Money and the real economy
We work and produce things. In today's language working and producing is what is called the real economy. It is the only real economy.
Not everyone who has a job and goes to work is part of the real economy. Lawyers, real estate agents, football players and others are not part of the real economy. They do not actually produce things, and in the case of lawyers and real estate agents there presence can be a negative because they distort the real economy.
But we need to exchange what we have produced for the things we need. The most primitive form of exchanging what we have produced for what we want is the barter system.
In a barter economy trade would have to be face to face with a person who wants what is have produced, and has something to offer in exchange. This would make the opportunities for trade limited. It would have to take place within a very limited area. It would take place within the same village or a nearby village.
With the money system the goods can be exchanged for a token of nominated value that has an acceptance to someone who has the goods we want.
With money a token of a nominal value is received from someone who does not have what the 'seller' wants. The seller can then take the token to someone else and exchange it for what is wanted. Money has no intrinsic value. It only eases the workings of the real economy by using a concept of value, not a real value. Real value only exists in the goods produced in the real economy.
There was another feature added to the money system. If someone had some spare money they could invest that money in companies that needed to raise money to aid production. That way excess value in the real economy can be re-directed to a place where there is s lack. This was done by way of share in companies purchased at the stock market.
But the overriding principle is that the money system has no value other than helping the real economy work.
Discussions about a directed economy (Communism) or a market economy (Capitalism) only refer to the philosophical way in which goods are distributed in the real economy. Will all good and services be shared equally or do those who works harder get more? This could became 'do the sneaky and unscrupulous get everything?' The money market in both cases would be the same to achieve maximum results, although in practice the ideology spills over.
The money system that has operated for the last few decades is the neo-conservative, (or sometime called neo-liberal) system. This is a real system, not just name calling, even though Malcolm Turnbull tried to use it as such when Kevin Rudd used the expression.
Basically neo-conservatism is 'let the market decide.' It is everyone for them selves. Neo-conservatism replaced Keynesian Theory. Keynesian Theory is basically free market, but with governmental controls and intervention to smooth out the rough bits. It is one of those ironies that now that neo-conservatism has completely messed up the markets are calling for Keynesian style interventions from governments to fix things.
What has happened has happened over and over the controllers of the money side of the equation lose site of the fact that they were only there to facilitate trade. No more and no less. Instead the money side started driving the real economy.
In the mistaken believe in its own existence the money markets act in ways that expand the money markets without the slightest concept of what it is doing to the real economy.
The real economy has a certain capacity to produce. The sustainable level of the real economy doe not change radically in the short/medium term. It has certain level that it cannot exceed at any time. The real economy can grow, but only with increased infrastructure and or/greater efficiencies/new technology.
But pure greed takes over and the money side increasingly pushes the real economy to produce more, until the demands of the money markets exceeded the ability of the real economy to produce. The problem with greed is that it losses sight of what money is and why it is there.
The visible sign of the greed of the money people pushing the real economy past reasonable expectations is the sub-prime market. This is not the sole problem, but it is the visible problem.
How could any one giving out Ninja loans (No Income, No Job, no Assets) expect that increases in the real economy would cover the dept? Somehow the real economy was expected to increase very quickly to cover trillions of dollars of new debt. It was never going to.
In 2001 I described the US economy as a .com economy. Sell twice as much this week (at a loss) to cover last weeks losses, and twice as much again next week. This produces rapidly increasing debt with no increase in the real asset base to cover the new debt. Many others predicted the collapse of the US economy because it was never going to work long term.
There is only one legitimate way in the real economy for people to get something they cannot afford. That is to grow the real economy (overall or personally) to a stage where they can afford to buy. That does not mean everything must be paid for in cash. It means loans must be within the reasonable expectations of what can be repaid.
What the greed of the money markets has done is give loans that could not be repaid and expected the real economy to expand beyond its capacity so they could be repaid. It did not happen. It could not happen, and can never happen. The real economy has finite limits.
