Tag: Financialism

The rich man believes in only his money. He worships neither God nor Devil as he is both unto himself. The poor man’s poverty is his only abundance.

News regarding the global economy becomes more disconcerting with each week. Oil and other commodity prices remain low yet volatile. The Chinese economy remains sluggish, meaning its appetite for raw material will not recover the new future. Europe seems to have become atabernacle of no growth. Even the relatively healthy American economy is showing signs of future weakness.  Given these storm winds, a growing number of economic and financial experts predict of global recession. Some even warn of worse.

Due primarily to the splashed oil and commodity prices, a degree of economic discomfort for most African nations is inevitable. Yet, the worst can be avoided provided right actions are taken. Economic orthodoxy has led us into the thicket. We would be wishful to a harmful extreme if we believed that it can extricate us from injury now caused. Radical but intelligent departure from standard economic practice is the clarion that must be answered.

In the two prior submissions of this trilogy, we accosted two interrelated tenets of mainstream economics.  First, we sought to bury the venerable hobgoblin that government deficit spending is inherently bad. Second, we annulled the marriage between government deficit spending and debt. The two have no reason to be betrothed except to profit the financial class and detrude the rest of the economy.

Now it is time to move from concepts and analysis into the realm of concrete policies that African nations should consider in order to avert the worse of the pursuing tempest.

1. End the implicit peg to the dollar: I have written about this in prior articles, so I will not go into intricate detail. Most African nations are commodity exporters. These governments formulate their budgets in like manner. Commodity exports form the lion’s share of hard currency earnings, usually dollars. The nations then perform a simple exchange rate conversion. Using the official exchange rate extant at the time, they create a new amount of their national currency based on the amount of dollars received for their exports. This new amount of national currency becomes an artificial, self-imposed limitation on fiscal policy. The amount of foreign currency acquired through export earnings dictates the amount of new domestic money the government injects into the economy. In effect, the whims and wants of foreign consumers determine the fiscal policies of most African nations.

There is no sound economic reason to perpetuate this brand of servitude. This custom should be trashed for it serves no purpose other than to undermine African fiscal independence. This practice is no less capricious than pegging government fiscal policy to how many stars one can sight in the evening sky on the third Monday of every month that has at least three different vowels in its name.

Governments need not peg their fiscal expenditure to the amount of foreign currency earned. This is because the amount of foreign currency acquired has no logical nexus with to the determination of the levels of domestic currency the government should place into the system to optimize growth.

It is a strange notion to believe that the amount of foreign currency earned which is a function of external demand for exports should determine how much money a government should spend for the economic betterment of its populace. The one goal is no way a function of the prior input.  Foreign demand and internal requirements do not readily translate into each other. This is the forced merger of two different sets of ideals and objectives that mean little if nothing to each other.  The only way this makes any sense if we are to believe the canard that all commercial and financial markets function perfectly and are at all times completely rational. We know this not to be true. The markets cannot be perfect because people are the market and people are imperfect. Thus, in as much as the markets are composites, they also are totems of compounded error upon error.

Markets are not impersonal forces impervious to fear, emotion, inconsistency and mistake. If they were, the world would not be in the current tailspin. All past and future recessions would be impossible. Thus, it is futile to believe that a nation’s optimal fiscal expenditure is intrinsically linked to the amount of money foreigners believe they should pay for that nation’s exports. The foreigner mostly seeks the best deal or the lowest prices for your exports. His ability to command a lower price should not define a nation’s ability to provide the best fiscal policy for its people provided that fiscal policy can be underwritten by that nation’s sovereign currency.

Thus, African governments must stop pegging their expenditures and their creation of new money to the amount of foreign currency they derive in any given period. Instead, governments should peg their fiscal policy to the amount of money they believe will produce the optimal level of broadly shared growth without giving rise to a harmful level of inflation.

2. Have the courage of deficit spending: Government deficit spending is basic to economic growth. When governments runs deficits, the private sector runs a surplus. The obverse is true as well. Empirical evidence supports the utility of government spending. America has engaged in deficit spending roughly 70 percent of its existence. This practice has not seemed to deter that economy from becoming the world’s largest. The few instances the American government fashioned balanced or surplus budgets for more than three consecutive years, the nation marched into recession each and every time. So much for the mainstream textbooks and their exultations of fiscal reticence. Their wrong theology is set aside by way of empirical fact.

No nation should engage in deficit spending for spending sake. This spending is a tool. As with any utensil, it must be properly used. During times when the private sector appears eviscerated, government deficits are needed to boost the private economy from recession’s pit. However, expenditure must not be toward frivolity; this will worsen the already bad state of affairs. Spending must be geared to projects that yield jobs as well as those that spark follow-on economic activity and consumption. If the deficit spending of one unit of currency produces more than that amount of new wealth, then the deficit spending benefits the nation and should be pursued with commitment and vigor in order to reduce the risks of economic contraction.

3. Greater deficit but no greater debt: Deficit spending should not automatically be linked to new borrowing. Borrowing to fund the deficit should only be done as part of a conscious policy to increase bond yields or protect the valuation of financial assets. Otherwise, deficit spending should be simply by government creation of new money out of “thin air.”

An interim arrangement between the current fiscal/monetary regime and the one above proposed is the creation of what I call “tax bonds.”  This concept is presented as a means of averting possible legislative or constitution impediments to government “money printing.” Also, this halfway measure might salve political opposition because it also functions as an excellent heuristic device that reveals the convolution of the current fiscal regime. These tax bonds would be instruments to be used in situations of insufficient money and revenue to meet the fiscal objectives a government should seek to accomplish.

