A mountain lake in British Columbia

economics102

Pensions and dreams

Many people like to dream about the things they will do in retirement and count on their pensions and savings to make the dreams come true.  For lots of current seniors this has been true but younger people may not get beyond the dream.  All the uncertainties of the economic future come to the fore when one starts thinking about pensions.

One hears two major concerns about pensions:  most  people are not saving enough and too many pensions are based on unfunded liabilities.

The one certainty about retirement futures is that well-being and standard of living will depend upon the quantity of goods and services we are capable of producing and the number of people with whom those goods and services must be shared.  Inflation or bankruptcies could easily wipe out  pensions and savings. In any case an increasing population and people living longer into retirement will put pressure on pensions.

There are two ways we can try to ensure our futures into retirement – we can work our butts off in an attempt to return to economic growth or we can reduce our expectations so that we don’t need so need so many goods and services.  It is possible the second option will be forced upon us.  That may not be all bad.  This blogger knows from experience that canoe camping is a lot cheaper and more enjoyable than the large cruise ships..   I also have to recognize that camping would be a lot less fun if we had to share the lake with 2,000 people at a time.

Most  of us are subject to a lot of media hype about the importance of pensions and saving for retirement.  We should keep in mind that we are in for the long-term while the people selling investments are more interested in their next pay cheque.  What is good for them may not be good for their customers and by the time you find out you may not even remember their name.

Some people are worried about government pensions and see private investments as the answer.  I figure the whole financial system is at risk of either inflation or bankruptcy.

In planning for the future we have to evaluate the potential for a return to economic growth.  If one believes we are going to return to growth then it might  be okay to put a lot of effort into a pension.  .  Personally, I think the best long-term investment at this time is a market garden.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

The future of money: inflation, deflation or disappearance into thin air

The future of money has been getting a little attention lately.  It could go one of three ways – inflation, deflation or part of it could disappear into thin air.  Concerns about money probably reflect concerns and uncertainty about where the economy is going.  Frequently behind these concerns lurk people who want a fixed money supply such as gold or bit coin.

This blogger figures money should be defined as a tool to facilitate the exchange of goods and services.  I do not like definitions that make it a store of wealth or a measure of value because these give money an intrinsic value which it does or should not have.  Money should only have value as a tool. 

One of the most important features of money should be the amount available  in the economy needs to be flexible.  It should be able go to up or down  with changes in the quantity of goods and services we want to exchange.  If the money supply is not flexible then as we change the quantity of goods and services then either prices must go up or down or the velocity, the rate at which money changes hands will change.  It is dangerous to assume there will be only growth.

Inflation happens when the money supply increases faster than the rate of economic growth and deflation happens when the money supply goes not keep up with the rate of growth.    Inflation is good for borrowers as the can repay their loans with money which has less real value.  This is one reason governments and their agents want to see mild inflation.  Deflation is good for lenders as they will be repaid with money which has more value.  The ideal should be price stability so nobody loses.

Our understanding of inflation and deflation has been distorted by the long period of economic growth we have just experienced. Most inflation has happened along with growth and most deflation has resulted from banking authorities trying to restrict the amount of money available.  This happened in the 1930s and todays central bankers have sworn to never again let that happen.

There is some evidence that our time of economic growth has terminated.  It is unclear how this will affect prices.  Quantitative easing which is an attempt to increase the money supply has not led to high inflation.  Past hyperinflations have occurred when governments have increased to money supply faster than the economy was capable of growing.  It appears the money created by quantitative easing has led to inflation in the financial markets rather than consumer markets.

Economists generally understand how fractional reserve banking works to increase the money supply but I am not aware of anyone who has thought out the opposite process.  Money that can be created out of thin air can just as easily disappear into thin air.

In fractional reserve banking banks are required to keep a portion of their deposits as reserves for protection against runs. The rest is loaned out and redeposited with the new deposits subject to the same fractional reserve.  The result is that a large proportion of our money supply is  somewhat precarious.  This blogger and many other people on the internet have explained the process.  Just search “fractional reserve banking.”

Central banks can add money to the system by purchasing financial instruments or by changing the reserve requirements.  The could also reduce the money supply by selling financial instruments or by changing the money supply although it is unlikely they will do either under current conditions.

