which was ruled by the same person as Spain, and then into rapid circulation throughout Europe.  This caused, what has been referred to as, “The Gold Revolution” which decreased significantly and continually the value of gold in its relationship to goods and services, and brought about unbelievable economic hardships to the wage earning working classes of Europe.  Wages remained essentially fixed while the value of the money dropped continually in a never ending cycle of inflation; thus bringing about a tremendous drop in standards of living.  It took about a century for a new reasonable balance between the value of gold in relation to the cost of goods and services to come about.   

 

Another problem which could upset the economies was large scale trade over great distances and/or between different nations. There was great danger from bands of thieves on land or pirates when shipping gold over bodies of water.  A safe way had to be found to ship gold. 

 

During the late Middle Ages different cities, city-states, provinces, and countries became known for producing certain products.  These were desired throughout Europe.  Also some of the Italian city-states, after gaining control of the Mediterranean Sea, gained a monopoly of trade with the East for spices and other products.  (It was the search for a new route to the East that brought about Columbus’ expedition.)  This and other factors brought about a need for the safe transfer of specie over long distances.  In addition the breakdown of Feudalism and the rise of Kings brought about a necessity for the availability of large amounts of money for the payment of armies and other large scale projects.

 

To offset these economic needs there arose in various cities: first in the Germanies and then in the Italian city-states merchant families who eventually traded in money as a commodity.  These became the merchant bankers of the Hanseatic League and the Italian city-states.  They set up branches of their banks in different countries which allowed for immediate transfers of gold; and they became in many cases the new nobility: the merchant princes.  Of the Medici family of Italy two of the women became queens in France and one of the Medici became a pope.  Cosimo, the founder of the family had been a money lender whose symbol of trade was three brass balls.

 

From the Italian Renaissance on (Fourteenth Century) banking was fully developed with the banking families, in many instances, ruling the Italian city-states.  The goods of the East came to Europe by way of the eastern Mediterranean, through the Italian city-states, and on to the general population of the continent.  The fleets of ships plying that sea were controlled by the merchants of the city-states; who also controlled banking and, among other enterprises, made high interest loans to the emerging kings.

 

It was the potential profits from the trade that caused the new nations like Spain, Portugal, England, and France to explore, searching for a new route to the East.  This was the justification for sailing west to get to Asia and thus discovering the Americas.  Prince Henry of Portugal began sending expeditions south, exploring Africa trying to find a river crossing Africa west to east.  Eventually one of the expeditions rounded that continent and was able to bring back to Europe a cargo of spices worth many times the value of the ship and cost of the expedition.  Portugal controlled that trade for about fifty years. 

 

With the new routes and the emergence of pirates in the eastern Mediterranean, Italy lost control of that body of water and the trade and profits moved to the new emerging nations.  Incidentally the Renaissance now became the Northern Renaissance and banking and trade moved to these countries.

 

Money, during this period, remained as it had always been: equal in value to the goods and services for which it was exchanged.  Spain’s looting of the gold from the New World and having it pass directly into the European economy brought about a 90 year period of inflation in the Sixteenth Century but did not change the concept of value for value.  Actually by making gold more plentiful and less expensive it allowed for a more rapid economic growth.

 

With the coming of the wonders of the Industrial Revolution (the development of machines going from wood to metal, transportation: put a steam engine on wheels and you have a train, advances in medicine: ever increasing abilities to fight the assorted diseases, phenomenal population growth, advances in metallurgy, gas and electric engines, etc., etc.) the nations of the planet underwent massive changes: national populations went from the low millions to the high millions approaching and exceeding in one or two cases a billion people.

 

As we moved into the Twentieth Century (in addition to the major wars which wiped out millions) with the tremendous growth of business, of  the needs for ever increasing goods and services there were not enough precious metals to allow for an exchange of goods and services based upon value for value.  For this and other reasons in 1929 we have the Great Depression.

 

Paper money when it was first used consisted of silver and gold certificates which supposedly could be exchanged for actual specie at any time at one’s bank.  (However, if everyone were to do it at the same time there would be a run on the banks and they might well become bankrupt because there was never enough metal to satisfy everyone’s needs.)  In point of fact the Industrial nations eventually got off the direct gold standard by collecting and storing the gold bullion and printing paper money supposedly based upon the value of this stored bullion.  Silver coins would maintain a certain amount of precious metal for a while.  Later in the Twentieth Century virtually all nations will go off the gold standard basing the value of the money on the prestige of the particular country. The remaining silver coins became copper sandwiches.  By the beginning of the Twenty-first Century money is, in all cases, devoid of any precious metal or anything else of real value except the credit of the nation issuing it.

                 ***********************************

Since 2008, when the United States went through what is generally called today The Great Recession the country has been recovering from what could have easily been The Greatest Depression in its history.  This economic condition had been building rapidly since the presidency of Ronald Reagan in the 1980s, when all government restrictions on trade, many of which were developed by the Roosevelt administration during the Great Depression, had been done away with by the Reagan administration.  The banking industry in the country had a free hand to do whatever they wanted.  And what they wanted was to increase their profits astronomically.

 

The banking industry convinced a large percentage of homeowners to turn their homes into bank accounts by a process of continually taking equity funds out of their homes.  They did this by constantly refinancing their properties.  In the process of doing this the paper value of the homes continually increased.  Presumably people were spending what they believed was their never ending increases.

 

This became rampart from the Reagan administration on.  By 2007 the oncoming crash was apparent but the banking industry was in denial.  At that point mortgage refinancing was raised to 125% of the appraised value of the home.  In 2008 the crash came and the Housing Industry collapsed.  Many of the banking houses were overextended and also at the point of collapse or bankruptcy. 

 

Since the basic financial structure of the entire economy or nation is based upon the banking structure and their functioning the Bush administration in 2008 lent large amounts to the banks.  This, however, was not enough money and the incoming Obama administration had to make more massive loans to the banking houses in order to save them.  The Obama administration also set conditions about massive remunerations to executives which the Bush people had not done.

All of this was in 2008 and 2009.  The trillions of dollars the Federal Government spent at this time saved the country from going into a more massive depression than that of 1929.  In fact we would still be coming out of it if the government had not jumped in. 

 

What emerged instead has been called The Great Recession.  In 2009 the unemployment rate had risen to 7.6%.  By 2010 it had reached 9.8%.  Thereafter it began to fall, reaching 4.6% by November of 2016.

