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Let's find a better way

Mar 19 2014 07:49
*Edward Ingram
Economics has a bad reputation. It has failed to keep the world out of trouble.

Consequently there is now a worldwide student activist movement demanding a wider syllabus, one that brings in new ideas from outside the mainstream syllabus. Reportedly, Harvard students even went on strike over this.

One of the key activists is now a valued member of my team, because every such new theory and insight that has been featured in recent times as being a significant reason for our economic woes seems to be assisted by the restructuring solutions my team can offer.

The main issues

Professor Steve Keen is famous for his book entitled ‘Debunking Economics’. He features excessive private sector debt as a key reason why economies are slow to recover post-1929 and post-2008.

Others feature unstable spending patterns – like a dip in spending on capital goods/housing. This can trigger a vicious downward spiral into recession.

Remedies

The new debt structures that I have been suggesting in this series address both of those issues.

These new debt structures would reduce instability in spending patterns as interest rates rise and fall, and they would prevent the redistribution of wealth as interest rates and inflation rates vary. The limitation of ‘loan to income’ multiples for housing finance will stabilise property prices.

But this is not the end of the story. I have recently featured instability in currencies (see Essays 17 and 18) and looked briefly at an idea that may solve that issue.

There is still more - unstable credit creation

But we still have not finished. For some theorists the most important idea is the abolition of the credit creation by the banks. This is one of the ways in which private sector borrowing can become excessive.

According to Professor Keen 11 minutes into this video interview, private sector lending in the USA reached 175% of gross domestic product (GDP) in 1929 and was drawn down (repaid) for many years at a peak rate of 15% p.a. That was the depression, during which spending dried up. Japan has had a similar experience.

In 2008 USA private debt peaked at 301% of GDP and has been drawn down by as much as 25% p.a. The professor says that full recovery will only happen when these figures get back to normal. The banks over-lent and now we are all suffering from reduced spending.

This credit creation by the banks is also known as factional banking, or leverage.

How it works

It means that banks take in deposits and they lend those deposits. The loans come right back as new deposits, which the banks can then lend again. This creates leverage – if all goes well the same deposits get lent multiple times, and the profits of the banks leap up in the process.

Leverage is investing money that you do not have. BUT if anything goes wrong with so much lending, the banks’ reserves are unlikely to be enough to cover the losses. The whole system can fail.

Another objection is that new money should not be given to one sector (banking and borrowers), because whoever gets it first is diluting the value of the remaining money in the economy. The minority who get in first receive profits denied to the rest, and the rest are losing out as money loses value.

All of these are good points, but to my mind the real reason for concern is that this model is difficult to manage. Next week I will try to come up with an alternative that will be a lot safer and which will not scare the hell out of the banking sector.

One of the principles of macro-economic design is to avoid disturbances or creating new imbalances in an economy. This is not something that traditional/mainstream economists seem to be good at. But we at the ‘Ingram School’ of Macro-economic Design say it is a first principle.

 - Fin24

If anyone would like to get involved, there is a group at LinkedIn called Rethinking Economics and there is my own group called MACRO-ECONOMIC DESIGN.

My group is restricted to people with a relevant skill in any of the financial services industries (which is where the solutions lie) and the media.

* Edward Ingram has a strong and growing support base. One American has started a petition asking President Barack Obama and/or his senate committees to look into these ideas. Ingram says: “Why not here in South Africa? The ideas are universal.”




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edward ingram  |  money  |  investments

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