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The biggest hoax in Economics: How CPI maintenance promotes inequality (Part II)Robert Wutscher
In the first article to this series, we described how unwanted money created by the banking system tends to gets stuck on the balance sheets of firms, where they begin to impede the circular flow of the economy, were it not for Central Bank or fiscal policies to get that flow going again (taxation is one way Governments help to redistribute that money back into the hands of consumers. Increasing money supply, another). The power imbalance between Capital and Labour Primary capital owners then get to decide how to distribute out all that unwanted money in the form of dividends, share buy-backs, executive pay and–Capitalist is thinking now: “do we still have some money left over for wages? . . . do we really have to?” Guess where the power for the distribution of income lies? Labour is largely powerless in this environment to gain a foothold on this increased bounty. This is especially so as this merry go round is first started off as an increase in investment loans that results in more and more capital investments relative to a level of sustainable long run employment. In other words, over time more goods will be able to be produced with less labour, so you bet there is less labour market pressure as the ranks of the unemployed swell. Marx used to refer to these ranks as the ‘Industrial Reserve Army’ ready to be mobilized when required for expansion into new Colonial markets. Depending on which side the political pendulum is on, labour also sometimes gets to wield some power over the ‘spoils’. However, by increasing their incomes, they also increase the costs to firms. So why go through all that trouble of increasing the money supply for the purposes of creating a battle over spoils that would not have been there to be fought over had that additional money that nobody wanted to hold, not been created in the first place? The whole economic act is actually one of self-sabotage. Consumer prices come under increasing pressure over time as more output can be produced with less labour, with less labour in turn leading to less income for consumption. Demand was driven by too much investment relative to long run sustainable employment. A fall in consumption and demand are inevitable. That is why we have Business Cycles. Of course, the Central Bank is there to save the day, but instead of solving the real problem (why is too much capital being produced relative to long run sustainable employment?–a question that Economists incidentally seldom ask), they only add to the problem. Heard of “saving a debt problem with more debt.” The problem is that Economists actually believe statements like that. Some Economists of course prefer to rephrase it a little: “Providing the necessary liquidity” comes to mind. Or “there is never a debt problem because, see, for as much debt that is created, deposits are created in equal measure . . . and we, the Central Bankers of the World, are not responsible for the distribution of that debt/deposits and wealth”. Pontius Pilate could not have said it better himself. How money is created I think we need to back up here again a bit: according to common economic wisdom, there is no debt problem if for every debt that is created there is a deposit created of equal measure. Bear with me, for we are now down in the boiler room of the money making machine. Money is created when you borrow money from the bank, you spend it and the person you just purchased from, deposits that money you borrowed into another bank account. Voilà! You have more money in the form of deposits in circulation. Note that the increase in money supply is entirely dependent on the demand for debt (and the bank manager’s discretion), a demand that is easily tweaked by the Central Bank by simply dropping the interest rate. It has nothing to do with any actual demand for money, i.e., the $10 or $12 you may wish to have in your pocket or bank balance as float. When does additional money lead to inflation and when not? If the person you bought from with your borrowed money actually wants to hold onto that additional money as savings, technically you have no problem. All that is required is that some day you will have to provide some form of equivalent value good or service to exchange with the former seller so that he will willingly have spent his deposit in order for you to repay your debt to the bank. The bank will have made sure that you had the credit record or surety to fulfill your obligation. There is also no impact on prices. That is also why the Economists are partly right: there need be no concern for the like-for-like increase in debt and deposits. On the other hand, if the person you bought from wants to go out immediately and spend all the additional money, you have another bidder out there for the same goods you want. Prices now rise and yet you think you’re safe because the Central Bankers are watching around the corners for just such price rises for them to know when to turn down the liquidity taps a little (or have they changed over to fire hydrants these days?). But what if prices don’t rise? Can too much money be created under such conditions? Here’s the trick, what if your seller isn’t really interested in the goods you’re eying out. Let’s say he’s one of the rich guys and he has enough consumption already. What he’s really after is some investment. But he’s not really interested in any more ‘productive’ capital investment, the kind that employs workers to produce machines, because we have enough capital already relative to a shrinking consumer workforce. And even though capital will require replacement, where people will need to be re-employed in the future to replace worn out machines, for now, however, there are more than enough machines and besides, sales are slowing, only requiring capital replacement much later than originally planned, based on projections that could not have foreseen the unsustainability of that former demand. Have you ever heard of a Central Bank targeting a cap on the Dow Jones Industrial Index? If not, then do you see how the genie is out of its bottle and the dog is sleeping under the consumer price index! In its attempt to kick-start the sleeping dog to bark once more, the Central Bank pumps more money, but that dog just barely wakes to lift an eyelid. Less and less money flows into goods circulation and more and more oozes out into FOMO (fear of missing out) secondary market capital investments– basically Capital that’s already there and which therefore doesn’t add to employment, real incomes or consumption demand (other than by those fewer who feel wealthier to want to spend more). Such secondary market investment only serves to drive up asset prices. Now the Economists speculate: “well there’s more debt, but there’s also more asset value–and of course Central Bankers cannot be held responsible for asset prices paid between willing buyers and sellers, can they?” The system would be so much fairer if only the asset value to income ratio didn’t rise over time. For how are your kids going to afford that first house costing 40 times their annual income, when it only cost you 10 back in your day. Lucky they have you to inherit from. What about all the kids that don’t have rich moms and dads like yours, starting off today where you were 30 years ago . . . do we really care? Central Bankers sure don't! In the next essay, we will attempt to show how exactly savings get redistributed from consumers to capital owners under one watchful and one blind eye of the Central Bankers during our sleep, where in the land of the blind, the one-eyed monster is king. ### Robert Wutscher Robert Wutscher is an independent researcher. 321gold Ltd |