 

In this process millions of people were underwater in their homes, suddenly owing more on the house than it was worth.  The banks, with aid from the government, largely recovered, with some being taken over by other banking houses.  Even with virtually no regulation some of the banking actions were illegal.  No one went to jail.  Instead the banks paid fines, which taken together were in the billions of dollars. The banks eventually repaid their government loans and executive pay rose to new heights.

 

We are still in a recession, with unemployment at the tail end of December 2016 at 4.5%.  For recovery, on the business model to occur, the range of people not working would have to reach 2.5%.  Is that a future possibility with President Donald Trump?  Probably not.  Since the Republican image of creating jobs has nothing to do with current levels of economic understanding.  They believe that jobs are created by doing away with government regulation.  It would seem that by their way of thinking as pollution increases and so do jobs.

The Weiner Component #130 – The World Economies & the Greek Crisis

On Monday, June 29 2015, the leading indicators on the American stock market took a sharp dive; the DOW dropped 350.33 points and the NASDAQ went down 122.04 points.

All this because Greece was at the point of near bankruptcy, with a massive payment that was due Tuesday June 30, which the government couldn’t and didn’t meet. Negotiations for a new loan broke down the Friday before, when the Greek negotiating team walked out of the meeting. The Greek Prime Minister, Alexis Tsipras and the leftist Syriza party who were elected to end austerity, called for a referendum to be held a week later, letting the people decide what to do. The next day, Tuesday June 30th 2015, Greece defaulted on its debt.  On Wednesday, July 1, the Greek government attempted to come to an agreement with the European Central Bank. When the referendum was held a week later the majority of Greek citizens voted against paying back the debt.

********************************

The Greeks through nefarious practices for the last decade or so were able to hide the fact that the government was spending far more than it was taking in in taxes. They continually kept spending far more than the GDP (Gross Domestic Product), the amount of wealth the country produced. In addition Greece apparently has a lot more tax cheaters than any of the other European nations, consequently they estimate that about 20 million euros worth of taxes and their earnings were/are going into numbered Swiss bank accounts.   The American firm, Goldman Sacks, had earlier engendered creative economics for multi-million dollar fees and allowed the government and people of Greece and other countries, some of which were part of the 19 nations of the Eurozone, to engage in picturesque bookkeeping and spend far more than they should have.

At the beginning of 2010 it was discovered that Greece had paid Goldman Sacks and other banks millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing. The most notable is a major currency swap that hid billions worth of Greek debts and loans which were factiously converted into yen and dollars, thus hiding the true extent of the debt. The purpose of this and similar actions was that these various Greek governments could continue spending. An interesting short term solution to an ever growing long term problem that would eventually explode.

The process of paying back its debt, currently set at 270 billion dollars, began toward the end of 2008 with a massive economic collapse. The financial crash that occurred at this time in the United States and beyond, diversely effected Greece, Portugal, Spain, and Italy of the Eurozone Nations. These countries had been working since that time to get themselves out of debt. They have not succeeded, actually Greece has significantly increased her level of debt.

Greece has now essentially defaulted on a repayment instalment of 1.7 billion dollars that was due on June 30, 2015. She could only meet this payment if she borrowed all of the funds from the European Central Bank plus an addition 50 to 60 billion dollars to keep herself functioning.  It’s a movement of figures in different columns of the banks bookkeeping that seems to go on forever with the debt never disappearing but continually growing.

On the first Saturday in July the people of Greece voted on a referendum determining whether or not they should pay back their debt to the nations of the Eurozone.  I understand that the referendum was fairly complex and that a lot of people had a problem determining exactly what it meant.  Also the government recommended a no vote.  They came out with a strong no vote.  Consequently the Greeks defaulted upon their debt but may still un-default it.

Currently Greece’s unemployment level is over 25%.  For the last six years the government has been paying back this debt without really diminishing the principle because she has to borrow to do so.  And the country has undergone ever increasing levels of privation in order to do this and accomplished nothing.  The banks were closed in Greece by government order and the amount of cash that could be taken out of ATM machines was very limited. The country essentially limped along close to total bankruptcy.  Much more money was needed than the country had in order to make the installment payments that Greece seemed to have or could reasonable get.  A real solution to this matter seemed highly problematic.

******************************

One of the major basic questions dealing with Greece and the Eurozone is what is really National Wealth?  Is it money or the goods and services produced within a given amount of time, usually a fiscal year, stated in terms of money value?

Money, for about the last fifty years has had nothing behind it but the word of the government issuing it.  Its domestic value is determined by what people will sell or take for it and internationally by what other countries will trade for it.  Basically, today, it is a tool, which allows the exchange of goods and services within the particular nation and throughout the world.  In essence it is the grease that allows the economies to function. Without an acceptable form of currency a nation faces complete economic disaster.

The problem with printing more money, which is a power the Greek Government does not have as a member of the Eurozone, is that too much money in circulation tends to force up the price of goods and services as people compete for these items.  It will eventually bring about a depression.  On the other hand too little money in circulation tends to reduce the amount of goods and services needed, as people are limited in what they can afford.  This can also bring about a recession leading to a depression. The trick is to have enough in circulation so that maximum productivity can be reached and maintained.  This also has to be gradually increased as the population of the nation increases.  In Greece today there is not enough funds left to service either the needs of the country or the debt.

People are taking their funds out of the country leaving the banks with a shortage of cash. The banks were closed several weeks ago to end a run on them with long lines waiting to withdraw their cash. The country was either days or hours away from total bankruptcy when the banks were closed.  Currently Greece is trapped in an ever increasing cycle of growing debt in order to just maintain its existence.

*****************************

The Eurozone today is in a situation fraught with contradictions.  When the Eurozone were first formed in 1999 the 19 nations agreed to function as a single economic unit with a single currency working through a central bank.  Meanwhile, with the exception of currency control, each of the 19 independent states gave up none of their sovereignty and still continued to act as an independent entity. Some of these 19 nations were far more economically secure than others.  Greece was one of the poorer nations that acted like the wealthier states and continually spent more money than it could realistically afford.

