Promoting economic growth

This post is in reaction to two articles in this week’s Economist..

The first article shows how the insurance industry is using digitization to sell more insurance to those who need it the least.  The second article talks about digitization as a factor of economic growth.

Perhaps the real issue for the second article is how digitization can be used so the marketing people can con us into working our butts of so we can purchase more goods and service we don’t really need for the sake of economic growth.

What we really need is some way of evaluating things such as music, arts, crafts, exercise and meditation so they can be included in gross national product.  They could then  become the growth industries of the future.

 

Running at banks

Today’s issue of The Economist has an article fears of bank runs in Europe.

Runs on banks are such serious things that you cannot expect any banker to tell the truth when his bank is threatened.    A large enough run would also impact a country’s money supply and that has to be a concern for all of us.

If a bank is unable to refund its deposits it is probably because its loans have gone bad.  It could also be because the banker has made some bad bets such as  on interest rate movements.

There is so much debt around that most of it, especially that of governments, will never be repaid.  The best that can be done is to keep rolling it over.  There is a high probability that eventually a lot of people are going to lose their savings either from bankruptcy or inflation.

Deposit insurance schemes can protect against small problems – the banker who makes a bad bet on interest rates – but I’m not sure they can protect against the general widespread debt problem we now face.

According to the article one suggestion for Europe is greater financial integration.  This could delay the crisis but would probably bring everyone down at the same time.

 

Responsitibilty for the financial crisis

A news report suggests there will never be any criminal prosecutions from the financial crisis.

This is because we are all to blame.

We all want/have wanted the highest possible returns on our investments and pension funds and the people higher up the line have taken advantage of our own greed to line their own pockets.

I suspect that a lot of what happens in courts has more to do with revenge and scapegoats than it does with justice.

Greek exit loses

This report from the Huffington Post puts a figure onto my analysis of a Greek exit from the Euro. It suggests Greeks would lose at least half their income.

Don’t be surprised if that happens whether or not they leave the Euro because what really counts is what is happening in the physical or real side of the economy.

Conseqences of Greece leaving the Euro

It appears a Greek departure from the Euro would be a surprise to the Greeks but not to everyone else.  If it does happen what would be the impact on them and the rest of us?

As I believe economic problems should be analyzed in terms of the physical side of the economy lets start there and then look at financial concerns.

Following an exit from the Euro the Greek standard of living would depend upon the quantity of goods and services the Greek people would be able to produce divided by the number of people.   This does not mean they would have to be self-sufficient as they would still be able to trade.

There could be a problem. If they were currently producing enough for their desired standard of living they probably would not now be in a crisis.

There are a number of factors which might reduce or improve their standard of living.

Some of the outside money they have been receiving was probably  used to import goods and services.  This would probably be lost although if things are really tough they might be given some aid.

If there were to be massive emigration (not a sure thing) things would be better.

The standard of living could be reduced by an obligation to repay some of the current debt to foreigners.  This would be because money repayments would be followed by goods and services.

They would also be adversely affected by what happens in other countries.  If things get worse elsewhere the number of tourists could drop which would reduce the foreign money they have for outside purchases.

On the financial side it appears there will be a massive write off of debt which means a lot of people will lose a lot of purchasing power.  A lot of people will be a lot less rich than they thought.  Both in and out of Greece this will fall upon individuals in the form of lost or devalued pensions or investments.

The writing off of debt will also mean a loss of money supply both in and out of Greece.  As there appears to be a lot of unused credit around this might not be too serious a problem

If Greece leaves the Euro its government will have to manage the replacement money and will have to be very careful not to create too much.  The consequences of too much money is inflation, maybe even hyperinflation.   Inflation is a loss of purchasing power just like the writing off of debt.  It can be a sneaky way for governments to steal from their people.

If I were a Greek politician I would want to write off all debt and start over with a national exchange trading system as outlined in my essay “LETS go to market”>

In working on this post I am very grateful I was born and raised in Western Canada.  However, I have to recognize our turns is probably coming soon.

Water and economics

It could be that one of the great injustices of the world is that for some of us the marginal cost of water is zero.

As this injustice is likely to get worse, the way for its victims to cope will be to apply supply and demand and marginal cost to pricing.  Here is an article about water markets.

When we were looking for a place to build our home we focused on a part of British Columbia through which there is a diagonal line.  One one side of this line it is dry sometimes getting close to desert.  On the other side is a cedar-hemlock forest.  Having previously lived in areas short of water I was determined we should be on the wet side.