Tax bonds would be local currency-denominated instruments with a perpetual or indefinite maturity date. They would also be interest free. The tax bonds could be used to partially pay for services, contracts or work done for government by large companies. Recipient entities might hold the bonds to use them to pay taxes or for other government services or fees the recipient could incur.They also could be used to purchase other government-issued securities. They would also be redeemable on demand by the banking system but at a stated discount of their face value. Using these bonds to partially pay large contracts would free the more conventional forms of money to be used to pay smaller contractors, to fund social services and to help finance special projects.

4. Begin to industrialize: The steep decline in commodity prices reteaches an age-old lesson. As to prosperity and an economy dependent on natural resource exportation, never the twain shall meet. A nation is better off manufacturing sturdy affordable cars or inexpensive machinist tools than in cultivating the perfect cassava or tomato. Currently, the only thing Africa manufactures in abundance are talented but undereducated and underutilized people. We must put this great mass to work, particularly given the rapid urbanization of the continent’s population.

As currently structured, the private sector is too weak and imbalanced to spark manufacturing on its own. It needs government assistance. Most countries could do with a national industrial policy that encourages the development of strategic industries which lie along the critical path to sustained growth and employment.

Modern Industry is based on credit. However, interest rates are too high for a borrowing manufacturer to be competitive.We need to experiment with interest rates. For industrial sectors designated as strategic by the government’s industrial plan, interest rates must be lowered. Banks must be legislated to devote a quota of loans to key enterprises at the lower rate.  These loans will be checked by a government auditing entity to ensure they are bona fide.Banks will be given tax breaks, preferences in transacting government business and other incentives to make these manufacturing loans.

Government must also institute a package of tax credit, subsidies and protection from imports for critical sectors.

While we must increase our manufacturing sectors, we must be careful as to the aim of this policy. In the past, nations adhered to export-dominated models. While exports will be important, we must be careful not to place too much faith in this tried way.These models proved successful, in part, because of the global economic environment of the times. Our environment is different.  Both the western and eastern economies now place greater emphasis on manufacturing and export-driven growth. Everyone cannot have an export surplus. Some nations will lose because too many already follow this approach. We must limit the number of African nations among them that fail.

Our major aim at this stage should be to nurture domestic demand and intra-regional as well as intra-continental trade through ECOWAS and other institutional mechanisms.

5. Help the farmer: In many nations, land ownership and tenure are based on antiquated systems. African governments need to urgently embark on radical land reform converting much of the land now in productive use into forms of private ownership more amenable to being collateralized in the stream of regular banking and credit transactions.

This is especially true for farmers. Clearer title and unambiguous private ownership of land will allow them to use the property as collateral for credit to purchase items and implements that enhance their yields and productivity.

Agricultural mortgage loan corporations should be established in many nations. In some instances, the entity will directly loan to farmers. Its main objective will be to create a secondary market for farm mortgages. The corporation will buy from lending banks those mortgages that conform to certain underwriting criteria such as loaned funds can only be used for farming-related expenditures.The underwriting requirements will ensure that the loans are not unfair bargains imposed by banks upon unwitting farmers. On the other hand, by selling the mortgages to the loan corporation the banks shall profit, increase their liquidity and thus giving them the incentive to make more loans.The loan corporation may securitize the loans, reselling individual loans or these farmland securities to investors. Government could partially guarantee the resales.A similar evolution should take place with residential and commercial real estate.

In addition, governments should consider establishing commodity boards ensuringminimum prices for certain crops. Improved warehousing systems will add food security and lower prices while improving farm incomes. Farmers will receive warehouse scrip or tickets for their products. They can use these to borrow money in the short-term as well.

6. Develop sub-national development and regional banks: To alleviate the financial crunch on subnational political units such as states in Nigeria as well as to promote infrastructure and integration at the regional level, publicly-owned and operated regional development banks should be established.

Equity capital for such banks would come from the participating states and the federal government.

The banks would lend primarily to the states, individually or in concert with other member states.  The loans would only be for infrastructural projects, particularly power generation, mass transport and water.To be eligible for loans, states must deposit a certain percentage of its funds with the bank.This mechanism will enhance the funds at the disposal of the states. This is because the banks, like a private bank, would have the charter to issue new currency for all projects deemed creditworthy. The banks must be subjected to strict auditing and underwriting requirements to minimize the negative effect of political influence in banking decisions and operations.

These are just a few ideas to bruit in the search for a more just and prosperous global economy. Opposition to these ideas is strong and as old as it is strong. The mainstream advocates that governments either cut expenses or impose more severe taxation. Thisfalse cure is but a species of true austerity.  In robbing the private sector to pay the public, greater taxation is an invitation for recession to become a permanent fixture in the national architecture.

Given the present difficulties, most nations require net increases in the amount of money in the political economy.  The new funds need to be allocated in the best possible ways to provide employment, spark infrastructural development, increase farm and industrial output while making the financial sector more amenable to helping the real sector move toward fuller employment.