Another way the money supply could be reduced is if the banks suffer large losses.  Any loans the banks have to write off will directly decrease their available reserves.  (The technical term is high powered money.)  This means they will have to decrease their outstanding loans with the same multiplier effect as the money supply was increased.  We will hear about it as a contraction of credit.

So if the banks experience unusually large losses there could be a drastic decrease in the money supply which could have dire consequences.  ( I have read that a number of Canadian and British banks are highly exposed to the energy industry with unsecured loans.)

If a large part of the money supply were to disappear into thin air in the short term a lot of economic activity would come to a screeching halt.  People have in the past used playing cards or candies as a substitute for money.  In the long term the level of activity would depend upon the physical resources available.

People who talk up monetary reform often want a return to a gold standard or facsimile (bit coin).  It is not clear that either of these would correct the problems inherent in the fractional reserve way of creating money.  Nor would they provide the flexibility that is needed in the total amount of money available.

We all think we know everything there is to know about money.  That is a part of what our parents teach us. However, it is a complex subject which few people understand and there are a lot of unknowns, especially if we have to deal with an extended period of low or negative growth.

Paying the piper/economist and making economic decisions

He who pays the piper calls the tune. This applies to economists as well as musicians and explains why economists have so much difficulty coming to terms with the ideological aspects of their field.

This post was prompted by an article about whether economists are biased towards the free market or towards regulation.  This blogger would prefer to evaluate economies according to who makes decisions.

I get suspicious when I hear economists talk about the “free market”  because they usually mean something different to what I understand is a free market economy.  To me a free market economy is one based on the perfect competition model.  What we actually have is an economy where governments pass legislation to restrict competition.  Copyright, patents, licensing, tariffs, health and safety regulations all work to restrict competition and allow some people to make profits they would not get in a competitive economy.

Sometimes the profit making gets out of control and the way to deal with this is to introduce  regulations  rather than to return to more competition.  Therefore I figure the debate in this article is irrelevant.

What is relevant is who makes economic decisions.  If we had perfect competition most if not all decisions would be made by consumers who would vote with their spending decisions.  Unfortunately there are too many people in this world who like to make decisions for others.

One of the big things which influences decision making is the fractional reserve way of creating money.  In this process money is created when bankers make loans and as they get to decide who gets loans they have a say over what economic activity is  going to take place.  If we had a national exchange trading system as proposed in the essay “LETS to market: Dealing with the economic crisis” on this weblog money would be created via payments to individuals who would then make decisions in their purchases or investments.

The fractional reserve system  also limits decision making in that many people, especially during their working years, carry a large debt load.  As most of us have to work to repay our debts, we are forced to support another person’s decisions.  And the work ethic adds a lot of support.

Governments also interfere with decision making by passing legislation which restricts competition and by accessing large amounts of created money.  This of course allows them to make economic decisions according to their values which don’t always agree with their citizens.

My view of how the economy works is less than consistent with conventional economic wisdom.  Readers will decide for themselves which view  they want to accept but I will point out that economists who don’t promote the conventional view probably don’t stand much chance of holding important high paying jobs.  People in power, industry or government, want to feel they are doing good and it is the role of economists to say what their employers want to hear and most economists are paid directly or indirectly by business or government.

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Compassionate austerity to deal with the economic crisis

To cope with the economic crisis we need austerity with compassion.  Stimulus as a policy will likely make things worse more quickly and austerity as currently practiced is mean and hurting victims.  Those people voting for politicians urging austerity may regret their votes when they too get caught in the crisis.

Compassionate austerity would recognize we are dealing with events beyond our control and would therefore not blame the victims.  It would include some sort of income support for people caught in the crisis

How one wants to deal with the economic crisis depends upon how strongly one believes in economic growth.  If one believes this is just a temporary setback, then one probably wants either stimulus to keep things going or some austerity until the economy corrects itself and growth returns.  This blogger figures the crisis results from problems in the resource base and it is unlikely we will again see the golden  years of prosperity which we have experienced in recent decades.

If this is the case, then austerity is something which will be forced upon us and we should try to cope with it with as little human suffering as possible.

