Giving in to popular demand (and the lack of news in other areas), our Just Third Way news items lean a little bit in the direction of the Covid-19 pandemic . . . but without giving recommendations on how to prevent it. What we’re concerned with (from the Just Third Way perspective, not personally) is the economic and financial responses being proposed, some of which strike us as possibly unwise:
• The $1 Trillion Stimulus. President Trump has proposed a $1 trillion stimulus package . . . which is exactly the wrong thing to do. It is easy to predict what will happen . . . especially since it is what happened with the preceding stimulus packages. With “idle” cash lying around, banks will look to place it where it has the most profit potential. Given that interest rates on business loans are low, the stock market seems (if not more prudent) the most profitable place to invest idle cash. Businesses will still be starved for credit, although a rise in share prices on Wall Street will give the illusion of prosperity. Share prices will rise, but the real, productive economy will continue to deteriorate.
|Commercial banks create money by lending.|
• The Real $1 Trillion Stimulus. What should be done to stimulate the economy if just printing money and handing it out or investing it in the stock market will only make the problem worse? The answer is astonishingly simple once you understand the true nature of money and what commercial and central banks were originally designed to do. Instead of printing $1 trillion and trying to figure out what to do with it (and ending up pouring it into the stock market), give $1 trillion (or however much is needed) in commercial loan guarantees at a nominal charge, say 1%. That way, the worst case scenario is completely neutral with no inflationary effect. If the government guarantees $1 trillion in loans to businesses, and every cent of every loan goes bad, the government prints up $1 trillion of new money which is paid to the commercial lenders . . . and cancelled. This is because if operating properly, a commercial bank doesn’t make loans out of reserves, that is, out of cash on hand. Instead, commercial banks create money by making loans, and cancel money when the loan is repaid, for which they charge a service fee, often erroneously called an interest rate. Now, it is highly unlikely that all loans made by commercial banks will go bad. Historically, between 3-5% of loans in the U.S. have been bad loans. In South Korea, the default rate has been around 1½%. Assuming that 5% of all loans made go bad, a $1 trillion loan guarantee package would cost the government $50 billion — a lot less than $1 trillion! But that’s not all. If the government charges 1% for its guarantee, it will take in $10 billion, reducing the loss by that much. If the program is turned over to the private sector for commercial insurance companies to handle, they will charge a premium for the guarantee set by the projected default rate plus some extra to cover expenses and allow for a profit. Instead of a loss of $1 trillion in the form of added government debt, there could be a net gain to society in the form of insurance company profits.
• Rate of Chinese Covid-19 Infections. The Peoples Republic of China has reported that there have been no new cases reported and that the disease is now completely under control. Reliability of this claim has not been verified.
|Strictly speaking, usury is taking a profit when it's not due.|
• Time to Restructure Corporate Finance? As an article in the Wall Street Journal (buried in the second section) had it, “Corporate Debt Poses Financial Risk” (03/20/20, B-1, B-10). Well . . . yes. Inability to pay debt (unless you’re a government employing Keynesian Modern Monetary Theory) is generally a sign that an entity is not financially sound. Of course, a temporary inability to pay debt should not bring things to a screeching half, nor should a business loan that goes bad result in punitive action, at least in classical philosophy, i.e., if you take a share of profits, you must also be willing to assume a share of any loss, or you are engaged in usury. If, however, corporations would shift from debt financing to equity financing as part of a program of expanded capital ownership, ordinary people could purchase shares on credit collateralized with capital credit insurance. Corporations would not have to worry about meeting debt service payments, while individual shareholders might find it much easier to reschedule their loans than would a corporation, given a diversified portfolio and sufficient collateral in the form of insurance. It would also stimulate demand naturally without inflation by freeing corporate earnings from the need to retain earnings to finance growth.
• Shop online and support CESJ’s work! Did you know that by making your purchases through the Amazon Smile program, Amazon will make a contribution to CESJ? Here’s how: First, go to https://smile.amazon.com/. Next, sign in to your Amazon account. (If you don’t have an account with Amazon, you can create one by clicking on the tiny little link below the “Sign in using our secure server” button.) Once you have signed into your account, you need to select CESJ as your charity — and you have to be careful to do it exactly this way: in the space provided for “Or select your own charitable organization” type “Center for Economic and Social Justice Arlington.” If you type anything else, you will either get no results or more than you want to sift through. Once you’ve typed (or copied and pasted) “Center for Economic and Social Justice Arlington” into the space provided, hit “Select” — and you will be taken to the Amazon shopping site, all ready to go.
• Blog Readership. We have had visitors from 43 different countries and 43 states and provinces in the United States and Canada to this blog over the past week. Most visitors are from the United States, Philippines, India, the United Kingdom, and South Africa. The most popular postings this past week in descending order were “Did Cardinal Ratzinger Endorse Socialism?” “Social Justice IV: The Characteristics of Social Justice,” “Private Property: Absolute? or Absolutely Not!” “News from the Network, Vol. 13, No. 11,” and “What, Then, Does Cardinal Ratzinger Mean?”
Those are the happenings for this week, at least those that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we’ll see that it gets into the next “issue.” Due to imprudent language on the part of some commentators, we removed temptation and disabled comments.