As it turned out the  “pile of rocks” my wife refused to look at the first time we drove by has three streams on it.

The stream from which we take our water goes underground and flows into a river.  The water that goes through our house goes into a septic field and flows underground into the river.

Therefore the marginal cost of our water is zero and we don’t worry about water conservation.

I am not saying where we live because I don’t want a lot of other people coming to live in this valley.

The health and economics of smart meters

A flunky from a contractor to B.C. Hydro came by yesterday and installed a smart meter to monitor our electricity use.

A few minutes later my wife went to her quilting club at the local community hall.  On her return, as usual,  I asked about the gossip in our rural community. Of course the talk was about smart meters and the refusal of some people to allow the installation of these meters.  One lady missed the session so she could ensure the meter was not installed.

There appear to be two concerns – health from radiation and it may be a way for B.C. Hydro to grab more money.

Radiation may or may not be a problem but I know we surround ourselves with lots of devices that emit radiation and electro-magnetic fields. I have for some years been saying electricity is the root cause of cancer because cancer is a lifestyle disease and our lifestyle is based on electricity.

If people are concerned about high electricity rates they should tackle the  company on its bureaucracy and the salaries paid to employees.

In theory smart meters should reduce costs partly through not having to pay meter readers.  The big benefit should come from time-of-day pricing  By encouraging people to use power at off-peak times, the company should be able to reduce its need for more generating capacity. In British Columbia that means we may be able to avoid another hydro dam on a river.

People who refuse the smart meters could end up paying more for their electricity.  The company could charge them extra for meter reading and when time-of-day pricing is introduced they would certainly have to pay the top price for all their electricity.

In denial about the economic crisis

How do you communicate with people who are in denial.

The question was raised while reading this article that suggests a lot of Greek people believe they will never leave the Euro zone.

The question also applies to a lot of economists, most of the world’s seven billion people and politicians  –  although politicians have an excuse.  They won’t be reelected if they try to tell people they will have to accept a lower standard of living.

The economic  crisis is not just a Greek or European problem, it is a world-wide problem.  The rest of us will probably have our turn soon.

I believe there are things we could do to reduce the impact but so long as so many people are in denial, there is little hope.

Money creation problems on YouTube

It’s great to see a criticism of how we create money getting a good airing on YouTube. (Here)

Victoria Grant is a 12-year old young lady who speaks with a great deal of confidence on a subject about which most people know nothing.  It is hardly surprising that she got a standing ovation for her explanation of how the banks and government are defrauding Canadians.

She clearly has  a good understanding of the problems with our money creation mechanisms but her proposed solution would probably be an even greater ripoff.

She got it right on when she said “under the present system all money is debt” and when she points out debt is enslavement.  I would take issue with her suggestion that money issued by the banks if fake while money issued by the Bank of Canada is real.  It is probably good that both are money “generated out of thin air” as the alternative, a commodity money, has its own problems.

Her concern is that the Canadian government is defrauding us by borrowing money from the banks and paying commercial interest rates. I would be more concerned that the government will never be ale to repay its debts with the same purchasing power as it borrowed.

Miss Grant’s solution is for the government to borrow directly from the Bank of Canada rather than the commercial banks and use the money for economic infrastructure..  This is quantitative easing and would increase the money supply.  It would work only if there are available lots of physical resources for infrastructure and that is not clear.

If the increased money supply is not matched by an increase in the goods and services produced, the result would probably be inflation.

Inflation is a more subtle and more efficient way for governments to steal from their people.  Any one with financial assets in fixed prices or with pensions would lose purchasing power.  I’m not sure Miss Grant would want that.

However, she should be lauded for pointing out some problems with our banks and money supply and for getting a lot people to think about them.

A guaranteed income scheme

This writer has long been in favor of a guaranteed income scheme in part because I believe subsidies should be given to consumers rather than producers.

Therefore I am pleased to provide you with this link to a report on a recent congress on a basic income guarantee.

Not only is there a need for an income scheme there is also a need for  changes in the way we create money in our economy. The two should go together.

I have tried to show a way in which the two could be combined in my essay “LETS go to market: dealing with the economic crisis.”

At a time when the economy is clearly going down there is a need to provide support for everyone.  There is also a need for economic efficiency and an overwhelming need to fix a sick financial system.