As I conclude, I again leave you with an excerpt from Financialism: Water From An Empty Well:

This book is not about politics nor is it about economics. It is about the confluence where politics and economics meld to become each the other… It is about complex thought and about behavior and fact of even greater complexity. It is as much about the inhumane behavior of facts as it is about the facts of human behavior.  It is about how thought can go awry. Yet, the more an idea goes awry, the more it and its adherents insist on its validity. This gives an account of that class of people who make and multiple money for the sake of it. It points out those who have staked the well-being of the greater portion of us on unnecessary wagers placed with the whimsical gods of high finance. In the end, this book is for those who seek to build a political economy based on an equitable creation of wealth so that all may have a better run at a better future.”

With this article and its earlier companions, my hope is to have added to our discourse on how to claim the prosperity that Providence intends for us all. Thank you.

08060340825 sms only

The rich man believes in only his money. He worships neither God nor Devil as he is both unto himself. The poor man’s poverty is his only abundance.The rich man believes in only his money. He worships neither God nor Devil as he is both unto himself. The poor man’s poverty is his only abundance.

News regarding the global economy becomes more disconcerting with each week. Oil and other commodity prices remain low yet volatile. The Chinese economy remains sluggish, meaning its appetite for raw material will not recover the new future. Europe seems to have become atabernacle of no growth. Even the relatively healthy American economy is showing signs of future weakness.  Given these storm winds, a growing number of economic and financial experts predict of global recession. Some even warn of worse.

Due primarily to the splashed oil and commodity prices, a degree of economic discomfort for most African nations is inevitable. Yet, the worst can be avoided provided right actions are taken. Economic orthodoxy has led us into the thicket. We would be wishful to a harmful extreme if we believed that it can extricate us from injury now caused. Radical but intelligent departure from standard economic practice is the clarion that must be answered.

In the two prior submissions of this trilogy, we accosted two interrelated tenets of mainstream economics.  First, we sought to bury the venerable hobgoblin that government deficit spending is inherently bad. Second, we annulled the marriage between government deficit spending and debt. The two have no reason to be betrothed except to profit the financial class and detrude the rest of the economy.

Now it is time to move from concepts and analysis into the realm of concrete policies that African nations should consider in order to avert the worse of the pursuing tempest.

1. End the implicit peg to the dollar: I have written about this in prior articles, so I will not go into intricate detail. Most African nations are commodity exporters. These governments formulate their budgets in like manner. Commodity exports form the lion’s share of hard currency earnings, usually dollars. The nations then perform a simple exchange rate conversion. Using the official exchange rate extant at the time, they create a new amount of their national currency based on the amount of dollars received for their exports. This new amount of national currency becomes an artificial, self-imposed limitation on fiscal policy. The amount of foreign currency acquired through export earnings dictates the amount of new domestic money the government injects into the economy. In effect, the whims and wants of foreign consumers determine the fiscal policies of most African nations.

There is no sound economic reason to perpetuate this brand of servitude. This custom should be trashed for it serves no purpose other than to undermine African fiscal independence. This practice is no less capricious than pegging government fiscal policy to how many stars one can sight in the evening sky on the third Monday of every month that has at least three different vowels in its name.

Governments need not peg their fiscal expenditure to the amount of foreign currency earned. This is because the amount of foreign currency acquired has no logical nexus with to the determination of the levels of domestic currency the government should place into the system to optimize growth.

It is a strange notion to believe that the amount of foreign currency earned which is a function of external demand for exports should determine how much money a government should spend for the economic betterment of its populace. The one goal is no way a function of the prior input.  Foreign demand and internal requirements do not readily translate into each other. This is the forced merger of two different sets of ideals and objectives that mean little if nothing to each other.  The only way this makes any sense if we are to believe the canard that all commercial and financial markets function perfectly and are at all times completely rational. We know this not to be true. The markets cannot be perfect because people are the market and people are imperfect. Thus, in as much as the markets are composites, they also are totems of compounded error upon error.

Markets are not impersonal forces impervious to fear, emotion, inconsistency and mistake. If they were, the world would not be in the current tailspin. All past and future recessions would be impossible. Thus, it is futile to believe that a nation’s optimal fiscal expenditure is intrinsically linked to the amount of money foreigners believe they should pay for that nation’s exports. The foreigner mostly seeks the best deal or the lowest prices for your exports. His ability to command a lower price should not define a nation’s ability to provide the best fiscal policy for its people provided that fiscal policy can be underwritten by that nation’s sovereign currency.

Thus, African governments must stop pegging their expenditures and their creation of new money to the amount of foreign currency they derive in any given period. Instead, governments should peg their fiscal policy to the amount of money they believe will produce the optimal level of broadly shared growth without giving rise to a harmful level of inflation.

2. Have the courage of deficit spending: Government deficit spending is basic to economic growth. When governments runs deficits, the private sector runs a surplus. The obverse is true as well. Empirical evidence supports the utility of government spending. America has engaged in deficit spending roughly 70 percent of its existence. This practice has not seemed to deter that economy from becoming the world’s largest. The few instances the American government fashioned balanced or surplus budgets for more than three consecutive years, the nation marched into recession each and every time. So much for the mainstream textbooks and their exultations of fiscal reticence. Their wrong theology is set aside by way of empirical fact.

No nation should engage in deficit spending for spending sake. This spending is a tool. As with any utensil, it must be properly used. During times when the private sector appears eviscerated, government deficits are needed to boost the private economy from recession’s pit. However, expenditure must not be toward frivolity; this will worsen the already bad state of affairs. Spending must be geared to projects that yield jobs as well as those that spark follow-on economic activity and consumption. If the deficit spending of one unit of currency produces more than that amount of new wealth, then the deficit spending benefits the nation and should be pursued with commitment and vigor in order to reduce the risks of economic contraction.

