Ripping the economic canvas

May 20 2015 11:20
*Edward Ingram

READERS of my previous essays on Fin24 may be interested in some updates.

Firstly, more seniors have joined in endorsing the ideas being put forward. And secondly I have restarted writing my book, this time as an academic treatise. This has simplified the explanations.

Economists are taught that economies are unstable and have to be steered.

I teach that economies would be stable enough if costs and prices were allowed to adjust in the ways that they should. Prices, costs, and values, are supposed to rise gradually, like rentals do, like the cost of living does, and like the level of national average earnings does for that matter.

Check this out: it is taken from one of three extracts I have drafted - one for common sense, one for professionals, and one for the remedies. This is the common sense one.

Housing finance with benefits for all

It is clear that the property sector is not behaving like any other. You might ask why. You might see that the cost of rentals does not jump up and down but the cost of housing finance does – much faster than anything else. Yet any payment is still a payment of wealth. It has value to the lender.

Why cannot the lender be patient and collect what is owed in a reasonable fashion? Why cannot contracts be written between lenders and borrowers which are fair and reliable for both parties? This treatise shows how that can be done, with benefits all round, including for lenders.

The same remedies can be used for government and commercial finance, making both of these easier to obtain, and cheaper.

The boom and bust syndrome

It is clear that there are booms and busts in the world’s economies. The reason is that people are fed too low interest rates, too much credit, and they spend more than the national economy can supply. They pay for that later – it is called boom and bust.

The busts can be long and enduring, depending upon how much excess debt has to be repaid and the cost of repaying it. When interest rates rise to stop the flood, debt servicing costs leap up, locking in the imbalances until the problem is squarely faced.

The problem arises because interest rates are a kind of price – the price paid for borrowing. They should balance the supply of credit with the demand for it. But the supply is not managed.

Until the supply is managed and limited to the amount that the national economy can cope with, boom and bust will continue, and interest rates will not be able to adjust to create the right balance.

Creating currency balance

It is clear that currencies are unsafe and unstable. One third of the world’s economic output is priced in foreign currencies in the form of imports and exports. One third of the world’s businesses cannot make a plan - not one that they can trust far into the future.

The reason is that foreigners are allowed to add money supply to our own economy, and they are allowed to alter the value of our currency when they buy into it as investors rather than as traders who simply want an exchange of currency at the market rate... the currency price can only work in one field of activity to create a balance, not two fields.

All of the above examples illustrate how we humans distort the pricing mechanism and then we - no, the economists - wonder why things are not under their control.

Most things do not need to be under control. They need to be allowed to do what comes naturally.

The world's economies will NEVER get that right until mankind stops interfering with the pricing action within the economies of the world.

My opening sentence for the treatise is:

This treatise represents a fundamental shift in thinking of enormous proportions. The benefits expected may be as much as 2% p. a. saved/added to the world’s economic output for generations to come.

I have been asked to explain to Australian policymakers why their policies are not working. All other policymakers should ask the same question.

Ripping the economic canvas

They should ask which of the above costs, prices and values (property and bond values should have been mentioned), are rising or falling even approximately in line with aggregate demand, the rate of increase in average earnings, or any other measure they may choose to use.

They should ask whether the basic law of pricing is being followed.

They will see the equivalent of the economic canvas being ripped apart. Confidence in an economic recovery cannot be created. Interest rates cannot be allowed to rise in a natural way, and reducing them, as Australia has just done, adds to the threat going forward.

* Edward Ingram is a leading thinker on the world stage of macro-economic design and has written a series of essays for Fin24.

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edward ingram  |  global economy



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