In the previous posting in this series, we looked at how money can (and is) created to finance new capital formation without being enslaved to existing accumulations of savings. All you do is back the issuance of new money with the present value of existing and future marketable goods and services. What happens, however, if you don't back the issuance of new money with the present value of existing inventories of goods and services or the new capital to be valued at the present value of the future goods and services to be produced? What happens if, as now, you simply create the money first, backed by the general promise of the State, and hope that the money will eventually end up invested somewhere?
What happens? Inflation. By creating money before you have drawn a bill — entered into a contract conveying ownership of the matter of the contract — based on real, present value, you haven't actually created a claim on valuable new, future wealth. The only thing you've done is create more claims on existing wealth . . . that belongs to somebody else, thereby effectively abolishing private property as a meaningful institution.
Understand, of course, that — consistent with Aquinas's conclusion that potential being and actual being are both different stages of being — the present value of future (potential) goods and services is just as "real" and material — that is, just as valuable — as the present value of existing (actual) inventories of goods and services. It is all "value," and it is "value" in the same way that all value is value. (This is the "analogy of being" . . . and you had no idea a discussion on savings could get this deep, did you?)
Unfortunately, Keynesian economics, the most widespread economics today, restricts all financing for new capital to existing accumulations of savings. Subordinating economics to politics, the question becomes how to manipulate the currency and the law — monetary and fiscal policy — in order to try and ensure that 1) there is sufficient "effective demand" (income) in the economy to keep the economy going, and 2) there is sufficient savings (reductions in consumption) to provide financing for new capital. This is what Moulton called, "the economic dilemma" . . . and then demonstrated that it was, financially and economically speaking, a red herring. (The Formation of Capital. Washington, DC: Economic Justice Media, 2010, 26-36.)
The "economic dilemma" is not, however, a red herring to the Keynesians, Monetarists, or Austrians. The main question that seems to obsess adherents of all these schools is if, or to what degree the State should interfere in the market in order to ensure that the economy actually does what it's supposed to do, i.e., allocate resources to meet people's wants and needs. Keynesians recommend virtually total control, while Austrians want no control. The Monetarists tend to fall somewhere in between. What keeps any of the schools from coming up with a viable solution is that they all assume the slavery of past savings as a given.
Of the three mainstream schools of economics, the Austrians seem to have the greatest respect for individual human dignity, at least in regards to the natural rights of life, liberty, and property. Keynesians tend to become diverted in a concern for quality of life in the aggregate, rather than the dignity of specific human beings. As a result, in the Keynesian analysis individual rights of life, liberty, and property tend either to get lost in the shuffle or defined out of existence. Not the Keynesians, the Monetarists nor the Austrians take into account the fact that having a right is not the same as exercising a right — but that is an issue for another day. Right now the question is how, trapped by the slavery of savings, Keynesian economics claims the system comes up with the savings presumed necessary to finance new capital formation and thereby create jobs.
The answer is simple, as least to a Keynesian: inflate the currency and manipulate the interest rate. Keep in mind, however, that Keynesians claim it isn't real or "true" inflation until full employment has been reached (vide Keynes's General Theory, III.10.ii, V.21.v). In the real world, inflating the currency raises prices to consumers. This forces consumers to cut consumption by paying more for less. This meets the definition of "saving" within the past savings paradigm. But how do the savings effected by reductions in consumption make their way to investment in new capital? By increasing the profits to producers. Producers — owners of capital — are getting higher prices for fewer goods and services, thereby enjoying a greater real income. This increases retained earnings (corporate savings) that are then reinvested in new capital.
There are just a couple of things wrong with this Keynesian scenario, however. One, any accountant can tell you that retained earnings are never used to finance new capital formation. The only ordinary charge against retained earnings is dividends, not expenditures for new capital. It just doesn't happen that way.