3. Greater deficit but no greater debt: Deficit spending should not automatically be linked to new borrowing. Borrowing to fund the deficit should only be done as part of a conscious policy to increase bond yields or protect the valuation of financial assets. Otherwise, deficit spending should be simply by government creation of new money out of “thin air.”

An interim arrangement between the current fiscal/monetary regime and the one above proposed is the creation of what I call “tax bonds.”  This concept is presented as a means of averting possible legislative or constitution impediments to government “money printing.” Also, this halfway measure might salve political opposition because it also functions as an excellent heuristic device that reveals the convolution of the current fiscal regime. These tax bonds would be instruments to be used in situations of insufficient money and revenue to meet the fiscal objectives a government should seek to accomplish.

Tax bonds would be local currency-denominated instruments with a perpetual or indefinite maturity date. They would also be interest free. The tax bonds could be used to partially pay for services, contracts or work done for government by large companies. Recipient entities might hold the bonds to use them to pay taxes or for other government services or fees the recipient could incur.They also could be used to purchase other government-issued securities. They would also be redeemable on demand by the banking system but at a stated discount of their face value. Using these bonds to partially pay large contracts would free the more conventional forms of money to be used to pay smaller contractors, to fund social services and to help finance special projects.

4. Begin to industrialize: The steep decline in commodity prices reteaches an age-old lesson. As to prosperity and an economy dependent on natural resource exportation, never the twain shall meet. A nation is better off manufacturing sturdy affordable cars or inexpensive machinist tools than in cultivating the perfect cassava or tomato. Currently, the only thing Africa manufactures in abundance are talented but undereducated and underutilized people. We must put this great mass to work, particularly given the rapid urbanization of the continent’s population.

As currently structured, the private sector is too weak and imbalanced to spark manufacturing on its own. It needs government assistance. Most countries could do with a national industrial policy that encourages the development of strategic industries which lie along the critical path to sustained growth and employment.

Modern Industry is based on credit. However, interest rates are too high for a borrowing manufacturer to be competitive.We need to experiment with interest rates. For industrial sectors designated as strategic by the government’s industrial plan, interest rates must be lowered. Banks must be legislated to devote a quota of loans to key enterprises at the lower rate.  These loans will be checked by a government auditing entity to ensure they are bona fide.Banks will be given tax breaks, preferences in transacting government business and other incentives to make these manufacturing loans.

Government must also institute a package of tax credit, subsidies and protection from imports for critical sectors.

While we must increase our manufacturing sectors, we must be careful as to the aim of this policy. In the past, nations adhered to export-dominated models. While exports will be important, we must be careful not to place too much faith in this tried way.These models proved successful, in part, because of the global economic environment of the times. Our environment is different.  Both the western and eastern economies now place greater emphasis on manufacturing and export-driven growth. Everyone cannot have an export surplus. Some nations will lose because too many already follow this approach. We must limit the number of African nations among them that fail.

Our major aim at this stage should be to nurture domestic demand and intra-regional as well as intra-continental trade through ECOWAS and other institutional mechanisms.

5. Help the farmer: In many nations, land ownership and tenure are based on antiquated systems. African governments need to urgently embark on radical land reform converting much of the land now in productive use into forms of private ownership more amenable to being collateralized in the stream of regular banking and credit transactions.

This is especially true for farmers. Clearer title and unambiguous private ownership of land will allow them to use the property as collateral for credit to purchase items and implements that enhance their yields and productivity.

Agricultural mortgage loan corporations should be established in many nations. In some instances, the entity will directly loan to farmers. Its main objective will be to create a secondary market for farm mortgages. The corporation will buy from lending banks those mortgages that conform to certain underwriting criteria such as loaned funds can only be used for farming-related expenditures.The underwriting requirements will ensure that the loans are not unfair bargains imposed by banks upon unwitting farmers. On the other hand, by selling the mortgages to the loan corporation the banks shall profit, increase their liquidity and thus giving them the incentive to make more loans.The loan corporation may securitize the loans, reselling individual loans or these farmland securities to investors. Government could partially guarantee the resales.A similar evolution should take place with residential and commercial real estate.

In addition, governments should consider establishing commodity boards ensuringminimum prices for certain crops. Improved warehousing systems will add food security and lower prices while improving farm incomes. Farmers will receive warehouse scrip or tickets for their products. They can use these to borrow money in the short-term as well.

6. Develop sub-national development and regional banks: To alleviate the financial crunch on subnational political units such as states in Nigeria as well as to promote infrastructure and integration at the regional level, publicly-owned and operated regional development banks should be established.

Equity capital for such banks would come from the participating states and the federal government.

The banks would lend primarily to the states, individually or in concert with other member states.  The loans would only be for infrastructural projects, particularly power generation, mass transport and water.To be eligible for loans, states must deposit a certain percentage of its funds with the bank.This mechanism will enhance the funds at the disposal of the states. This is because the banks, like a private bank, would have the charter to issue new currency for all projects deemed creditworthy. The banks must be subjected to strict auditing and underwriting requirements to minimize the negative effect of political influence in banking decisions and operations.

These are just a few ideas to bruit in the search for a more just and prosperous global economy. Opposition to these ideas is strong and as old as it is strong. The mainstream advocates that governments either cut expenses or impose more severe taxation. Thisfalse cure is but a species of true austerity.  In robbing the private sector to pay the public, greater taxation is an invitation for recession to become a permanent fixture in the national architecture.