Up until the end of 2008 the U.S. and other industrial nations were a-flow with money. Then, starting with the United States, the Housing Bubble burst and property values in that country went down the toilet.  Internationally the flow of money tightened.  Suddenly Greece and these other countries were heavily in debt.  In order to meet these debt payments the governments had to divert a good percentage of their taxes.  An ever larger percentage of the GDP left these countries and there was not enough left to perform the regular services which the governments ordinarily provided.  This in turn forced the governments to lay off large numbers of government employees which, in turn, exacerbated unemployment and decreased the GDP.  In order to meet these payments Greece had to borrow more funds from the European Central Bank, actually increasing its debt.  With a shrinking economy the government had to further economize in an attempt to meet its payments.  This caused more and more economic shrinkage in the country.

What currently exists in Greece is a lose, lose situation with no hope in sight and well over 50% of the population in the referendum have voted for permanent default.  But if the Central Bank in the Eurozone grants this then Portugal, Italy, Spain and Ireland may demand the same treatment.  In fact it could become a pattern with some of its members.  Yet if it doesn’t grant relief they also face an impossible situation.  Greece is currently just days ahead of its banks running out of money and going into bankruptcy. It’s quite a dilemma.

*****************************

In the United States toward the end of 2008 a similar situation existed.  This was caused by the explosion of the Real Estate Bubble brought about by the large banks in the country over a thirty year period.  The banks had divided each of the many home mortgages into hundreds of pieces and the different pieces were combined and sold in a multitude of different Hedge Funds.  Actually no one owned the mortgages, just fractional pieces of them.  The large banks financed or refinanced the mortgage paper, then sold the pieces, administered everything and charged fees for everything they did. Once the mortgages were sold the money was lent out again.  It was an endless process with the banks collecting multimillions in fees. In this way a million dollars could fund one hundred million or more in mortgages.  The banks were in such a hurry to continue the process that they devised an unbelievable sloppy system of record keeping that was fraught with error.  This meant there was no accurate record keeping of the multitude of transactions.

When the Real Estate Bubble burst in late 2008 the large banks began foreclosing on properties that they did not own.  It took a while for the courts to realize the fraud and all the large banking houses were fined heavily for these and other illegal actions.  What the country faced was a possible twenty years or more of insane confusion in the housing industry and a depression greater than that of 1929.  With the addition factor that most of the large banking houses in the U.S. could go under and the movement of money throughout the country would become a trickle.

The first actions were taken by President George W. Bush during his last few months in office when the Federal Government began the process of bailing out most of the banks. This was followed by President Barak Obama who successfully continued bailing out most of the large banking houses and also the auto industry and avoided a deep depression.

The housing crisis was largely solved by the Federal Reserve under the sterling leadership of Ben Bernanke, who for a period of over two years bought 45 billion dollars’ worth of mortgage paper every month, spending well over a trillion dollars.  The mortgages came from all 50 states and were all fractional shares of an endless number of properties.  In essence what the FED did was to contribute well over a trillion dollars to this enterprise with no way of collecting any of it back.  In fact it contributed this amount of money to the general welfare and growth of the economy.  And the process brought back a level of prosperity and solved the mortgage dilemma in a period of just a few years.

The difference between this solution and the current problem in the Eurozone is that no one in the United States has ever mentioned what was being done.  All that the FED announced was that they were buying back mortgage paper.  There was never any discussion about the morality of the issue or the fact that they would never be able to cash these mortgages.  To my knowledge no one questioned the meaning of this statement.  If the country and Congress had been aware of what was happening we might still be in the middle of the mortgage crisis that the banks in their greed caused. People do not like someone else to get something for free even if it indirectly benefits them.

***********************************

Over the July 4th Weekend the majority of the Greek population voted to reject the current austerity negotiations with the other Eurozone nations.  As a result the European, American, and other stock markets dropped on the following Monday.

Basically the issue is with what is the Central European Bank dealing? Is the issue the Greek default on an impossible debt?   Or is it a problem the Eurozone is facing regarding one or some of her members?  If it’s the former then default is inevitable sooner or later with the lack of stability that would follow this action.  If, on the other hand, the issue is the latter then it becomes a problem of the entire Eurozone and its solution is one involving all the states of the Eurozone.  The result of this could be a new stability for all the states within the Eurozone.

We’ve seen that dealing with this issue totally as a Greek problem is insolvable from any aspect.  If other members of the Eurozone want to punish Greece for excess spending over a decade that ended 6 or 7 years ago they are not only hurting Greece but also themselves and their own futures.  But if this issue is dealt with as a Eurozone problem then there are possible solutions from which all of the Eurozone states can benefit.

What is required is a consortium of all the Eurozone states to handle not just Greece’s economic problem but also that of Spain, Portugal, and Italy. They are also in debt to the European Central Bank. If it is everyone’s problem they all need to participate in its solution.

Basically what these states have to deal with is the setting up of a central legislative body representing all of the states that can determine what is best for all of the states. They need to bring about a United States of Europe that has the authority to function for the benefit of all the states within the Eurozone.  And all the states need to give up some of their sovereign rights for the good of the union. This, incidentally, was their original goal

Numerous problems will have to be faced and resolved, particularly in terms of the extent of representation each state will have in this new union.  With a union each state would be stronger than it currently is and the euro would be back on a solid footing as one of the world’s safest forms of money. The European Central Bank would be the European version of the American Federal Reserve and the world’s stock markets would again be more stable.

Is this possible? That’s a good question. There are innumerable problems that have to be solved before this can come about.  But if the answer is, yes, then there would be more stability not only in the Eurozone but also throughout all the industrial nations.

*************************************

It would seem that the interests of Germany, France, and some of the other members are against Greece defaulting and exiting from the Eurozone.  Rather than fall out of the Eurozone on Thursday, July 9, 2015 the Greek government capitulated by delivering a new package of economic reforms to the ECB, raising taxes and the retirement age. Faced with the collapse of the country’s banking system and total economic catastrophe the government yielded on the issues that led to the previous collapse on a new rescue plan.  The retirement age is being pushed to 67 and government pensions are being cut by 15% for government workers who retired at age 62 after 40 year of employment.  The government will also withhold more taxes from state salaries and pensions and deduct a 6% healthcare premium from retirees’ checks.  The reforms are projected to generate at least 13.2 billion dollars in revenue over the next two years.

Currently the Greek debt is over 175% of its GDP.  It needs to be reduced or rescheduled over a longer period of time with the interest rates kept low to prevent the debt from growing. The Greek people need to take a more realistic attitude about repayment.

On Monday, July 13, 2015, after long hours of deliberation, with some states of the Eurozone arguing that the Greek prime minister’s word could not be trusted, the other states agreed to bail out Greece with a loan of about 50 billion euros.  Presumably Greece will pass further economizing measures and the loan will be implemented gradually. There is a payment due on the debt in about two years and Greece will be able to reduce her debt somewhat at that time if she adheres to her agreement.

