For those of you used to doing things the right way instead of getting everything all turned around, the title of this blog is “How to Finance Capital Backwards,” which is what the world has been doing for the last two centuries or so . . . or thinks it has, which amounts to the same thing.
|Pluto . . . god of wealth and of Hell.|
What brought on this bit of whimsy was an article in the Wall Street Journal earlier this week about Democratic Candidate Apparent Joe Biden on the sensitive subject of capital gains taxation. (Mark A. Bloomfield and Oscar S. Pollock, “On Capital Gains, Joe Biden Is No Jack Kennedy,” WSJ, 08/10/20, A-17.) The authors were complaining that, unlike JFK, Biden doesn’t appear to understand the need to favor the rich so that they can become richer.
Why is it essential for the rich to become richer? Because — in accordance with the (demonstrably false) belief that the only way to finance new capital formation is to reduce consumption, accumulate money savings, and then purchase the capital — as capital becomes more expensive, the only people who can afford to save in the required amounts are the rich. This means that the whole of the economy must be directed to making the rich richer and keeping them that way.
What about the rest of us? If the rich have all the money, and they are the ones producing by means of their exceptionally expensive capital instruments that none of the rest of us can afford to buy, who is able to buy the marketable goods and services the rich produce?
|Keynes . . . god of economics.|
Never fear. Lord Keynes to the rescue. It is an iron law of Keynesian economics (as well as Austrian and Monetarist/Chicago economics) that “savings = investment,” and “savings” is defined as the excess of production over consumption. That being the case, the only way to turn savings in the form of unconsumed production into money is . . . to consume it! In other words, the only way to save for investment in the Keynesian system is not to save!!
That’s a bit of a contradiction, but Keynes had the answer: screw the non-rich for their own good. And how did Keynes say to do that?
First, everyone except the rich must have a wage system job or be a recipient of government welfare to get an income. The small owner who uses the income from his or her investments for consumption purposes is a drag on the economy and must be eliminated. Keynes called for “the euthanasia of the rentier, the functionless investor.” These “useless eaters” consume investment income instead of reinvesting it to create jobs for themselves that they wouldn’t need if they had investments to generate consumption income. . . .
|Fisher . . . god of stock market speculation.|
Second, inflate the currency so that workers and welfare recipients can never catch up, no matter what they do. The idea is that financing job creation and welfare payments by issuing government debt to back the currency and lower its value gives the workers and welfare recipients the money to purchase the excess goods they produced to generate savings. The additional sales revenue flows into the pockets of the rich, who presumably use it to invest in new capital and create jobs.
Inflating the currency also raises prices, so that workers and welfare recipients pay more for the goods they were encouraged to purchase, but get less than they would have had the currency not been inflated by the “legal counterfeiting” in which the government engages by issuing debt-backed money. (That’s what Irving Fisher called it, and he wasn’t being pejorative. He approved of it.)
This enables producers to charge higher prices for goods that cost less to produce in monetary terms, thereby making a much greater profit. The more the currency is inflated, the more their profits soar . . . unless, of course, the currency is inflated to the point where it becomes worthless, in which case you institute a new currency and start the game all over again.
|Milton Friedman . . . god of greed is good.|
By this means the workers and welfare recipients are gradually worse off as time goes by. For every increase in income that is not matched by an increase in production, the price level rises. Now, if that was all that happened, savers of money would be hurt, because the value of their savings would evaporate as the value of the currency fell.
But only the rich are the ones saving in appreciable amounts, and not in cash. The small saver is the one destroyed by this process. The rich saver doesn’t let his or her money sit around in the form of cash, but invests it in new capital assets, the value of which goes up as the value of the currency goes down!
Further, the rise in the price level shifts purchasing power from the workers and welfare recipients to the producers; where the workers and welfare recipients get less and pay more, the rich producers produce less and get paid more!! The perfect system, right? Of course, the workers and the welfare recipients never get as much in increased pay and benefits as they lost by inflation, but who cares?
Of course, Keynes’s analysis, and that of the doyens of the other schools of economics, is completely backwards. As a rule, during periods of rapid capital expansion, savings for new investment doesn’t come out of past reductions in consumption, but future increases in production.
Keynes’s whole house of cards falls apart once this simple fact is revealed. The rich didn’t become rich by reducing consumption. They became rich by purchasing capital that pays for itself out of its own future profits — and became super rich by continuing to do the same thing. By assuming that the only way to finance new capital formation is to cut consumption and save, Keynes guaranteed that only the rich would or could own, and that the State would have a permanent role in redistributing wealth to keep the lid on — at least until it blows off.
And why would the lid blow off? We’ll look at that in the next posting on this subject.