Given the present difficulties, most nations require net increases in the amount of money in the political economy.  The new funds need to be allocated in the best possible ways to provide employment, spark infrastructural development, increase farm and industrial output while making the financial sector more amenable to helping the real sector move toward fuller employment.

As I conclude, I again leave you with an excerpt from Financialism: Water From An Empty Well:

This book is not about politics nor is it about economics. It is about the confluence where politics and economics meld to become each the other… It is about complex thought and about behavior and fact of even greater complexity. It is as much about the inhumane behavior of facts as it is about the facts of human behavior.  It is about how thought can go awry. Yet, the more an idea goes awry, the more it and its adherents insist on its validity. This gives an account of that class of people who make and multiple money for the sake of it. It points out those who have staked the well-being of the greater portion of us on unnecessary wagers placed with the whimsical gods of high finance. In the end, this book is for those who seek to build a political economy based on an equitable creation of wealth so that all may have a better run at a better future.”

With this article and its earlier companions, my hope is to have added to our discourse on how to claim the prosperity that Providence intends for us all. Thank you.

08060340825 sms only

 

The Sweat of the Poor are the Pillars of the Castle the Poor are forbidden to enter.

Last week’s piece ended with the assertion that governmental budget surpluses and balances are not inherently virtuous. Nor should they be elevated to the status of being the prime objective of the fiscal policy of a government that is the sovereign issuer of its currency. For such a government, insolvency in its own coin is an impossibility. Such a government can only run dry its treasury because that government achieves thrawn satisfaction in so doing. When the private sector threatens to become febrile from overheating or from running too long, too fast, brakes must be applied. Budget surpluses are warranted to constrain and cool private-sector hyperactivity. When the private sector falls weak and sluggish, budget deficits are apt to give that sector the added fuel needed to restore its strength that it may rise to its feet once more.

Since the free market does not truly exist except in the imaginings of some and since markets are imperfect because they are the composite behavior of imperfect people, it is generally the case that the private sector will beg assistance in one form or another from government. Thus, the accounts of most governments, including those of the largest economies, usually run red. They operate at deficits year in, year out.

If your knowledge of economics is confined to mainstream orthodoxy, you will shudder that deficit spending means mounting debt spending. You are right and wrong. The way fiscal and monetary operations are now structured, public deficit spending is associated with increased government debt. However, this is not from necessity but from conscious choice to favor the moneyed class above all others.

The financing of government deficit spending is the acme of convolution. Its general acceptance is also one of the world’s most blatant examples of mass conditioning. You have been taught that a government must borrow the currency which it has the sovereign right to issue in order to fund a deficit. Government that can issue its currency in infinite amounts must seek borrow from someone who has not the power to issue the currency. Most have become so accustomed to this operation that they accept it as an article of blind faith.

It is an article of stunning contrivance.Yet, most people are afraid to question this accepted oddity because they want to appear learned or sophisticated enough to understand why the process is as stilted as it is. People have been cowed into believing the most direct route between two visible points is an underground labyrinth. No one seeks to question it because none wants to be ridiculed as naïve or unlearned. Thus, we continue with a ritual the origins of we know little about. We must have to courage to question practices when they are more elaborate than they ought to be. Usually such convolution in matters of finance is a sign of something amiss. A great swindle has been established.We have been deceived to venerate it as a prudential exercise in fiscal restraint.

Orthodoxy croaks that the system is designed as such because forcing government to borrow will constrain government from engaging in excessive deficit spending, thus curbing inflation. This is the most charitable reason given for this artifice. Even this explanation is so illogical that it defies reason that so many otherwise logical human would hold to it as they would a religious creed. First, making government borrow money only further increases the deficit that supposedly is meant to be constrained; this is because government must repay interest as well as principal on the borrowed money. To repay the heightened amount means government must continually borrowing.  Thus, this rationale undermines itself. It aggravates not mitigates the perceived ailment.

Second, this type of debt-compounding deficit financing enriches the financial sector relative to the real economy. This means that deficit spending will be less productive in spurring the real economy – where the jobs and production are – than it inflating the financial sector. Third, this constraint does not seem to have proven effective in limiting government deficit spending over time. If a government is determined to engage in deficit spending, it will do so. Debt as a constraint to borrowing is a weak, false barrier. Fourth, it we want to contain inflation, it would simply be better put and more straightforward to simply establish an explicit inflation ceiling on fiscal operations. As that inflation ceiling is approached, deficit spending would lessen. This is more precise and will generate much less debt than the current architecture. Set an inflation ceiling and adhere its dictates! If government lacks the willpower to follow this simple way, that same government will not be kept from borrowing more and more money no matter the debt incurred by doing so.

Thus, we come to the more compelling reason for the strange custom that government borrow its own money. The system was established not so much to battle inflation but to ensure financial institutions have a sure revenue stream. Financial institutions have a big appetite for government debt; they have engineered this system to produce such debt because that debt means their profit. Holding government bonds is a risk free investment; holding large volumes of the same means a handsome return even though the yield per bond is small. This is a sure return on investment. The banks know government can always pay its debt because of the simple reason that government has the unlimited ability to issue its currency.