The problems that the Greek government has to meet at this time is to economize enough to at least make a payment on her debt and also to restore the confidence of her own population in her banking system. The probability is that as soon as the banks are reopened within the country there will be at least a light run on them.  Presently the Greek Government’s solution is to reopen the banks and only allow very limited withdrawals.  Many people with large enough incomes may deposit the salaries in other countries, fearing that the bank closure could happen again.  It will take time for domestic confidence to be restored.  And a payment must be met in about two years.

Another problem which effects the entire Eurozone is one dealing with the declining value of the euro. The euro when it first appeared was worth about 1.5 dollars.  Last year with the infusion of a large amount of euros by the European Central Bank into the national flow of the Eurozone it dropped to about 100.3 percent of the dollar. On Monday July 13 with the current solution to the Greek Crisis the euro was worth 90.51 cents to the dollar. On Tuesday, July 14, the euro had risen to 1.1034 to the dollar. What will happen to its value in the future?  I suppose that is dependent on how well the Eurozone continues to function.

Greece will have a payment due in about two years. If she is able to make a payment  and not have to borrow more money then, the Eurozone will function properly and the value of the euro will have risen.  If, on the other hand, Greece has to borrow money again to just stay alive then there is no telling what the disaster will be for the Eurozone.

On Monday, July 20, 2015 the banks in Greece reopened; but the amount that could be withdrawn from any account was severely limited. What does this portend for the immediate future?  We’ll have to wait and see.

(Footnote:  To my readers: you must forgive me for not responding to your enquiries.  I get innumerable requests daily.  If I answered all of them I wouldn’t have time left to write the blog.  Virtually all your enquiries are answered in The Weiner Component #122 – Responding To Your Enquiries.)

English: Alexis Tsipras in a press conference ...

English: Alexis Tsipras in a press conference in Komotini. Ελληνικά: Συνέντευξη Τύπου του Αλέξη Τσίπρα στο ξενοδοχείο Ξενία στα πλαίσια της επίσκεψης του στην Κομοτηνή 13.11.2008 (Photo credit: Wikipedia)

 

English: Greece's recent debt history, between...

English: Greece’s recent debt history, between 1999 and 2010. (Photo credit: Wikipedia)

 

The Weiner Component #94 – Consumption Equals Production

Comparison of real GDP using BEA Deflator vs r...

Comparison of real GDP using BEA Deflator vs real GDP using Money Supply (Photo credit: Wikipedia)

Much has been stated and written during the 20th Century about the production of goods, about how production brings about the consumption of a particular product, there are theories about how a finished good will find its own market.

How valid are these beliefs? If the product or products are highly desired as those produced by a company like Apple then the theory would seem to be valid. Apple, while not a monopoly, produces unique items. But if the product is an automobile like a Ford, Chrysler, Volkswagen, or Honda then the theory is limited. First off there are a number of national and international companies competing for the sale of their product. Automobiles are expensive items. Only a certain number is needed on the market or can be afforded; and these can be new or used. If a seemingly endless amount are produced by the assorted companies then at some point the price will decrease and will continue to do so until the cost of producing the vehicle could be greater than the price for which it can be sold. What we have here is a question of demand and supply, not a theory of production; and even that is an anomaly because supply is engendered by demand.

The term supply and demand is actually the opposite of what it should be: Demand determines Supply. An entrepreneur will produce and market virtually any product from which he can make a profit. He is, after all, in the business of making money; profit is his major goal as an entrepreneur.

It would seem that the ability to purchase, having the funds to pay for goods and services, determines the extent of the production of wealth. After all free access of money determines the production of all goods and services.

In the period leading up to the Housing Bubble of 2008 a goodly percentage of homeowners used their homes as bank accounts, freely remortgaging again and again, in order to acquire whatever they wanted. There was essentially full employment and everyone was doing well, that is both consumers and producers. When the bubble exploded, because of the abuse of the banks, and housing values collapsed like lead weights many consumers were suddenly left underwater, owing more on their homes than they were worth. Consumption of both goods and services came to screeching halt and the economy tanked. There was suddenly massive unemployment. Generally outside of absolute necessities the public could not afford to consume and we were headed for a massive depression which the federal government was able to forestall by massive loans to some industries.

What happened here was that consumption of goods and services stopped when the money supply dried-up. It was the massive sudden termination of consumption that brought about the extent of the crash. Limited consumption had engendered what was largely the end of a production boom and unemployment suddenly became massive.

What suddenly happened in the economy was that consumption determined production. The ability of people to freely spend money had suddenly ended and unemployment almost instantly rose to phenomenal heights. The same people who could no longer spend were those who mainly suffered from the lack of spending. An interesting note of irony!

Money, currency was and is a tool issued by the government of the nation. It has no intrinsic value and can be freely issued by the central government. All that is required for an additional release of this paper is for the government to print it and issue it.

The problem is that if too much of this paper is released into the general society, if the people have more currency than the amount of goods and services that can be produced then the cost of the materials that can be produced within the society will be bid up and mad inflation can be the result. If, on the other hand there is too little money in circulation the public will be limited in what they can buy and a recession and large-scale unemployment will result. The government, in issuing currency has to keep a constant balance between these two positions.

The basic problem or problems here is that the government has to keep a balance and distribute this money, the national income, on the widest possible level throughout the society for maximum demand.

The principle here is that Demand Equals Production. And for maximum demand to occur the money, the national income, must be distributed throughout the entire society.

Unfortunately what is currently happening is the opposite of what should be occurring. Since 2009 a greater and greater share of the national income is and has been moving up to the upper twenty percent of the society. They are currently earning far more than they can possibly spend and their surplus funds in the millions are being stored while the bottom twenty percent is getting less and less of the national income, and the middle class is, in most cases, just barely maintaining itself or just about shrinking in size. There has been a redistribution of income continually going on.

In order for the economy to grow and for everyone to reach a level of prosperity the federal government has to take control of the national income and widen its distribution to include the entire economy. One way this can be done is through tax and entitlement policies. Another way would be by fiscal policies, Congress passing legislation to upgrade the infrastructure of the United States and bring it into the 21st Century. Of course a combination of the two would be even more effective.

