Can you spend money you haven't got?
I can't.
But this seems to be what the leaders who claim they can save the world from economic collapse expect to happen. I can't see how it will work and it looks like it isn't.
Rewind. Last year, there was concern consumers had far too much debt. People could barely make ends meet. Banks were "extremely concerned" about consumer debt levels.
In the present, the obvious answer to that problem would be to reduce spending to pay off debt. But to pay down debt significantly, people in debt would have to retrench for a long time - perhaps several years (and the rest). To pay off a $20,000 credit card debt in just two years, you'd have to put about $1000 a month into it, above and beyond the $400 / month interest charges. That's a big chunk of money every month for most people and any mortgage would be on top of that...and you haven't bought any food yet.
The effect? Reducing consumer demand by even several percentage points overall for periods of years would lead to a long recession at the least and perhaps even a depression if enough people try to save enough, fast enough, at the same time....and ironically end up throwing each other out of work.
Debt starts to look more and more like an addiction. When the world tries to go cold turkey on debt, it starts to feel very ill and rushes off to the local central bank for a fresh "fix" of debt......as cheap and as much as possible and - now - backed by the taxpayer.The same taxpayer too often mired in peronsal debt and loss of their job. Tax takes must fall.
The G20 just met and the main thing to come out of that meeting is a plan to get together in April to actually talk about doing something about the broken financial system and rapidly deteriorating economic situation. The other main thing to come out of the meeting is the expansion of the G7/G8 to include 20 countries, with China, Brasil and India among them. Many have called this a sign that global economic power is shifting to the developing countries. A cynic might see it as the old powers scrounging for cash from the up and coming powers.
The immediate aims are to keep trade barriers low, ensure access to capital for vulnerable countries, keep consumers spending and the economies of the world flying.
But if people are saddled with debt, concerned about job security and looking at their primary asset - their home - having lost a chunk of its value, they won't have any new money to spend. A short term fix might be to cut taxes, but that endangers the people who are already vulnerable at the very bottom and don't forget the tax take will be falling even without tax cuts. Tax cuts start to look like a dumb idea, not much helping consumers while at the same time limiting the options open to government.
The bottom line appears to be the only way to keep this albotross in the air for a bit longer is to make debt cheap again....and back it all with taxpayer guarantees. But isn't that - in effect - the country hollowing itself out the same way home owners were spending their home equity on consumption via credit lines secured by the equity in their homes? Sure looks like it.
Won't taxpayers just end up having to pay more tax tomorrow to fund their consumption today? On top of the debt they also have, of course.
How long can that go on?
Did Social Credit win after all? Is funny money now the only money?
It looks like the climax to this situation is yet to come.
"Can you spend money you haven't got?
ReplyDeleteI can't." (Truth Seeker)
"A common cause of confusion to those unfamiliar with the technique of finance can be found in the excusable assumption that a statement which is true and obvious in regard to individual experience of money matters is equally true in regard to the money matters of a nation. There are at least two assumptions made by those who argue in this way. The first is that the process by which a community obtains money is fundamentally similar to the process by which an individual obtains money. The second is the idea, alternatively, that money is limited in quantity by the laws of nature, or that it is always exactly equal in amount to the price values of the goods which it is supposed to represent.
Now, as a matter of fact, no one of these common assumptions is justified, as can easily be seen by anyone who will take the trouble to give the matter a little thought. All individuals obtain money by getting it from somebody else, i.e., so far as individuals are concerned, money is quite correctly defined as a medium of exchange (although not an invariable medium of exchange). But in the case of a sovereign community, this never is and never has been the case. Whether the power be delegated, as in the case of Great Britain to the Bank of England, or not, a sovereign community has the power of actually creating money--it is self-financing, a situation which in fact places the community and the individual in a position of technical opposition, the community and the individual always being on opposite sides of the ledger. " (C.H. Douglas, "Fallacy of a Balanced Budget")
http://www.cooperativeindividualism.org/douglas-c-h_fallacy-of-a-balanced-budget.html
"Debt starts to look more and more like an addiction. When the world tries to go cold turkey on debt,"
All money is debt. No debt; no money. Debt is an "addiction" in the same sense that "money is an addiction".
"Did Social Credit win after all? Is funny money now the only money?"
Seems to me you don't understand the first thing about money or Social Credit.
socred: Forgive me. I was attempting to present the point I was making in the language of those who criticise the idea of social credit. The intention was to highlight that money appears to be being created more or less as C H Douglas envisaged....though the source is referred to as "taxpayer" instead of any idea of intrinsic national wealth. The way this is being done, it looks like "Taxpayer" is merely a euphemism for the other.
ReplyDeleteAgain, you are completely incorrect.
ReplyDeleteMoney is not created the way that Douglas would have envisioned. Douglas proposed to remedy the problem of ever increasing debt.
The other technical error in your post if the fallicious belief that a community can "live beyond its means", because it is going into debt to purchase the goods and services ALREADY IN EXISTENCE.
You cannot consume what you haven't already produced, and the community as a whole should be able to purchase what it has produced, otherwise, that production is WASTED.
Douglas demonstrated that cost increase faster than incomes when regarded as a flow, so that the community must continuously enter into increasing debt in order to consume the goods and services it produces.
Douglas wanted a monetary system based on productive capacity, not one based on currency (or gold), which is what we have now (or had prior). Both of these concepts of money are archaic.
I seriously doubt whether you understand Social Credit, or how the current monetary system works. You seem to think that you can eliminate all debt, which is equivalent to saying you want to eliminate money, since currently, all money is created as a debt.
socred: Understood. In writing my own post I did not set out to seriously examine monetary systems - actual or theoretical.
ReplyDeleteI hope you'll take note of the point I was making in the original post: The debt being created to pay for the bailout(s), that is intended to cover other defaulted debt, is being loaded on the backs of the same people already carrying a lot of debt....or who may have already defaulted.
That was what made no sense to me and still doesn't. You appear to agree. The system is on a hiding to noting and nowhere.