This is welfare for the rich and affluent writ large. It actually is a slap in the face of the ordinary citizen who can’t get government to provide the basic social services. We saw this same spirit of financial system welfare in operation during the 2009 recession.  All over the world, governments “printed” trillions of dollars of money to pump into financial institutions, rescuing them from the jeopardy of their own greedy intemperance. There is nothing wrong with relief to the financial institutions when part of broader economic rescue package. However, the relief given the financial sector was behemoth. That which went to the common man was scant and begrudgingly done. Financial institutions were bailed out while the rest of society was tied to a thin rope and left twisting in the wind.

This bring us to the key point. We must learn that government deficit spending need not be synonymous with debt. The linkage of deficits and debt is based on an economic model that has run its course. In doing, so this model has helped expand the financial sector to where it is crowding out the real economy from getting the resources it requires. It is a cause and a symptom of the minatory financialism that now sparks serial economic crises.

There is no logical reason why governments cannot fund their fiscal deficits simply by issuing their currencies without having to borrow more money. When the financial crisis hit, governments could not bail out the banks by borrowing from the banks. The financial firms had ruined themselves into widespread illiquidity and some to insolvency. The banks had become cash-strapped; that lack was the core of the crisis.  Unable to borrow from the spendthrift banks, governments did what only government could. They printed money by the trillions to feed and salvage banks. They printed trillions of dollars but the world did not collapse. In fact, a graver economic depression was held back. Inflation did not mount to dangerous proportions. During that period, the orthodox economists gagged their opposition to government printing money.

If government can print trillions of dollars to save financial institutions without turning inflation into an all-consuming monster, then there is no defensible reason that governments around the world, without the entanglement of added debt, cannot print several hundred billion dollars on fiscal projects that create jobs, build infrastructure and provide improved services. Big money and big business will oppose this, again screaming inflation. However, the bank bailout illustrates that such deficit spending will not spark harmful levels of inflation when the economy is laggard and falling. Big money actually knows this. However, big money does not want you to know it. If the average person understood, they just might demand more from government.

The hold of Big Money would be loosened or even broken altogether. Thus, Money Power has inculcated us on the way that it would have us go instead of the way that is best for us. In effect, economics is not an absolute science. It is a harsh art, a wrestling match of competing interests. Money and Power have enjoyed a long,intimate tryst. Money does what it can for Power and Power reciprocates the favor. Meanwhile, both detest the modest and the poor. They conspire to lower the humble to a place where his economic survival will appear to him a thankful feat such that he will not deign to question why those who already have now appear to have too much for even their own good.

The present structure of deficit linked to debt is as if society passed a law forcing a farmer to go to the supermarket to purchase the very potatoes he grows in his fields.  By law, he cannot directly consume the produce he grows. He is compelled to buy it from another at a higher price than it cost him to grow it. To constrain a farmer in this way would be cruel, a definite sign that society unduly hates farmers or excessively loves supermarkets.Essentially, there is no difference in how we handle government deficits in real life and how we mistreat the farmer in this hypothetical circumstance.

Deficit spending by printing money is no more inflationary than what banks do when they make a loan. You have been taught that banks make loans based on the deposits they hold from savers. You have been taught wrong. What you have been taught is so far from the truth that it cannot be considered an innocent mistake. It is an intellectual fraud invented to make us believe that governments should not be allowed the fiscal space this commentary now proposes. In the main, bank loans are not generated from prior deposits. The obverse is true.  Most bank deposits are created by loans made. When a bank concludes a person has a creditworthy proposal, the bank does not check its vaults to make sure it has the money for the loan. No.  The bank simply credits the borrower’s account by a few strokes on the computer keyboard. In effect, money is generate from nothing except the bank’s decision that the borrower can repay the loan with interest.

However, orthodox economists dare not admit this procedure by which banks truly operate. To admit that banks actually “create money from nothing” would bruise their opposition to government deficit money printing.  The private sector can print money from thin air and have that action lauded as the productive juice of the economy and not at all inherently inflationary. There then is no reason to castigate government money printing as the parent of intrinsically harmful inflation. However, expansionary fiscal policy in the hands of a popular, democratic government could strengthen the economic lot and political power of the average man. Such an enlightened awakening runs contrary to the misanthropic designs of Money Power.

Empirical evidence does not indicate that the individual decisions of bank loan officers about the profitability of the loan applications in their portfolios is any more productive or less inflationary than government decisions on fiscal policy spending. What determines whether additional money will create inflation is not whether thenew money derives from the private or public sector. What the money is spent on matters more. A government created naira spent on infrastructural projects that provide jobs as well as lower the costs of transportation and doing business may provide more than a naira’s worth of new wealth and production. As such, this spending will not be inflationary. Meanwhile, privately-created money spent on frivolous luxury items and meaningless diversions may well be inflationary.

All other things being equal, government creation of money is less inflationary than private-money creation. That is because privately-created money always come with a cost. It bears interest because it is the product of a commercial loan. To repay the loan, the borrower must return to the lender more than one dollar.  This means one dollar in privately-created money is really worth less than one dollar in government created money which bears no interest.

Provided the funds are directed to productive endeavors, the more government-created money in the system will lessen the aggregate debt and thus likely reduce rather than spark inflation. This is antithetical to all that the economic books have taught us to believe. Nonetheless, what has been written here is more real and accurate than the myths that now pervade. Next week, we will delve into what these observations may mean in terms of practical policies to give people the economic opportunity and fairness they seek.

In the meantime, I leave you with the concluding paragraph of Financialism.