I figure the basic economic problem is that while we have lots of energy and mineral resources left in and on the surface of the planet we have used up the most easily accessible.  Those that are left take so much energy to extract it is becoming less feasible to do so.  Suppose that during the age of prosperity we were able to build an automobile with 1,000 units of energy and labour and suppose it now takes 2,000 units to build the same car.  Not only is this going to double the real cost of building a car it will probably limit the number of cars that can be built.  It will certainly limit the number of people who will be able to afford them.

If this is a correct analysis of the problem, then clearly we need to make some revolutionary changes in the way in which we organize ourselves to produce and exchange goods and services.  I predict there is little likelihood of the revolution starting until the economic crisis hits pensioners.  For the time being it is mostly young people who are hurting.

There is a need to rethink our commitment to economic growth and rearrange our economy so we take advantage of modern technology so that most of us can live comfortably without having a job.

What disturbs me about austerity is that the people who promote it have so little compassion and understanding for those who have been caught by the crisis.  Many of those who vote for politicians pushing austerity need to rethink their votes as it could be only a matter of time before they too will find their comfortable lifestyle being challenged,

Austerity with compassion should include some sort of income support.  This blogger would like to see  a guaranteed annual income scheme combined with changes in the way in which we create money.  However, the need is so great I will say we need anything that will provide everyone with a more or less equal share of the goods and services we are capable of producing.

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

 

 

A guaranteed income – another impossible dream

I believe the arguments in favor of a universal income scheme are overwhelming.  The problem is this belief is not shared by everyone.  I would go even further than an income scheme and say there is an urgent need to reform the way in which we create money and the two reforms should be combined.

Our survival and our enjoyment of life depends upon our being able to provide ourselves with food, shelter, clothing and smart phones.  The way in which we do this involves a lot of complex relationships with people we do not know.   As, for the most part,  we do not understand how these relationships work,  any attempt to change them will be a threat and arouse a lot of fierce emotions.  On top of that a lot of people have a vested interest in the current way of exchanging goods and services and will resist change.

It may be impossible to overcome these problems, but is that a good reason to not discuss them and to not try?  With current economic trends it could be that changes will be forced upon us and maybe we should try to influence them rather than just let them happen.

The essay “LETS go to market; Dealing with the economic crisis”  on this weblog deals with a proposal for a guarantee income scheme and how it could be combined with a different way of creating money.  Do have a look at it.

A major question around an income scheme is how much work needs to be done.  Modern technology has reduced the amount of labor needed for survival.  I think we are at the point where a lot of work is just for the sake of working to satisfy the work ethic.  The work ethic allows a lot of people to build empires to fulfill their own ambitions.  The work ethic is unnecessary and makes a lot of people into slaves.

A guaranteed income scheme would be a major transfer of decision-making power to individuals because having money allows people to make decisions.    No longer would people be dependent upon an employer for their total income.  No longer would we be slaves to employers.  We would be able to decide what we want to do with our time.

An income scheme would deal with problems of poverty, inequality and economic inefficiencies.  With an income scheme there would no longer be a case for subsidies to producers and this would remove a lot of price distortions from the economy.  The result would be a more efficient economy.

Value is determined by supply and demand.  As all of us have a limited lifespan time should be the most valuable thing we have.  Therefore we should by trying to use modern technology to give us more time in which to do the things we most enjoy.  Instead it seems modern technology is mostly being used to sell us more smart phones which are used to sell us more junk.  That’s stupid.

Equality – the impossible dream

Charlie can’t breathe

The most evil of all people are those who believe they can force their religion, beliefs, values and will upon others.  There are evil people in all nations, religions and cultures.

Inequality is an issue that will probably never go away because it has traditionally been the natural order and because its solution, perfect competition,  is something few people will be able to accept.

Inequality was a feature of Roman and Medieval societies and probably of most historical large-scale civilizations.  To find true equality one would probably have to look to small tribal groups where everybody knew each other and were probably related.  (I suspect these groups had relationship problems in that lots of people didn’t speak to each other.)

In historical civilizations the elite depended upon the work of the peasants for their food and luxuries.  The challenge was to confiscate as much of the agricultural surplus as possible while leaving enough for subsistence.  Probably a factor in the calculations was the supply of workers.  If there was a shortage, the workers were able to retain a little more than when there was a good supply.

