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Why the world's economies are so confused

Aug 16 2016 12:54
Edward Ingram

THE world's economies have never in history been so confused. This is why.

As I explained last week, there are two kinds of money which can be created: base money like notes and coins and money which can be created only by the state in a computer's record of accounts. Then there is 'fiat money', which is created by bank lending.

So as not to enrich the lenders, fiat money gets deleted from the lenders' accounts when it gets repaid. Because too much fiat money had been created, amounting to over 97% of all money in some economies, people's appetite for borrowing had been saturated by 2008.

There was then a great shortage of fiat money in circulation. Many central banks, whose job it is to manage new money creation, started printing trillions in base money (which is/can be more permanent) in a process called quantitative easing or QE (easing the shortage).

THE NEXT BIG MISTAKE

Unfortunately the central banks did not let anyone else spend it. They spent the money themselves, buying up bad debts and then good debts (bonds), and in some cases they bought equities. That new money went into circulation but it did not get spent by ordinary people and businesses in any kind of balanced, across-the-board spending spree. The central banks became immensely rich while the wealthiest owners of bonds, property and equities saw the value of their assets inflated - not enriched, just seemingly worth more due to their resulting shortage in the market.

BASIC PRINCIPLES

There are two or three sets of basic principles to be followed as laid down in macro-economic design and management. None have been followed and the result is the most confused state of the world's economies ever seen in history.

#1. MAKING YOU SAFE

The first set, briefly outlined in the first of these latest essays, is designed to fade out all the problems we get when the value of money falls. The major inflation problem gets taken out. Except for cash holdings, it would be as if money never changed in value. Everyone can feel safe.

No one knows exactly how much money is enough. This means that when a little too much money gets created and inflation rises as money consequently falls a little in value, unlike now, people will barely notice.

#2 MONEY CREATION

The second set to be followed is about balance.

1. Any new base money must be given to all sectors as equally as possible, so that spending patterns are not changed (unbalanced) and everyone gets some. Central banks must never spend it themselves as they do now.

Nor should they give it to the government to spend on their pet projects, taking resources from here and putting them there, and enriching their friends and donors. Doing that destroys other jobs and businesses in the process. It only creates temporary jobs until the money runs out.

In a well-balanced economy, one person's spending is another person's employment. So when new money is created and spent, everyone needs to spend some of it. All employment needs to benefit. Some new base money AND some new fiat money may be needed.

Here is how new base money can be distributed:

 - VAT can be reduced, leaving people with more money to spend at the end of each month.

 - A subsidy would be given to VAT-exempt spending in the same proportion for the same reason.

 - The new money created would be given to the VAT revenue and used to make the subsidies.

Every time anyone spends money, they will get one of those two subsidies from the new money. Spending will rise and the economy will thrive. Afterwards, there would be enough money around for the economy to continue to thrive.

2. What cannot be achieved in that way is a direct boost to new lending. That is what the creation of new fiat money is supposed to do.

Again, there are some basic principles not being followed. I will explain those next time.

How can we get all of these reforms put in place? With great sensitivity, because some people and businesses will benefit while others will be significantly damaged in the process of rebalancing the economy unless great care is taken.

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