“Our political economy can never be perfect, but that admission provides Financialism no easement to make the world more flawed. We cling to the belief that man can attain higher levels of economic cooperation in order to increase wealth and decrease scarcity. For this reason, we feel compelled to raise the alarm about Financialism and its attempt to reshape us in its harsh image. We are in a fight pitting the imperfect against the vile. The former has civic purpose. The latter has no purpose save the incessant feeding of its own selfishness. There really is no choice in deciding which side to join. We must do all we can to uphold the imperfection of man’s collaborative endeavors against the perfection of his selfish designs.”

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The eye sees more of the mind behind than of the reality before it.

Those expecting the concluding part of my piece on global security, I ask your forgiveness. That commentary shall come. However, given the tremors rocking the global political economy, I felt compelled to focus on these developments this week.

In 2012, I coauthored Financialism: Water from an Empty Well – How the Financial System Drains the Economy with Asiwaju Bola Tinubu. The book foresawserial financial and economic crises because of the evolution of the global political economy toward excessive financial speculation and a resultant debt accumulation that spoke incessant instability. We predicted another serious downturn was forming just over the horizon. That skein may be upon us.

With the experience of the 2009 Deep Recession still relatively fresh, reason would suggest that global leaders and policy makers are better prepared to contain the coming threats. Yet, reason is a poor indicator at such moments. For much of the world’s elite and leadership, the lessons that should have been learned faded with the passing of the recession. As danger faded, did also that prudence and sagacity withdrew. Having sidestepped calamity, the masters of the economy returned to as they were before.  As a result, they rendered the current downturn something inevitable much as combustion is ordained when one marries fire to acetylene.

World equity markets now quake.  This is a major factor in the turbulence.  Due to the expansionary monetary policies of most nations, the nominal values of financial assets were pushed higher than actual economic conditions warranted. This benefitted the elite yet was coldly indifferent to the rest of mankind.

For the elite, the eye again saw what the mind told it to see and was blind to the reality in front of it. Yet, reality has a way of disturbing even the most elaborate intellectual mirage. Financial and stock markets would start to retreat at the hint of bad news.Most of players sensed they had been erecting ice castles in the cool shade. The sun had now come out.

Asecond factor related to the abovementioned stock market sickness is that the Chinese economy flinches under massive debt caused by undue speculation and malinvestment in real estate and construction. The Chinese economy must now slow down as it transforms from a mercantilist export driven model to one that better promotes domestic wages and consumption. Along with this Chinese deceleration, the Eurozone continues its long dalliance with low growth.  Aggregate global demand remains slack because of government policy in most nations lean toward fiscal austerity yet robust monetary policy. This dictates that abundant flows of money are channeled to the wealthy while the means of the modest and poor are minutely augmented or even suffer a gross subtraction. Yet, the spending of the masses is the backbone of any economy. The wages and employment of the working class and the government assistance given the jobless poor fuel this spending. By throttling these things, the masters of the economy confine the real economy and most of the people to the doldrums. As such, the real economy still feels the effects of the 2009 financial crisis although the banking sector has been rescue from the breakage it has caused.

A dramatic fall in oil prices is the third major factor in the current downturn. It is the only factor that does not originate in the financial sector. It started in the real economy. It will hurt oil producers but those most severely interrogated will be producer nations and firms that incurred significant debt in erroneous speculation that oil prices would continually soar. What now is transpiring gives breath to the maxim that behind every economic crisis is a financial crisis and behind every financial crisis is one bad debt too many.

The theme of our Financialism book is that things do not have to be as they are. Reform is possible provided we change how we think about money and how it is created.

At its core, the book warns that the current neoliberal economic model, in both theory and application, is outdated. This model ironically does not give adequate consideration for the role of money and finance in man’s commerce with his fellow man. Money is treated as an artifice constructed solely to avert the obvious strictures of barter. This breach of intellectual honesty and of empirical objectivity parents a multitude of sins.

Making a lie of the myths contained in mainstream economic textbooks, barter never figured significantly in the economic history of any major society.  Money, debt and credit were among man’searliest social inventions. The mismanagement of these things has been at the source of most economic crises. Down the warped and crooked arc of human history, most economic crises first gestate as financial crises. However, orthodox economists ignore the independent impact of money in our economic behavior. They further compound this mistake by insisting free markets are optimally rationale and efficient.

They have established a mindset where the movement and borrowing of money in the private sector is always judged as beneficial. The vocation of trading in money to make more money is not properly assessed; its merits are taken for granted. This mindset promotes the libertine flow of money and thus its abuse. It allows those who hold it in abundance to slant and distort the economy toward their myopic aims.

Inthe aggregate, the effect of these aims is to place the financial sector in a dominant position over the rest of the economy. Rentier conduct and arbitrage become the hallmarks of the system. The economy is geared more to making money than making things and providing jobs. Thus, the economy, as measured by GDP, may impressively grow while the very processes of this growth compels the relative impoverishment of the majority of the people.

Financial institutions were given wide latitude because it was thought they could never go astray.

Even after they have demonstrated that if left to their own devices, their inherent trait is to go astray and take the entire economy down the thoroughfare of ruin, the banks and other financial institutions are quickly absolved of sin then allowed to continue as they were. Their misbehavior and the damaged caused is attributed to some inexplicable dark matter that no one can see or know. Though completely guilty, they are presumed innocent and treated as victims although caught with the loot in hand. Inclusion in the financial elite, is the new righteousness; it is in the manner of secular simony.