Inequality has historically been so much the norm that the general prosperity following  the industrial revolution should be considered an aberration. One of the things which has happened since the start of the industrial revolution has been  the exploitation of energy and mineral resources found in the earth’s crust.  The result has been a lot of prosperity which had to be shared with most of the population because the prosperity depended upon the labor of the working people.  Once again supply of workers was  a concern and generally  there was a shortage – until recently.  With a limited supply of labor the elite had to tolerate sharing some of the wealth.

In historical times the agricultural surplus was probably taken with the use of force or the threat of its use.    Since the industrial revolution the elite has discovered a less messy way of getting the greater share – legislation which restricts competition and allows for profits.  If we had perfect competition there would be no profits, we would have equality and the one percent would be just like the rest of us.  Licensing, copyrights, patents, health and safety regulations and tariffs all work to restrict competition.  If we did not have copyright Bill Gates would be just another programmer and we would all be using super great software. Recent prosperity has been so great leaving some for the rest of us was not an issue.

Other ways in which  the elite exploit us are  by the work ethic and debt.  So long as we believe in the divine nature of work we will continue to produce the profits which the elite need to maintain their fortunes.  So long as our money system is based on debt we will be chained to our employers.

It may be the golden age of prosperity is coming to an end.  We still have lots of mineral and energy resources but the most easily accessible have been taken.  It now takes more energy and effort to get at what is left and this limits the potential for future growth.

With the end of growth and a surplus of workers we are ripe for a return to historical inequality.where the elites take for themselves most of the agricultural surplus and leave a minimum for everybody else.  The difference is that we now have technology to replace workers.  This guy does not want to think about the implications of this.

It is my understanding that in some parts of the United States some local level governments are getting a significant part of their revenues from petty  fines enforced by police.  This source of revenue falls heaviest on poor people.  The justice of this program is questionable. Another source of revenue is called civil forfeiture where authorities confiscate the proceeds of crime even if there has been no conviction.  Once again this has potential for abuse and raises justice questions.   I am sad to report that my home province of British Columbia uses this process.

I have to wonder if these developments are part of increasing inequality and a return to inequality enforced with force in that they have a lot of potential for abuse of poor people and involve police.

This writer is pessimistic about the future.  To increase equality we will probably have to increase competition and introduce an income scheme.  These are controversial concepts although they will never come into being if we don’t talk about them.  In the meantime,   probably the best way for individuals to deal with inequality is to become a part of the minority  and one does that by taking advantage of legislation which restricts competition.

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Regulating business with competition

Generally we try to protect ourselves from the excesses of capitalism with regulations.  An alternative method may be to increase competition.

Capitalism is known for its disregard for health and safety concerns and for its excessive profits.  To deal with these problems we impose regulations on firms.  As people are good at getting around regulations the natural reaction is to increase the regulations.

An alternative approach would be to increase competition.

One of the myths of our economy is to equate competition and capitalism.  The reality is that capitalism depends upon governments passing legislation which limits competition.  Most economic legislation, while labeled as consumer protection, works to restrict competition.  For example, many manufactured items are subject to strict regulations as a safety thing. .  But these regulations tend to be set so that only large producers can comply.  This means that specialty manufacturers cannot afford to get started as the extra costs have to charged to a small production run.

Health and safety regulations, copyright and patent legislation and licensing requirements all work to limit competition.

Here in Canada we have a strong commitment to separation of church and state.  The result is that the provision of spiritual and religious services comes closer than anything else to the perfect competition model.  When people move into a new area they often go church shopping, even among churches of the same denomination. 

Churches are also the least regulated institutions in the country as their members look after that either by asking their ministers to leave or by leaving themselves.  (Ministers get fired for one of two reasons – they get into relationships their congregations consider inappropriate or they over stay their welcome.)    When the United Church of Canada decided to ordain and marry gays and lesbians a lot of people switched denominations.

This blogger figures  increasing competition in most if not all industries would do a lot to resolve the excesses of capitalism and reduce the need for regulations.

One of the requirements of perfect competition is that all participants have perfect knowledge.  Therefore the only regulation needed is that firms be required to publish all the information customers need to make good decisions.  This would require us to take responsibility for our own lives rather than expecting the government to look after us.

I realize this suggestion is a political can of worms as people don’t like to reveal secrets.  However with internet and smart phone technology more and more information will be easily available.  Rather than trying to increase regulations we should demand that this information be made generally available so that we as consumers can become the regulators – just like church goers.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

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