Retirement, the future and The Economist

The editors and writers of The Economist news magazine must be ageing and not seeing things too clearly.  That is my conclusion after reading their recent special report on the future of elderly people.  Another option is that my view of the future is incorrect.  The Economist is much more optimistic than I am, I hope they are correct.

I disagree with them on three issues – the future of the economy, the work ethic and financial issues.

Most of their readers probably have a vested interest in continued economic growth and to prosper the magazine needs to support this. And they do.

This blogger figures the current economic problems are related to energy and mineral resources.  We have used up the most accessible of these and those which are left take so much energy to extract they are worthless.  If this is correct the outlook for the future is rather grim.  We can anticipate a lot of human suffering as we have to adapt to a down economy.  So far retirees have largely been exempt from this but our time may be coming. Trump, Brexit, Saunders, Corbyn and Macron could all be symptoms of this problem.  Lots of people recognize something is not right but do not know what it is.

In recent years The Economist has come up with a number of cute cures for the economic crisis.  This time we are going to save ourselves by getting people to work further into old age.  This commitment to the work ethic may be good for those whose fortunes and status depend upon getting other people to work for them but if the above analysis is correct increasing economic activity will use up more energy and resources and bring forward the timing of a complete economic collapse.  Rather than promoting the work ethic we need to be pushing a leisure ethic  in which people get their self identity from doing non economic things such as music, theatre, art or writing a weblog on economics. The Economist talks about a longevity dividend.  Should this dividend be more work or more leisure?

One of the features of money is that it gives a person control over resources.  Financial obligations left over from the era of prosperity mean some older people have a greater  command over current resources than the young.  Older people are going on luxury cruises in which a waiter from a third world country puts the pepper on their food while their grandchildren are struggling to find jobs and homes.  When the crisis hits pensions and other savings the cruise ship operators will be lobbying for the release from prison of a famous Italian captain so they can put him back to work.

This blogger tends to be pessimistic about the economic future.  I figure I was very lucky in the time and place in which I was born and have lived most of my life (1941 and western Canada).

This columnist from The Economist is encouraging theft

This post is to accuse the Buttonwood columnist in The Economist of encouraging the theft of people’s savings.

In the Nov 30th 2013 issue he/she says “Debt needs to be reduced by default, inflation or financial repression (keeping interest rates as low as possible).”

Lots of others including economists concerned with government policy make similar statements.

The problem is that one person’s debt is another person’s savings.  Therefore when debt is reduced by default or inflation it is going to take away from somebody’s savings.  This might be more visible if loans were made directly from a saver to a borrower without the financial intermediation of banks.

It might also be easier to understand if we were to define money as something representing purchasing power.  Thus a loan is a transfer of purchasing power from the lender to the borrower.  If the loan is not repaid because of default or is reduced by inflation then the lender has lost some of his/her purchasing power.

Some people might say the losses from default are carried by financial institutions.  This is true only if the banks are making excess profits.  If they are not making excess profits and maybe even if they are the losses are most likely to be spread over all their depositors in the form of reduced interest payments.

Of course people who owe lots of money, especially governments, benefit from inflation because they don’t have to repay as much purchasing power.  The ideal should be price stability – zero inflation and zero deflation.

However it happens default or inflation reduces the purchasing power previously owned by savers.  To me this is theft by or on behalf of borrowers.

Which is more likely – deflation or inflation?

Conventional economic wisdom, as illustrated by the cover of last week’s The Economist, says deflation is a major threat.  However, this blogger, ever the contrarian,  figures inflation, perhaps even hyperinflation, is a more likely threat.

 The idea that deflation is a threat appears to be  based on the concept of inflationary expectations and the desire by those who make decisions on behalf of he government to maintain mild inflation to help deal with government debt.

That high inflation is a threat is based on the formula MV=PQ, known as the quantity theory of money although I prefer to call it the connectivity formula as it connects the financial and real sides of the economy.

 The case for deflation is made in the November 9, 2013 issue of The Economist. (http://www.economist.com/printedition/2013-11-09)

The above formula tells us that the money supply times the velocity at which it changes hands is equal to prices, or a price index, times the quantity of goods and services produced.  It is not clear everybody accepts this formula but I think it contains a lot of truth.  If one of the four variables changes then to maintain the equality one or more of the others also has to change.  For example if the quantity of goods and services goes up then the money supply also needs to go up.  If the increase in money supply exceeds the increase goods and services, then velocity must go down or prices must go up.  Through recent decades prices have gone up and we have had inflation.

 The  current economic crisis is probably mostly a crisis in Q.  While there are still a lot of mineral and energy resources in the earth’s crust we have extracted the most easily accessible.  What is left is difficult to extract and requires a lot of energy.  In the past economic growth has covered a multitude of economic sins.  It is not clear that the economy will be able to return to the type of growth we have experienced since the start of the industrial revolution.

 During the depression of the 1930s the monetary authorities deliberately restricted the money supply (a reduction in M) and this led to a reduction in Q, a recession and a number of financial institutions failed.  This time they are not going to make the same mistake and have been trying to increase the money supply calling it quantitative easing. Large amounts of money have been pumped into the economy.  Consumer prices have not increased and it is tempting to say the formula is not valid.   It could be that velocity has fallen (there are complaints that corporations are sitting on piles of cash) and that price increases have been in paper financial instruments.