When that finite limit was reach the real economy defaulted. It simply broke down under the pressure of the money markets. The money stopped flowing, and the whole system stopped working. You can stretch rubber band so far before it breaks, but when it breaks it stays broken. Greed can only stretch thing so far before something breaks.
Making a stand against greed by way of government controls is not a slide towards communism as some will say. Do we want money to be used as it was intended? As a way to facilitate trade?
If people are going to trade, either with goods or labour, they must have the ability to trade. If the housing market wants to sell houses people must be able to buy houses. Trade depends on people with the ability to trade, and that means in a healthy economy the wealth must be spread around sufficiently to promote the highest possible level of activity.
Poor people don't trade, they survive. Balancing the economy so that poor people are lifted out of poverty is one of the things that is needed. This is not a social nicety or philosophical position. A healthy sustainable real economy cannot afford poor people. A healthy real economy needs all its participants to be productive and solvent.
That does not mean that the hard working or business sector are not rewarded their efforts. It means that there must be a minimum level of general wealth within an economic system if that system is going to operate to maximum sustainable capacity.
Please do not confuse my use of the word 'sustainable' with global warming issues or power issues. I and using it in the sense of healthy and long lived.
The thing that must not happen in a healthy economy is that the money side becomes the driver, not the facilitator. There has to be sufficient control and government intervention policies to ensure that the money side stays subordinate to the real economy.
There has to be balance between allowing the real economy room to manoeuvre without being overly restricted by money supply, and the need to keep greed out of the markets. How can greed be legislated against? With great difficulty, but it has to be done if another sub-prime fiasco is to be avoided.
The world economy is essentially smashed. Do we re-build the same system only to have it self destruct again some time in the future, or build new greed resistant economic systems?
The 'allow the market to find its own level' miss the point that the money market does not need to find its own level. What the money market need to do is to respond sensitively to the demands of the real economy. The idea that regulation of the money market is somehow an interference with free trade or restricts trade in any way is incorrect. Regulation of the money market that keeps it in line with the real market promotes free trade. It allows the real market to run at equilibrium levels.
What are the conditions that allow the maximum flexibility with sustainable certainty in the real market? Design the workings of the money markets to facilitate the real economy.
Would anyone watching a game of football complain that the rules of the game interfere with the free market principle of the right of the players to do whatever they want? Without rule the game of football would be a shambles. It is the same with the money markets in relation to the real economy. Defining how the money market must work in order to perform the task was intended too is no different.
Making rules someone who wants a house loan must have 10% deposit and reasonably proof that they can repay the loan is not interfering with the market because the only real market is the real economy. The real economy must have the capacity to support the loan. If the person cannot repay then the real economy does not have the capacity to support the loan.
If finance is need in the real economy the person taking the loan needs some sort of stability and certainty on which to make rational decisions. This is impossible when limited regulations allow cowboys (and girls) to play poker on the stock market.
The stock market was a good idea but quickly became a non stop game of poker using other people's money. Stopping short selling, getting stock brokers under control and not allowing re-sale of stock for 30days is not interfering with the market. It is ensuring that the money markets work for the benefit of the real market. We must get the gamblers out of the way.
Problem gamblers at the casino destroy families. The stock market gamblers destroy the real economy.
Without regulation the money markets become the survival of the greediest by totally screwing the real economy. No problem for the greedy. They just cash in their chips and sit out the recession. When the real economy recovers they can do it all again.
With a lot of luck there may be enough people of good will that can rebuild the real economy and bring the money markets under control. I doubt it because there will always be those who do not understand that no matter money they have it is all useless without a healthy real economy.
There will those who will cry 'pinko commie' or other insults at the suggestion that money markets need to be regulated to a high degree, but ideology has nothing to do with it. We can argue ideology once the money market is under control and the real economy is working again.
Success is likely to be difficult against large vested interests but does not constitute a reason for not trying.
David Young.