"Retained earnings" represents prior period income that has already been "retained," that is, reinvested in the corporation. Retained earnings are a statement of owners' equity. "Retained earnings" is not an asset account, as a quick look at any corporate balance sheet will tell you. Cash that has been invested in the business may be used to purchase other assets, but "retained earnings" does not thereby change by so much as one cent. To think otherwise is to confuse — as Keynes clearly did — ownership and the thing owned.
This should come as no surprise. Keynesian economics rides roughshod over private property because Keynes had no real understanding of the institution — and thus of the derivatives of private property, i.e., money, credit, interest, and banking. Keynes's General Theory of Employment, Interest, and Money (1936), possibly, along with Karl Marx's Das Kapital (1867), the most influential book on economics in our day, is based on erroneous ideas of interest and money! Keynes's rejection of Say's Law of Markets suggests further that he didn't truly understand employment, either, but that is a posting for another day.
The other thing wrong with the Keynesian scenario is that, the more the State tries to "stimulate demand" or promote new investment by inflating the currency, the more it has to "tinker" with other things and take over every aspect of the economy. Is the price level rising too fast? Increase the price of money by raising interest rates. (This makes sense if you define inflation as a rise in the price level after reaching full employment, for then you only have to claim that you haven't reached "full employment," and thus the rise in the price level is "due to other factors" than inflation.) Has the price level risen to the point that companies are making too much in profits, with a negative impact on effective demand? Tax the excess away and redistribute.
This last accommodation to the slavery of savings leads directly to yet another form of slavery: debt slavery. This, too, is easy to understand.
It is not politically feasible to raise corporate taxes too high. For one thing, it offends the people who make political contributions. For another, it takes away the savings allegedly needed to finance new capital and thus create jobs. No, it's better to tax "the rich" and redistribute that money than to harm corporate savings.
Taxing "the rich," however, creates another set of problems. First, the amount of money that can be raised by increasing taxes (the tax rate) instead of increasing taxable income (the tax base) is frequently negative in its effect. This is because, faced with increased taxes, the rich have ways of avoiding taxation. A 5% increase in the rate in all tax brackets may look good on paper, but there are ways to reduce your income without in any way reducing your wealth — if you're rich enough. For example, don't vote yourself a dividend, but retain the money in your corporation. That way you avoid the "double tax" on corporate profits . . . reducing the taxes you pay, but retaining the money behind the corporate screen. Besides, if you really need the money, you can sell some of your shares, on which you are taxed only on the net above cost, and then usually at a lower rate than "earned" income. (We won't get into the various ways to generate capital losses to offset gains, thereby zeroing out the effect of selling shares.)
But isn't that shortfall made up by increasing the taxes at the same time on the non-rich? Not really. For one thing, the rich pay more simply because they have more. When they reduce or shelter their income, there is less income in the system to tax. For another, a 5% across the board tax increase means one thing to a rich person who goes from 35% to 40% — a 14.28% increase — and quite another to a poor person who goes from 10% to 15% — a 50% increase. A tax increase to the rich may mean some inconvenience or delaying the enjoyment of one's income for a time. The same increase in the rate to the poor can be a disaster.
The problem with all the tinkering and relying on existing savings to finance new capital formation is that, as Moulton pointed out, the resulting decrease in consumer demand makes the new capital less financially feasible. To keep the economy going, consumer demand has to be made up somewhere. As ownership of capital has become increasingly concentrated, shortfalls in effective demand have increasingly been made up by increases in consumer debt. Non-mortgage debt (we won't get into the mess with mortgage debt) has been rising at a rapid rate since the early 1950s, as this link to the St. Louis Federal Reserve makes clear.
As you can see from the chart, you could have ignored the per capita figure in 1950. By 2008, it had risen to over $8,300. In 2010, it was over $10,000 — and that's per capita, not by household, the datum on which the chart is based. The message is clear. For most people, real income is declining rapidly, and the value lost is being transferred to the already wealthy via inflation caused by government debt and reliance on consumer debt, increasing the growing gap between the rich and the poor at an accelerating rate. The problem is what to do about it.