As we may have mentioned one or two . . . dozen times before, we like it when somebody tosses us a question or a comment to which we can respond with a recyclable answer that can be turned into a blog posting. Like this one regarding the prevalence of consumer credit debt among presumably affluent Americans who have suddenly found themselves bereft of that weekly paycheck they were living on from day to day, grossly supplemented with more than a modicum of consumer credit (edited for anonymity to protect the guilty):
|Consumer credit might be a little harebrained. . . .|
Oh, guess what? I had one of my former history, math and economics students who graduated in 2006 say, “Yo, Teach” [yeah, that was one of the things we edited as it sort of gave a name], you were right. I should have put money into savings and not taken out so many credit cards.” I like it that he and-or she ‘fessed-up. However, sometimes OLD FOGGIES [yup, another edit; we won’t use the word originally used] know what we are talking about. Educators such as my close friend Professor Seville Barber and historian friends like Margie Figaro, what do you think? Professor Barber, you and I have been pals since 1970, what do college professors think about this?
We’ll cut straight to the chase. For years we have taken the position that credit, a great social good, is easily, even egregiously misused in the world today. We could give a (very) long discourse on how things got this way, but we’ll take a short cut and blame it on the virtual global domination of Keynesian economics.
First, however, we need a little background.
|"Ned Ludd" and his Swingkettles|
Keynesian economics limits most people to wages and welfare for income. This is due to the disproved belief that accumulated savings are essential to finance new capital formation. Since most (if not all) workers cannot earn enough from wages to be able to save to purchase advanced capital instruments,* they are perforce trapped in the wage system, backed up with the welfare system when they can no longer work.
* For example, ‘way back in the ancient days of the eighteenth century when the power loom was invented, hand weavers (who had formerly made very good livings as the only source of cloth), found themselves not only out of jobs as the power loom could weave far better, faster, and cheaper than they ever could, they were cut off from owning the new machinery because it was so very expensive to purchase originally, although its productiveness made it incredibly cheaper for the consumer. Hilaire Belloc thought that had the hand weavers been able to pool their savings to purchase the new machinery, but that is unrealistic. What the hand weavers needed was not past savings, but future savings, i.e., access to self-liquidating capital credit, and thus the ability to purchase capital equipment without past savings. This resulted in the Luddites, who were not so much opposed to machinery as to losing their jobs.
Workers are less productive than advancing technology, thereby making technology relatively cheaper than labor. As a result, workers are displaced from jobs by advancing technology, and often have to take lower-paying jobs as competition with advancing technology lowers the market value of human labor relative to technology. Naturally, what that means is that to keep some income rolling in, wages must remain low or it becomes profitable to replace labor with technology!
Rather than take the obvious course and enable workers to own capital (as authorities as diverse as William Cobbett, Charles Morrison, Pope Leo XIII et seq., Louis Kelso, Walter Reuther, Ronald Reagan, etc., etc., etc. recommended), the Keynesian solution is to raise fixed wages and benefits, thereby increasing costs and raising prices. Modern Monetary Theory (MMT) is a complex body of theory rooted in Keynesian assumptions geared toward manipulating the money supply in various ways to achieve three ends:
· Create “full employment” (a wage system job for everyone) in order to have sufficient consumer demand to keep the economy running,
· Redistribute purchasing power from wage earners and savers, to consumers to clear production and sustain demand to keep the economy running, and
· Redistribute value from consumers to producers via the “forced savings” of higher prices so producers can purchase more machinery to displace workers from employment.
Naturally, the experts don’t put it that way, but that’s what it boils down to. Keynesian economics is one giant shell game that continually shifts purchasing power around by currency manipulation for political ends.
|Pope Leo XIII|
There’s just one problem. Consumers who rely on wages for their consumption needs find themselves continually short of cash. Their real income is always declining as MMT relies on inflation to redistribute purchasing power. They have “more” money, but the money in total buys less than “less” money did before.
More and more, workers’ decline in real income is increasingly made up out of various transfer payments and, especially, with consumer credit. Since the late 1950s with the advent of Diners Club, the first commercially successful credit card, consumer credit has been extraordinarily easy to obtain. As a result, per capita non-mortgage consumer debt is at the highest it has ever been in the United States.
Consequently (believe it or not), global wealth statistics ironically put the developed economies like the U.S. in the lowest level of net wealth due to this accumulated personal debt. In the richest country on Earth we have the poorest people in terms of net worth . . . as the current situation graphically demonstrates as people living very affluent lifestyles find themselves in serious financial difficulties after less than a month of no pay.
Nevertheless, credit is a very good thing — if used properly. When used to purchase consumer goods it can be a convenience (that can easily get out of hand), but when used to purchase self-liquidating capital, it is essential.
Ever since the invention of central banking in 1694 with the establishment of the Bank of England, most private sector economic development has been financed on “pure credit,” i.e., credit extended by banks based on the expectation that what is purchased will pay for itself out of future profits. As Dr. Harold Moulton pointed out in his 1935 book, The Formation of Capital, from 1830 to 1930 the United States experienced the greatest economic expansion in history, virtually all of which was financed on commercial bank credit.
That, however, does not solve the problem of consumer debt . . . directly. In 1958, however, Louis Kelso and Mortimer Adler published a great book with a terrible title, The Capitalist Manifesto.
In The Capitalist Manifesto (along with the principles of economic justice), Kelso and Adler advocated letting ordinary people use pure credit to acquire capital assets, supplementing and even replacing wage income with dividend income. Walter Reuther, head of the United Auto Workers and formerly a socialist, advocated this, as did President Ronald Reagan.
Under the name “Capital Homesteading,” CESJ advocates a program of expanded capital ownership for every child, woman, and man in the U.S. and the world. We even have free books on the subject!