The 2014 Midterm Election will give the country an opportunity to decide in what direction it wants to go for the next two years: with the Republicans toward continued gridlock or with the Democrats attempting to move toward fiscal policy, possible tax reform, and toward full employment.

The Republican conservatives who represent the well-to-do CEOs and successful entrepreneurs are generally representing congressional gridlock. They don’t want any changes in the economic system. But if they were to look closely at the system they would discover that their economic base is slowly shrinking. As more and more people are slowly being forced from the middle class to the lower class their ability to consume goods and services is slowly also shrinking. As the percentage of the poor goes from 20% to 22% to 25% to 30% their shrinking incomes will be able to buy less of the goods and services this society is capable of producing and the GDP will decrease at a greater rate than these people’s incomes. The profits possible will also shrink and so will the incomes of the upper 20%.

In essence these people are contributing millions of dollars in political elections to support an economic system that in the long run will significantly reduce their profits and shrink the GDP.

If they were to reverse their positions and support the Democratic positions of fiscal spending and reform of the tax system then they would be engendering a phenomenal growth in the GDP which, in turn, would massively increase their profits and incomes. By fairly paying taxes and encouraging the Federal Government to bring the infrastructure up to standards in the 21st Century the upper 20th percent could multitudinously increase their profits and income far beyond what they would be paying in increased taxes.

It’s a wonderful piece of irony, having the upper echelon of our society fighting tooth-and-nail against their own long-term economic interests.

English: Changes in US Money supply based on F...

English: Changes in US Money supply based on Federal Reserve historical data. Source code is in File:Components of US Money supply.svg (Photo credit: Wikipedia)

 

 

 

 

 

The Weiner Component #73 – The Problem of the Distribution of the National Income

Manhattan Panoramic View, NYC

One of the greatest misnomers to come out of the 2008 Real Estate Debacle was that the CEOs’ large compensation packages and the massive spending by the general public were closely interrelated.  The spending affected the extent of the salaries but it was separate from them.  The bundling of mortgages caused the Real Estate Bubble.  Going back to the last two decades of the 20th Century many individuals and families began to add their home equity to their incomes in order to enjoy all the comforts possible.  With the continual rise of real estate values over a thirty plus year period this seemed infinitely possible.  With the ever-growing demand for major and minor items by the general property owning public the country was in a period of immense profit for all types of retail concerns.  People bought cars, boats, bigger houses in better neighborhoods.  They frequented restaurants, bought new clothing, TVs, almost anything.  As corporate profits increased CEOs demanded and got greater and greater bonuses and overall compensation packages.  There was full employment; banks were earning greater and greater profits.  The country, the world was living in a sort of fairyland that would presumably go on forever.

And then, at the tail end of 2008, the bubble burst and hard reality set in.  Property values dropped, in many cases, well over fifty percent.  Demand for products fell and there was massive unemployment.  People could not meet their bills.  Many owed far more on their homes than they were worth.  Everyone, including the CEOs faced disaster.  Then the government jumped in with $900 billion worth of loans and saved both the banking industry and the country from a massive depression.

The CEOs were very frustrated.  They had gotten these phenomenal salaries and now they were gone or practically gone.  For some bonuses had been cut in half.  The CEO of Bank of America was very upset particularly after President Obama had insisted that no bailout money be used to pay bonuses.

In addition corporate profits dropped significantly at the end of 2008.  The country was in unbelievable economic pain.  By 2010 the economy was expanding again.  This continued through 2011, 2012, 2013, and 2014.  During 2011 Congress slowed growth with the Debt Ceiling crises.  The next year the fiscal cliff held the economy hostage, again reducing job growth.  By 2013 many workers had left the labor force, because of constant inability to find almost any kind of work, supposedly reducing the unemployment rate.

In 2008, with the crash, the Gross Domestic Product was $14,720.3 trillion.  The GDP per capita was $48,951.  The following year it dropped to $14,417.9 trillion with the per capita level at $47,041.  In 2010 it slightly exceeded the 2008 level and in 2011 it was $15,533.8 trillion with the per capita rate at $48,282.  By 2012 the country was in the $16 trillion level and by 2914 it has reached $17 trillion with the per capita level also rising.

The unemployment level increased significantly from the end of 2008 on rising to 9.9% of the workforce and then gradually dropping by 2013 to about 6.7%.  Keep in mind that this percentage does not include those that are underemployed or who have given up looking for work.  We can only guess at these numbers.

Of course the irony of all this is the level of the per capita income which would give a family of four if it existed in real life a little under two hundred thousand dollars a year.  What exists is a wide distribution of incomes with the bulk of the $17 trillion going to a very small percentage of the population.  For example a person working at Wal-Mart for $7.25 an hour with a family of four would have to apply for food stamps and other government aid in order to survive while the CEO of any giant corporation would be earning about a million dollars a month or more.  If I remember correctly the CEO of Hewlett Packard received about $15 million in 2013.  The general compensation for CEOs could be more or slightly less.

Interestingly in cases like that of Wal-Mart it is the taxpayer, who generally is earning a lot less than the per capita level of income, that pick up the difference needed for the Wal-Mart worker’s family to survive through the various entitlement programs the federal and state governments provide.

Wages, salaries, compensation packages vary greatly.  Only a very small percentage would reach the actual level of the per capita income.  And a much smaller percentage would be above it.  And still a much smaller number, perhaps a hand-full, would have their income in the millions of dollars.  There are even a few in the billion dollar category.

President Franklin Delano Roosevelt, during the Great Depression and again during World War II, stated that a person could only spend so much during a year or during a lifetime.  There was no need for them to earn that much more.  He wanted to tax excess profits.  Congress in neither case would go completely along with him.

Currently the tax system is set up so that anyone earning over $140,000 a year pays a fixed rate on everything earned over this amount.  The more he earns over this the smaller is the percentage of his income that he pays in taxes.  This means that the average family earning under $140,000 a year, which is most of us, pays a greater percentage of their income in federal taxes.  In essence the rich can store endless barrels of money for countless future generations or use some of the money to buy elections while everyone else can do without and just generally survive, with some people not even really surviving.  In the case of corporate subsidies, this money can be used for lobbying and political campaigns to buy influence in the federal and state governments even though it is indirectly paid by the taxpayer.

Obviously there is something wrong with this system.  Something in the way of reform has to be brought about or eventually tragedy will occur.  People will accept a lot of inequities but eventually these inequities become so blatant and their misery so great that they will violently be objected to.

