As should be obvious by now, whoever has won the U.S. election (and assuming it doesn’t change too rapidly in response to whoever makes the most noise), the American people and their well-wishers around the world (far more than some believe, but fewer than there would be, “if”) are, in a sense, the losers. Why would we say such a terrible thing?
Because — consistent with what we’ve been saying since the beginning of CESJ and before — while there are serious problems in leadership and the party system, there is a bigger problem underlying the Same Old Political Thing peddled by both parties and pretty much all the alternatives, both within and without the party system.
No, we’re not saying the party system is the problem. It’s a problem, but one we could live with if we didn’t have to worry about buying groceries, filling gas tanks, paying utility bills, making housing payments (whether mortgage or rent), purchasing prescriptions, and providing for our families . . . at least, those who are still speaking to us. Whoever is sitting in Congress or the White House isn’t going to make a difference for the better, only for the worse, so long as most people are without property and therefore power — and thus basic economic security.
At the most superficial level, it’s not just the inflation rate. The math is probably wrong on this, but you’ll get the idea: if you had 20% inflation last year and 5% inflation this year, it doesn’t mean you’re 15% better off this year. It means you’re 25% worse off than you were two years ago. And don’t correct the math. We know it’s off, but the idea is the important thing . . .
Inflation is cumulative, not a one-time event. If you have 10% inflation per year for a decade, a price doesn’t start at $1, rise to $1.10 in Year One, reset to $1.00 and rise again to $1.10 in Year Two, and so on. No, the price of $1.00 on January 1 of Year One rises to $1.10 on December 31 of Year One, starts at $1.10 on January 1 of Year Two and rises to $1.21 on December 31 of Year Two, and so on, until you reach $2.59 on December 31 of Year Ten. The price has increased by 159%, not 10% or even 100%.
What about raises? On the average, for several years now, wages have not been keeping up with inflation or at best have been staying even. The good news is that if a worker can live within his or her means, he or she won’t be any worse or better off. The bad news is if someone gets into debt, and everything else being equal, he or she will never get out of debt. If someone manages to save, the savings become worth less every year. The interest rate on savings accounts is around 0.5%. That means if someone saves a dollar at the beginning of Year One with an inflation rate of 10%, that dollar will be worth 37¢ at the end of Year Ten.
Thus, if the saver had spent the $1 instead of saving it, he or she would have purchased something worth the same as the $1. If, however, he or she waits to spend the dollar at the end of Year Ten, he or she is either $1.22 short to get what would have cost $1 at the beginning of Year One or is getting 37¢ worth of something in Year One terms. The bottom line here is whether one spends, saves, or lives within one’s means, inflation is bad, regardless of what the experts and politicians tell each other and us.
Unfortunately, the expectation of inflation is not merely built into the system, it relies on it due to some flawed assumptions on which the science of economics as it is widely understood today is solidly (if by solidly we mean built on quicksand) based. These assumptions underpin mainstream economics and public policy and are themselves based on the idea that existing accumulations of wealth (savings or “past savings” to be more accurate) are the only source of financing for new capital formation.
Dr. Harold G. Moulton
As Dr.
Harold G. Moulton proved in 1935 — and which the science of finance had known
for a few millennia before then — existing wealth is not the only source of
financing for forming new capital, and (strictly speaking) using inflation to
redistribute wealth (for that is what it does) to finance new capital formation
is (at least in financial and economic terms) sheer insanity.
Think about it. What are savings? In today’s economic theory, specifically that of John Maynard Keynes, savings is strictly and solely defined as the excess of production over consumption, or in other words as past decreases in consumption below what is produced. If you want to finance new capital, so the thinking goes, then you must save (i.e., not consume) enough production to finance the new capital.
Sounds reasonable . . . until you think about it — and that’s where the Great Financial Paradox comes in:
· If (as Keynes insisted) the only way to finance new capital formation and therefore production is out of existing accumulations of savings, and
· If (as Keynes also insisted) savings consists only of past reductions in consumption, then —
· Where did the first savings come from?
Think about it. Take your time. You won’t be able to resolve this because it is what is called a “logical fallacy,” specifically the “fallacy of the wrong direction” or cum hoc ergo propter hoc / reversing cause and effect — putting the cart before the horse. It consists of reversing the natural or logical sequence of events, premises, or causal relationships. Rhetorically, it’s a trick known as hysteron proteron, a figure of speech where the last thing is put first.
In other words, Keynesian economics (which is the basis — more or less — of the modern global financial system and economic policy) is based on a rhetorical gimmick and a logical fallacy. The fact it doesn’t work has been proven (or at least suggested) by the gargantuan debt load and the falling living standards, falling income, growing disparities in wealth and just about everything else. Don’t think so? Tell that to the protestors in Europe and the voters in the United States.
In the next posting on this subject, however, we will take a look at how things are supposed to work and a possible way to get things back on track.
#30#