The assumptions economists make

The assumptions economists make is the title of a book published in March of this year and for which a review is located here.  It sounds a little interesting so I have suggested it for purchase by our local library.  I’m not sure it is interesting enough to spend $25 for my own copy.

However, the title reminds me of my own struggles with the assumptions of perfect competition.  So here is a post from almost two years ago about the assumptions of perfect competition and how one could interpret them.

 

Perfect competition utopia

When I started studying economics and learned about perfect competition and its assumptions I thought it was totally unrealistic. I really enjoyed the joke about the economist who wanted to assume he had a can opener.

However, through the years I have come to see perfect competition as an utopia which provides guidelines for policy. I like the perfect competition model because it provides high efficiency, equality in that there are no profits, it works without economic growth and decision making is by individual consumers rather than governments.

One of the features of perfect competition is that there are no profits because if profits are being made in an industry others will enter that industry increasing competition and driving prices down until there are no more profits.

To get around this no profit feature business people lobby governments to pass legislation which restricts competition. For example, subsidies, some taxes, licensing, copyright and patent legislation all interfere with perfect competition.

To make our economy more competitive we should:

– Give subsidies to consumers rather than producers. This way prices will reflect true costs and buyers can make decisions according to their own values.

– Require producers to provide consumers will all relevant information about their products.

– Abolish patent and copyright legislation.

– Unilaterally abolish import and export tariffs.

Following is a summary of the assumptions for perfect competition.

The link for the website from which they were taken is http://tutor2u.net/economics/content/topics/competition/competition.htm

Assumptions behind a Perfectly Competitive Market

1. Many suppliers each with an insignificant share of the market “ this means that each firm is too small relative to the overall market to affect price via a change in its own supply “ each individual firm is assumed to be a price taker

2. An identical output produced by each firm “ in other words, the market supplies homogeneous or standardized products that are perfect substitutes for each other. Consumers perceive the products to be identical

3. Consumers have perfect information about the prices all sellers in the market charge “ so if some firms decide to charge a price higher than the ruling market price, there will be a large substitution effect away from this firm

4. All firms (industry participants and new entrants) are assumed to have equal access to resources (technology, other factor inputs) and improvements in production technologies achieved by one firm can spill-over to all the other suppliers in the market

5. There are assumed to be no barriers to entry & exit of firms in long run “ which means that the market is open to competition from new suppliers “ this affects the long run profits made by each firm in the industry. The long run equilibrium for a perfectly competitive market occurs when the marginal firm makes normal profit only in the long-term

6. No externalities in production and consumption so that there is no divergence between private and social costs and benefits.

School vouchers and public schools

Here’s a link to a report that mothers are generally in favor of a voucher system for schools in which parents are given a voucher and can use it for education at a school of their choice.

The idea behind public schools is excellent but one that has gone in a different direction.  All children should have the opportunity for the best possible education.  This has not always been the case and in many parts of the world still is not the case.

The result  (at least in British Columbia) has been  schools run by a huge bureaucracy and controlled by people who claim to be professionals.  (True professionals have specialized knowledge they can use to help one out of a crisis situation.)

A voucher system should allow for schools based on different curriculum, different teaching philosophies and different approaches to discipline.

Education should first of all  be the responsibility of parents. A voucher system would return that responsibility to them and allow them to determine how they want their children to be educated.  It would still allow the state to ensure that all children get educated.

Education is much too important to leave to a monopoly.

TheEuro crisis and economic growth

If or when the dust finally settles on the economic crisis the world will probably look like quite a different place.  Yet all the proposed policies are designed to try to restore a golden age of prosperity which will probably never return.

The challenge should be to control our destiny so as to have a society in which everyone has a comfortable life but one that is not based on so many material things.

The probable root cause of this crisis, Europe and worldwide, is that we have used up a lot of resources, or at least those resources which were easily accessible.

The shortage of resources is bound to have an effect on our economy and one likely result is that most if not all the world will become a series of third-world economies with most people living at a subsistence level.

The most formidable obstacle to resolving the crisis is our commitment to the religion of economic growth.

Economic growth is no longer an option and efforts to revive it are doomed to failure.  Our best hope for the future is to put our energies into finding an economic model in which our well-being does not depend upon growth.

Alternate money systems: LETS and Timebank

In my essay on dealing with the current economic crisis (here) I proposed resolving some of the problems with our fractional reserve money creation process by expanding the concept of the Local Exchange Trading System (LETS)  into a national system.