The rich seemingly have endless amounts of money.  They are using some of it to influence the general public in elections.  In essence they are buying influence in government which is being used for their own benefits.

 

Enhanced by Zemanta

The Weiner Component #67 – Monetary & Fiscal Policy & The National Debt

During the late 18th Century, when the United States first came into existence and for the majority of the 19th Century, the U.S. Government followed a policy of laissez faire; with the exception of import duties, used to run the government, they kept hands off all economic activity within the nation.  Toward the end of the 19th Century, with the growth of cities, rapid industrialization and the emergence of monopolies, society became too complicated to be left alone by the Federal Government.  State and   National regulations began to come about attempting to control the economic ravages brought about by the moneyed classes which had and continued to lead to miserable conditions for the masses, and included both recessions and depressions.

In addition to assorted laws regulating conditions with the society in 1913 the Federal Government created the Federal Reserve as a semi-autonomous agency whose mission was to control the National Cash Flow, the amount of money available throughout the economy.  They were to add or subtract cash as needed to keep economic growth regular and avoid rapid upturns or downturns in the economy.

This became one of the major tools in attempting to control economic conditions within the nation.  Were they always successful in what they did?  The answer is obviously, No.  Witness the Great Depression of 1929 and the Real Estate Debacle of 2008.

The other major tool which the Federal Government had/has was Fiscal Policy.  This is the power to spend money by passing a law.  Congress, with the signature of the President can appropriate money for any purpose it deems necessary.  This was done during the Great Depression and enabled Roosevelt to propagate his New Deal and later to pay for World War II.  Congress, at the time, spent much more money than it took in in taxes.  Eisenhower did the same thing in the 1950s, both to build a national highway system across the United States and to fight the Korean War (police action).  This use of fiscal policy has been used over the years of our history to do numerous things, generally for the benefit of the entire country.

During the Great Depression the economist, John Maynard Keynes, promulgated what is called Keynesian Economics, which stated that during periods of economic contraction the government has to spend more money than it takes in in taxes and during periods of expansion or growth it can balance that by taking in more money than it spends.  He is considered the progenitor of Macroeconomics.

While this is not always true, generally because of war or police actions, still, historically, the economy has grown to the point of decreasing the percentage of debt in relation to the Gross Domestic Product, the amount of wealth produced in one fiscal year.  The National Debt has never been a problem in our history for future generations.

It should be noted that the Debt reached its astronomical level beginning with the Administration of Ronald Reagan and his Star Wars policy.  It went from 848 billion in 1981 to 2.698 trillion by 1989, a 218% increase.  Then it continued to zoom with George H.W. Bush and his Desert Storm operation increasing another 55% to 4.188 trillion.  It increased another 37% with Bill Clinton and was actually reduced during his eighth year in office.  The Nation Debt took off like a high flying rocket with the Administration of George W Bush and his policy of two wars, one in Afghanistan and the other in Iraq, while at the same time he lowered taxes.  It rose 86% to 5.778 trillion.  With Barak Obama the amount of the Debt initially increased but by the end of 2013 reached a surplus.  The National Debt grew voluminously under Republican presidents and tended to decrease under Democratic Presidents after rising somewhat.

The National Debt is currently at about 17.3 trillion dollars.  Is this too high?  Is this amount endangering the country in any way?

It should be noted that the nation began in debt.  During the Revolutionary War the Continental Congress issued paper money, called Continentals, to pay its debts.  The value of this money varied depending on how well we were doing in the war at the time; it never commanded full face value.  The British paid for everything in gold. After the war the new government, under the first Secretary of the Treasury, Alexander Hamilton, redeemed this paper for full face value.  There had been speculation with the Continentals and a number of people, not the original possessors of the funds, made a fortune on this.  They had bought up the currency for pennies on the dollar. (See Charles Beard, The Economic Interpretation of the Constitution.)

Jefferson hated the debt and tried to get rid of it, but under his presidency the United States got involved in an undeclared war with the Barbary Pirates, the North African nations along the Mediterranean.  Other presidents had similar occurrences, facing military crises not of their making.  There have been a few short periods over our history when there was no National Debt; but generally the United States has always had one.  The question in terms of today is: Does the current debt endanger the welfare of the nation?

The National Debt consists of two parts, one public and one private.  The public part of the debt is owned in various ways by the Federal Government, the private section is money borrowed for short to long periods of time by individuals, foreign nations, and other entities.

The Federal Government admits to owning, through various government agencies like Social Security and Medicare at least 40% of its own debt.  Social Security, for example, holds well over 1 ½ trillion dollars in debt paper.  This was several years ago.  Today, I would estimate, the Federal Government holds 60 to 70% of its own debt.  I would be inclined to quote the higher figure.

During the last quarter of 2013 the Federal Government collected more in taxes than it spent.  There was a surplus.  This would indicated that the GDP has grown to a point where it is or can handle the National Debt and in all probability very gradually decrease it.

It should also be noted that since 2011 when the Republican majority first took over the House of Representatives there has been no fiscal policy.  If anything Congress has reduced government spending to the point of shrinking the government and entitlement spending.  This process together with the shrinkage of State governments because of decreased taxes has phenomenally decreased government employment on all levels and exacerbated the 2008 Recession.  What has saved the country from another Great Depression has been imaginative Monetary Policy.

Had there been Fiscal Policy since 2011 unemployment would have dropped to about 3% or less and the Gross Domestic Product would have been far higher than it is.  Virtually everyone in the country would have been better off.

With Republican help we are doing a good job of holding back economic growth and not bringing the United States solidly into the 21st Century.

 

 

 

 

 

The Weiner Component #66 – Macroeconomics & the GDP

Imagine a giant caldron or pot as high and as large as the tallest building you’ve ever seen,

The western front of the United States Capitol...

The western front of the United States Capitol. The Capitol serves as the seat of government for the United States Congress, the legislative branch of the U.S. federal government. It is located in Washington, D.C., on top of Capitol Hill at the east end of the National Mall. The building is marked by its central dome above a rotunda and two wings. It is an exemplar of the Neoclassical architecture style. (Photo credit: Wikipedia)

filled[ with money, paper bills, with over 17 trillion dollars in it.  This is the Gross Domestic Product, the GDP, the amount of wealth produced in one year in the United States.  It represents the monetary value of all the goods and services produced and consumed in a twelve month period.  The money is a paper means of exchanging all this wealth and productivity, all the goods and services produced in one fiscal year.  It has no real value except as a token of transfer, goods and services for goods and services.  There is nothing behind the dollar except the word of the Federal Government.  Gold, which has a high value, cannot be used for money because there is not enough of it in existence to meet the financial needs of any of the many industrial nations.

