Thursday, March 10, 2016

Do We Need the Rich?, V: How Future Savings Emancipates

So far in this series we’ve seen how past savings enslaves, and we’ve mentioned how future savings emancipates — but we didn’t say how future savings does the trick.  It’s all very well for a magician not to reveal his secrets, but a financial wizard who is interested in economic democracy had better be a little more forthcoming . . . especially when the “secret” is how to turn non-owners into owners without harming existing owners.
"My hands never leave my wrists, or my cash leave my wallet."
It’s not all that hard, although that doesn’t mean it’s easy.  Basically, “all you have to do” is switch from past savings to future savings, that is, from financing with what you’ve withheld from consumption in the past, to financing with the present value of what you reasonably expect to produce in the future.  That way, you’re not taking anything out of anyone’s pocket now, and anybody who comes up with a financially feasible project should be able to get financing for it.
An added benefit is a complete change in how the amount of money to be added to the economy gets determined.  As it now stands, somebody in a government office somewhere decides that we need, say, 1% growth in the coming quarter.  To do that, the estimates are that $1 crunchzillion in new money must flow into the economy, of which $572 velzillion will come from existing savings, $398 wadrillion from new government debt, and the rest from the operation of the Keynesian money multiplier.
Richard Kahn, First Baron Kahn (1905-1989)
Or so the experts hope.  Of course, the fact that existing savings are, in general, already invested (it’s just a matter of where you stand whether something is savings or investment), non-productive credit is a really, really, really bad way to finance anything, and Baron Kahn's Keynesian money multiplier was proven by Dr. Harold G. Moulton of the Brookings Institution to be a big, steaming load of hooey within a year of its publication, means that it’s only by chance that the amount of money created and the needs of the economy are in sync, but so what?  If you didn’t create enough, government just goes deeper into debt, and if there’s too much, you tax it away — that’s called “Modern Monetary Theory.”  It’s why government debt has mushroomed since the powers-that-be started listening to Lord Keynes.  For some reason money collected in taxes never seems to get cancelled, just spent, adding to the problem.
Now, what happens in the Just Third Way scenario, in which money is created ONLY in response to financially feasible private sector projects, and governments can’t create money and are forced to live within their means, except for short-term borrowing from existing pools of savings?
First off, the only estimate that’s made is how much new capital formation will take place in the coming quarter.  If the estimate is too big, reduce the next estimate.  Too small?  Increase the next quarter.
This is possible because (hold your breath) no new money is or can be created until and unless a financially feasible project is brought to a commercial bank for financing.  The money supply does not increase except when there is a specific use for that specific new money.  No “print it and they will invest.”  No “we ‘need’ 237% inflation or there won’t be enough money for investment.”
Kelso: You can finance growth with future savings.
Forget all that, and keep this in mind: no new money is or can be created until and unless a financially feasible project is brought to a commercial bank for financing.  We can scream that at you if you like, but if you haven’t caught on by now that no new money is or can be created until and unless a financially feasible project is brought to a commercial bank for financing, you’re not likely to get the idea by raising the decibel level.
The first big advantage, the Number One benefit to this is (have you guessed?) it allows you to finance new capital formation without using past savings.  And “past savings” are, by definition, a virtual monopoly of the rich.
Can you put two and two together and make four?  Test yourself by following this logic: if you can finance new capital formation without using past savings, that means you don’t need to be rich in order to become an owner of productive capital . . . and that means that every child, woman, and man — regardless whether she, he, or it has savings now — can use “future savings” to become an owner without taking anything away from “the rich.”
"Our fable tonight, kiddies, is the money multiplier."
Another benefit?  When everybody is a capital owner, and nobody needs to set aside savings to finance future new capital, you only need to produce enough to consume.  No deliberate waste just to generate savings.  No promotion of consumerism to encourage people to buy what they don’t need, going into debt to do it, just to generate profits and thus savings.  No “make work” jobs just to generate income to keep up consumption levels so that new capital can be feasible (profitable).
And — everything else being equal — there would be no inflation or deflation.  Instead, your dollar would always be worth a dollar, and probably buy more as technology becomes increasingly productive, giving the owners more money to spend on consumption naturally, not artificially.
In short, there would always be exactly the right amount of money in the economy without playing guessing games or having the government spend, spend, spend.
In other words, we can now answer the question, Do we need the rich? by saying, Sure, we do.  We need the rich the same way we need everyone else.  No man is an island, etc.
What we don’t need is the money of the rich.  That they can keep for themselves . . . or, better, spend it and have some fun, doing good by creating demand for goods and services that the rest of us can make a profit supplying, thereby optimizing our chances for an adequate and secure income from both labor and capital.
So what are the mechanics of all this?  We’ll look at that on Monday.

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