Here are links to three articles about LETS or Timebank systems. (onetwo three)  These are presented as ways for local communities to cope with the breakdown of national financial systems.

In designing alternative money plans one must be careful not to repeat the problems of the existing system.

The first is to ensure that the total money supply is  flexible.  So long as the money supply is flexible and able to increase or decrease with the quantity of goods and services to be exchanged, then prices will be steady.  One of the problems of the gold standard was that it did not have flexibility.

The second is to ensure that interest is not charged or paid on the debits and credits created as goods and services are exchanged.  I am not  aware that anyone has tried to think out the problems caused by interest being charged on the loans used to create money in the fractional reserve process but I suspect it is a sort of Ponzi scheme which frequently breaks down into a financial crisis.

I found it interesting that all three of the  articles referred to the social aspects of these exchange systems because I have long believed that  economics is largely about relationships.

Feeling defeatist about the economy

Today is a day for feeling defeatist especially  on hearing the results of the French and Greek elections.

A lot of the economic hot air currently being generated is based on a faith that all our problems can be solved with the “correct” policy which will return the planet to economic growth.   The correct policy varies according to the economic theology of the writer.

My own economic theology is that a return to economic growth probably is not feasible because the root cause of the crisis is resource depletion, or rather the depletion of those resources which are easily extracted.

If this is true then there is no politically feasible solution because as well as getting most people to recognize the problem one would also have to get everybody to voluntarily reduce their standard of living.

Here in British Columbia  teachers are taking job action to support claims for a wage increase.

I would feel a little less defeatist if they were to use  their monopoly power to demand increased benefits for the homeless and welfare recipients.

Milton Friedman and Money Mischief

I have just finished reading Money Mischief, Episodes in monetary history by Milton Friedman published about 20 years ago.

Friedman is remembered for his interest in the economics of money and banking. However, I have two concerns about omissions from this book.  The first is that he places too little emphasis on the T or Q in the quantity theory formula and the second is that he has missed the significance of interest in the creation of money.

Any discussion of money in economics has to include the formula MV=PT because this shows how the real and financial sides of the economy are connected.  This formula states that the stock of money times the velocity with which it changes hands is equal to a price index times the total of transactions or the quantity of goods and services exchanged.

Friedman uses this formula to support a claim that inflation is purely a monetary thing.  Prices go up when there is too much money in the economy and governments control the total amount of money.

My concern is that he does not appear to recognize the potential of T (or Q) to disrupt the economy.

In the chapter on money he suggests T could go down because workers are “paying less attention to their work and more to the stock ticker.”  A few pages later he states: “What happens to output depends on real factors: the enterprise, ingenuity and industry of the people; the extent of thrift; the structure of industry and government; the relations among nations; and so on.”

He may be excused on the grounds that throughout recorded economic history downward changes in T have not been an obvious problem.

However, there is some evidence that the resource base is now being depleted, or at least the most easily extractable, of the resources are gone.  This is certainly going to impact on the T in the formula.  Other things which could impact the formula are climate change, natural disasters or disease epidemics.

MY second concern relates to the role of interest in the creation of money.  Friedman didn’t see this and I have not come across any other economist who has recognized it.

During the 20th century there was a change in the nature of money from that based on a commodity (gold or silver) to money based on fractional reserves and credit.  (For a more detailed discussion of fractional reserve money and its problems, please see my essay “LETS go to market.”)

So long as money was based on gold the total supply was limited by the amount of gold and could be increased only as more gold was dug out of the ground.  If you look at the formula it is easily seen that this could cause problems in a growing economy.

With the switch to fractional reserve money the problem became reversed.  Now there is the potential for too much money to be available.

One of the differences between commodity money and fractional reserve money is that with the latter as new money is created the creators (the banks) demand that interest be paid on that new money.  I see this as a  built n force requiring that even more money be created to pay interest.  I see this as a sort of Ponzi scheme which from time to time collapses into a financial crisis.

Friedman provides a different take on why the money supply is increasing.  “Whatever may have been true for money linked to silver and gold, with today’s paper money it is governments and governments alone that can produce excessive monetary growth, and hence inflation.”

I have to take issue with him.  Fractional reserve money is not paper. It is entries in the computers of the banks.  Governments are involved in its creation when their bonds are purchased by central banks.  It might be good for governments to stop issuing bonds but I am not sure it is fair to blame them for inflation.

However we create money, the formula makes it clear that if the goal is price stability the money supply or its velocity must be easily variable.

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