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.
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| 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.
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| 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.
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