The real wealth is what is produced and exchanged.  The money is merely the means of exchange that rates one unit of productivity against another and is used nationally or internationally.  The currency, then, is the tool through which this system of exchange occurs.  It can be used immediately or stored in institutions like banks or credit unions and used at some point in the future.  Money can also be used as a commodity, loaned or rented out with interest for a period of time or it can be used for all sorts of investments that pay interest or dividends.  It is in every case a tool to satisfy different types of wants and needs.

To consider money as the source of wealth is to be naïve.  The amount one has through earnings or inheritance can be used as a sort of score to determine one’s level of success against that of all other people in the society.  It is a government supplied tool that allows for the productive functioning of society.

It is the responsibility of the Federal Government to keep enough of it in circulation, a constant cash flow, so that full productivity occurs.  A shortage of the money supply in the nation can cause economic recession and eventual depression.  An excess amount of money in the National Economy can bring about run-away inflation, too much money available for the goods and services produced.  The Federal Government’s task is to provide just enough for full employment and full creation of the goods and services needed for the highest possible standard of living for the entire population.

This is not easy and requires constant readjustment because, according to the U.S. Census Bureau the population of the nation is increasing at the rate of one additional person every eleven seconds.  This figure includes births, immigration, and deaths.  In 2010, the time of the last National Census, the estimated population was 308,745,536, and this was considered a low count.  While an adjustment upward was made a year later this figure was used for the apportionment of seats in the House of Representatives.

One has to keep in mind that in addition to this number the population since then has increased at the rate of 5.46 people per minute, 327.27 per hour, 7,854.55 per day, 54,981.81 per week, 2,866,911 per year, plus another 7,854 for leap years.  The money supply has to be continually increased to keep up with these ever-growing numbers or the country moves in the direction of economic constriction, unemployment, recession, and finally depression.  All this is supposed to be done by the Federal Reserve with the aid of Congress and the President.

The Federal Reserve continually monitors the economy and continually makes its adjustments through Monetary Policy.  It can strongly but not completely affect the amount and flow of currency. The other section of the Federal Government that is supposed to continually affect the level of economic prosperity in the country is Congress.  They do this through fiscal policy; passing laws that can diminish or create employment throughout the United States by either increasing or decreasing government spending.  In essence through the passage of laws they can constrict or expand the cash flow and the level of employment

If we look at the actions of the Republicans in the House of Representatives from 2011 on, when they gained control of that body, it would seem that they by their actions are working very hard to bring this country into an economic depression and not allow for any recovery from the Real Estate Debacle of 2008.  We are still, six years later at seven plus percent unemployment.  Millions of people are still not earning enough to maintain a decent standard of living.  There is growing hunger in America, that many people are not food secure.  What are the Republicans proposing and trying to push through Congress?  Massively reducing food stamp and other programs that are vital for the proper survival of fifteen or more million people.

Their version of job creation is to massively reduce Federal spending for entitlement programs while wasting twenty-five billion dollars on shutting down the Federal Government for a period of time.  If one looked for a plan to destroy the United States or make it into a third rate nation then one would do exactly what the Republicans in Congress have been and are trying to achieve, to bring a large part of the population into despair and desolation.

The Republicans are acting like the Hoover Administration did from 1929, when the Great Depression broke, until 1933, when the Roosevelt Administration came into being.  Is it an act of maliciousness or just simply economic ignorance?  They are attempting to run the country as they run or ran their household budgets.  One Tea Party Congressman stated that he understood economics because he had raised a family.  They are making money the object of value and ignoring the potential productivity of the nation.  They are actually using the principles of Microeconomics, which works well with households, businesses, and state and municipal governments but can create disaster if it is used to run an industrial nation of over 300 million people.

 


 

Enhanced by Zemanta

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!

 

 

 

Enhanced by Zemanta

The Weiner Component #34 – The Function of Government: Adding money to the Economy

English: Detail from Government. Mural by Elih...

English: Detail from Government. Mural by Elihu Vedder. Lobby to Main Reading Room, Library of Congress Thomas Jefferson Building, Washington, D.C. Main figure is seated atop a pedestal saying “GOVERNMENT” and holding a tablet saying “A GOVERNMENT / OF THE PEOPLE / BY THE PEOPLE / FOR THE PEOPLE”. Artist’s signature is “ELIHU VEDDER / ROMA–1896”. (Photo credit: Wikipedia)

One of the functions of government, according to the Preamble to the Constitution is to “provide for the common welfare” of all the people.  In addition to other means of doing this the Federal Government is supposed to supply enough currency to meet the needs of the population, always keeping the amount below an inflationary spiral. 

 In times of recession when there is not enough money in the National Cash Flow the government has and should utilize its two major means of adding currency to the flow.  These are Monetary Policy and Fiscal Policy.  The Federal Reserve controls Monetary Policy.  Through it, by various means, money can be added or subtracted from the economy depending upon the immediate needs of the country.  Congress and the President control Fiscal Policy.  They can also add or limit the money supply by various legislative means.

 Government spending also includes other factors than the health of the economy such as the cost of government, as well as expensive items like wars and natural disasters or rebuilding the infrastructure of the nation.  They can terminate recessions or periods of inflation by passing legislation, at these times spending money to reinvigorate the economy.

 Currently the country is presumably facing two major problems: massive debt and massive unemployment.  Whether the massive debt is real or not is an academic question.  If unemployment is significantly lowered through government spending then we increase the National Debt and if the National Debt is lowered then we further increase unemployment.  Which way makes the most sense?

 The Federal Reserve is adding forty-five billion dollars a month in currency to the National Cash Flow.  That is 540 billion dollars a year by buying up, on the secondary market, U.S. debt.  It is also purchasing forty billion dollars worth of real estate paper (mortgages) per month.  That is 480 billion dollars a year buying bundled real estate.  These moves are adding money to the economy, unraveling the housing bundling fiasco, creating a shortage of housing in the United States, bringing about economic growth by causing new construction throughout the country, and adding a substantial amount to income taxes in monies that are no longer being deducted for interest from housing loans.  This process has gone on for well over a year causing gradual and continual growth in the economy.