 We should note that Wikipedia gives four major examples of deflation in American history and all of them involve contractions in the money supply.  Maybe the formula holds.

 If the formula is correct and with all the excess money floating around the economy, then there is quite a bit of  potential for something unpleasant to happen.   If not high inflation, then a financial crisis in which the money supply is reduced.  In either case the paper used for those financial instruments might have been more useful as firewood.

 Inflation is complicated by the fractional reserve creation of money.  As can be seen from the formula the money supply needs to flexible up or down according to variations in the quantity of goods and services produced.  But our money supply is created when banks make loans upon which interest is charged. Rather than flexibility there is pressure for the money supply to increase continuously.  The result is a Ponzi scheme which collapses from time to time.  Oops, here comes another financial crisis.

 The goal should be price stability or a zero inflation rate.  As loans are in nominal terms when prices go up people who have borrowed benefit at the expense of those who have loaned the money.  If you are a lender, the higher the inflation rate, the more purchasing power you lose.  Deflation works the opposite way, in that a borrower has to repay more purchasing power.  As governments are major borrowers it is hardly surprising that those who set economic policy are anxious for moderate inflation.  Inflation is a tax if not theft.

 Those  charged with setting government economic policy fear that low inflation could easily slip into deflation.  That would  make repaying government debt more difficult and in the past deflation has been associated severe recession.  The difference this time is that there is lots of money available to facilitate the exchange of goods and services.  Hyperinflation would wipe out a lot of savings, fortunes and pensions.

 Whatever happens it looks as if there is a lot of potential for increasing economic chaos.

High pay packages and restricted competition

The Economist appears to be defending high pay packages for company bosses in this article about the current focus of criticism.  The argument is that $52 million is justified by performance but one has to ask if this performance is based on the skills of the chief executive and if so what skills.

The general rule is that firms make profits by getting governments to pass legislation which restricts competition.shokunin_businessman

I don’t know much about the health care industry (the firm is McKesson, a big American wholesaler of drugs and other health-care supplies) but this industry involves a lot of emotions in that many people will use a lot of purchasing power in the hope of living an extra two years – possibly in a nursing home.  It is also an industry that depends upon patents for its profits.

It is not clear to me that this firm is making huge profits because of the skills of its boss.  Maybe the smartest thing this guy did was to get into the health care industry.

I am also wondering about the ethics and morality of a firm (or industry) that uses patents to exploit people’s emotions to make excessive profits.  But what the heck, some of the points in this post probably apply to a lot of other industries.

Economic growth and thinking outside the box

This column in The Economist leaves me feeling extremely uncomfortable because it speaks for all those economists (and others) who are in denial about the reasons  for the economic crisis and the need for thinking outside the conventional economic box to deal with it.

For some time The Economist has been saying the economic crisis must and can only be solved with more growth.  And the way to attain economic growth is innovation and increasing productivity.  This column claims aging workers become less productive than younger workers and the aging workforce dooms us to decreasing rather than increasing productivity.

clownIf only older workers could increase their productivity then all our problems would be solved.

Another article in the same issue talks about the economic crisis around the world.  I find it a bit of a stretch to think that all these problems are a result of an aging workforce in the rich world countries.

One has to observe that in the last few years the marginal cost of a lot of energy and mineral resources has gone up.  This means the most easily extracted of these resources have now been used.  What is left will require more energy to extract.  This has to have a negative impact on our economy.   It could even mean that future growth will be difficult if not impossible.

This is a much more serious issue than what most people can admit.  Rather than asking people to work harder and to use  Google glasses we need to look for ways to organize our economy so that our welfare does not depend upon continued economic growth.

 

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.

Subsidies for consumers rather than producers

People writing for and editing a magazine named The Economist should know that government subsidies to manufacturers are evil in that they distort prices, cause inefficiencies in production and are unfair in that they help a few people and not others.  Yet in this article this magazine appears to be saying subsidies are to be encouraged.

Governments give out subsidies to protect jobs or to encourage firms to locate and provide jobs in their areas.

Surely it would be better to give subsidies to consumers rather than producers.  Then prices would not be distorted and the market economy would operate efficiently and according to the values of all people.

Also subsidies to consumers rather than producers could be organized so that we could meet a collective responsibility to ensure all people have the opportunity for minimum standard of living.

Electronic money payments in the Middle East

This week’s The Economist has an article about the introduction of electronic payment systems in the Middle East.

This sounds like a major change in the type of money being used  – a transition from cash to a more intangible type of money.

It illustrates that money should be considered purchasing power rather than a commodity.

I wonder what percent of the money supply in Middle East countries is cash and what percent is bank deposits?  To what extent is fractional reserve money being used?

For their sake I hope the transition does not include increasing fractional reserve money because that is a Ponzi scheme.  As fractional reserve money is based on loans if all debt plus interest had to be repaid at once there would not be enough money.  This type of money works only so long as there is continued economic growth and a continuously increasing supply of new money via new loans.

(The author of this comment has a web log on economics at https://economics102.wordpress.com/)

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