 New Money added to the economy has a multiplier effect; that is, the money is spent a number of times before it becomes part of the naturally enriched cash flow.  The amount of new productivity is three to six times the amount spent.  This spending, in addition to the advantages we’ve seen above, is adding no less than one trillion dollars a year to the GDP and probably the amount is well over two trillion dollars annually.

 All of this is Monetary Policy, which is generated by the Federal Reserve.  Dr. Ben Bernacke, an economist, who was appointed by a Republican president, heads the FED.

 Monetary Policy has improved conditions within the economy.  The GDP is very gradually improving but it is not doing so fast enough.  In order for complete recovery to occur Fiscal Policy is needed.  At present the goal of the Republicans is to reduce the deficit.  They have been successful in turning the problem from a need for more employment to reducing the debt, which has not occurred.  This has been done by forcing the president to cut programs in order for them to raise the debt limit and have the government pay its bills.  In essence their policy has been to economize and limit economic growth, the opposite of fiscal policy.  This is a program working against economic recovery, in that, among other things, it has reduced government employment.

 Because they could not reduce the cost of the social programs the Republicans came up with the sequester around eleven months ago which gradually will cut, across the board, all government programs; that is, the different programs that both the Republicans and the Democrats favor, being both social and military, reducing virtually everything upon which the government spends money.  The result will be to gradually and continually reduce employment, both militarily and among civilians who are dependent upon military contracts.  Some of this job loss will probably be picked up by private economic growth but there will still be an increase in unemployment.

 What is needed is an acceptance of unemployment as the major problem the nation is currently facing and the application of fiscal policy to solve it.  Economizing may be worthwhile but not at the cost of hurting a goodly percentage of the population. 

 A number of people in Washington are applying Microeconomics, their own household budgets, as the means of operating this country.  They need to understand that the United States Government operates through Macroeconomics.  It can issue currency as needed to increase employment and grow the economy.  A larger economy with the bulk of the population employed will be paying much more in taxes and could conceivably reduce the National Debt.  This would also be a successful means of economizing.  It would successfully rebuild the infrastructure and phenomenally increase productivity.

Enhanced by Zemanta

The Weiner Component #32 – Are The Republicans Their Own Worst Enemies?

Image

  English: Breakdown of political party represen...

The basic position of the Republicans in Congress is that the National Debt is out of control, being currently over sixteen trillion dollars, and that it must be reduced.  The current Ryan Plan is their general roadmap to achieving this objective.  They have generally ignored the 2008 Recession, the effects of which still exist and the massive problem of unemployment.  What they want to do is cut discretionary spending, this includes Social Security and Medicare, reduce the size and costs of government, raise military spending, not raise any taxes, this includes not cutting any subsidies, and reduce taxes on those earning  four hundred thousand dollars or more a year.  With the income from this they want to overbalance the National Budget, spend less that is taken in and thus help reduce the debt.  This to the Republicans will bring about prosperity in the United States. 

What would be the effects if they were able to achieve this?  The consumer base for purchasing goods and services would be decreased considerably lowering overall demand for much of what is produced and bringing about a shrinkage in productivity and a substantial increase in unemployment.  The money taken out of the economy would have a multiplier effect, beginning a cycle of economic shrinkage that would cause an ever-growing level of misery for a goodly percentage of the population.  Money, the National incomes, would have been moved upward to the upper few percent of the population leaving and ever decreasing amount for the lower echelons of our society and allowing far more to be stored, probably outside the country, because there would be far less worth investing into in the United States.  The level of economic misery among a goodly percentage of the population would continue to grow.  This is what the Republicans would achieve if they could successfully bring about their Congressional aims.

Because the Republicans have not successfully been able to achieve this we are currently dealing with a dysfunctional Congress.  The Republicans, with control of the House of Representatives and a filibustering Senate, have been successful in not allowing any fiscal (job creating) bills. 

The Federal Reserve, which is separate and not under the control of Congress, has continually and very creatively added money to the economy helping to bring about a slow recovery through monetary policy.  Government, on both state and Federal levels, has continually shrunk lowering both tax revenues and services but the private level has very gradually grown and continues to grow.  It has more or less offset a part of the public shrinkage. 

Today corporate profits are up; industries profits are continually growing, Ford Motors is currently in the process of expanding one of its plants and hiring two thousands additional workers to expand its truck-building capacity; CEOs and upper echelon executives salaries are growing exponentially but unemployment is still at a 7.6% level; many people are doing without.  The GDP is currently growing at the slow level of 2 1/2%.  Population, according to the Senses Population Clock is growing at the rate of one person every eleven seconds; that is 3,063,273 people per year.  The GDP has to grow enough to accommodate over three million additional people each year before any real growth can occur.

A large percentage of these increased profits are moving to the upper few percent of our society.  This money is not being invested in any form of economic growth because the money available to the consumer base is actually decreasing, continuingly lowering the base for consumer consumption.  Overall demand is decreasing because there is less and less money available for the purchase of goods and services.  The upper echelon is storing its ever-growing incomes, probably a goodly percent of it overseas where it can accrue a better rate of interest and be largely except from domestic taxes.  While consumption is up for the upper middle class and above, it is decreasing for the rest of the population.

While all this is going on the Republicans in the House of Representatives and in the filibustering Senate are working vigorously to shrink the government by reducing its expenditures.  They consider the National Debt, most of which Republican Administrations have created since 1981, too high and obscene.  They have all become, since Barak Oboma was elected president, fiscal conservatives.  Consequently they are attempting to limit government expenditures by decreasing Federal expenses.  The result of this is for the Federal Government to gradually employ less people and shrink the economic base, making less money available in the GDP.

It is difficult to understand the thinking of the Republican leaders.  Are they more interested in achieving control of Congress and the Presidency than in the welfare of the country, than in following their oath to the Constitution, in having a Democratic President fail even at the cost of large-scale human misery?  If they follow the logic of their thinking through to its conclusion it leads to endless austerity, intense economic shrinkage, recession and depression.  And while this is going on the military will grow and the upper echelon of society will become phenomenally richer with taxes that run the country being paid by the ever-shrinking resources of the bottom rung of society.  The nation would end up with privation, starvation, and probably violence.

Is this the Republican objective or don’t they understand that everything in the economy effects everything else, that seemingly minor changes can lead eventually to horrible disasters.

It would seem that the Republicans are their own worst enemies.  Their so-called reforms could eventually lead to ultimate chaos.

Enhanced by Zemanta

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.

Enhanced by Zemanta