Excessive speculation and debt are the rubrics of this stage of the evolution of global capitalism. This is the recipe for frequent financial crises and overall economic instability that robs from labor in order to prosper the rentier and insulate the speculator when his greedy devices turn against him. A worst system could hardly be imagined given the high level of economic progress the modern era has attained. With the world able to produce sufficient goods to improve the wealth status of every human being, the economic system places the average worker in a condition of debt peonage. Not as heinous as actual slavery, this peonage derives from the same spirit of the strong dominating and squeezing weaker others for the sake of profit.

While the want to dominate others is a permanent trait of a certain segment of the human population, elevating this soiled objective to be the driving force of an economy is not inevitable. It is the product of conscious decision not of blind fate. We must begin to dismantle the inequitable construct of the economy. The starting place is a more realistic view of the role and importance of money.

Because of the false notion that money is but a facilitator in the exchange of goods, money has been treated as if it were a commodity. To some only the precious metals of gold and silver are true money. To the metallists, every other form of money is counterfeit.

Their belief is popular and seems commonsensical. But common sense is no insurance when based on fables so often stated that they assume the status of truth, masking what may be the a more complex reality. In other words, our sense is commonly tricked by false information, oft repeated.  For most of human history and in most places, gold and silver were not common currency.  These only came into use as a result of technological advance in metallurgy centuries ago.  They eventually would fall into disuse as currency because of economic practicality – these metals were inherently deflationary because of their limited and uncertain supply -and of technology.

That paper and electronic signals are now “money” is consonant with history. As we progress, man seeks to distill money to its essence. Money is rendered faster and more mobile. The inherent trait of money is its finest, most obscure secret: its intangibility.

Money is not a commodity; it is but a representation of economic value. It is not an actual consumable item of wealth or an approximation of such a material item any more than a flag is a factual approximation of the nation it represents. If you want to travel to Ghana, you cannot quench the desire by touching that nation’s flag.

Money is essentially an idea, a social convention not dissimilar from, but significantly more contentious than, the custom of greeting another person through the mutual grasp of right hands.  It is our attempt to impose an objective numerical measurement on economic value, which is inherently subjective. By lending this cloak of objectivity to something innately subjective, it becomes possible to use the measure of money across space and time. Commerce, credit and investment are impossible without the concept of money. These factors are what gives money value in itself. Thus, money is important as an economic construct in and of itself but it is not constructed of wealth; it is the vehicle by which we transport and secure value so long as we all agree that money does such a thing. Thus although money has independent value in itself it also has no value when isolated from the consumption of actual goods or services.

However, the serious flaw in orthodox thinking is that they reduce commerce to being the trade in material goods. Money is just a mere facilitator for them.  Like a cipher in mathematics, it is useful but has no independent value. The reality is that commerce is more than the trade of tangible wares. At its essence, commerce is the dynamic reallocation of value from one economic actor to another. That reallocation of value is a vital labor that only money can perform.

In that money is an idea, its essence is not linked to anything material; it thus is not bound to finite limits like a normal commodity. There is only so much gold, oil, cotton or cassava to be had at any given time.  However, the amount of money or, for that matter, any other financial instruments is theoretically infinite.

This theoretical limitlessness of money is being exploited by the financialists to expand their nominal holdings and financial portfolios to the detriment of most others. They know and understand this unique aspect in the nature of money. Most laymen do not. The affluent now rudely exploit this asymmetry in financial understanding to build their fortune on your misfortune. It is past due that we study whether this limitlessness can be used to help the vast majority of humanity instead of just those already possessed with large quantities of money.

First, we must reform the financial architecture of our political economy. That architecture was built during the time that money was tied to the gold standard. The restraints imposed by this system may have a served a purpose during that era. But much of the utility of these structures passed away with the gold standard in the 1970s. To continue to follow these ways is as morbid an exercise as attempting to give daily meals to a cadaver that went cold more than four decades ago. It is a necromancy that does nothing for that which has died but impairs those still alive.

When national governments ran deficits during the gold standard era, they had to finance the deficits by depleting their gold reserves; money was readily convertible to gold on demand.  There was logic in government maintaining a balanced budget. However, we exist in a time of nonconvertible fiat currencies. Governments can run deficits in their own currencies without depleting gold or any other reserves. The innate utility in a balanced or a surplus budget evaporates. A balanced budget should no longer be an objective but a strategy deployed toward a larger objective. That objective should be the optimal employment of labor and assets for the creation of wealth without allowing inflation to escalate to harmful levels.

In practical terms, these means that during times of private sector weakness, government fiscal policy should expand to fill the vacuum and bolster the flagging private sector. Only when the private sector becomes robust, should government retreat from fiscal activism.  Yet, orthodox theory demands a fiscal austerity as a matter of course, no matter the circumstance. At a time of private sector weakness, this is a recipe for recession or worse.

Adherence to this outmoded thinking is a major reason behind the slow global economy. Because the wealthy run things, they pushed governments to maintain policies of monetary activism coupled with fiscal restraint. This allowed financial asset prices to rise and enrich the wealthy. This new wealth spurred increased speculation. The consequences of that speculation are now being felt in global stock and asset markets. Meanwhile, with minimalist fiscal policies being the norm, global levels of production and employment moved very little.

The rich have advanced much farther than the poor since the 2009 recession.This disparity allows orthodox economists and mainstream leaders like President Obama and Prime Minister Cameron to proclaim their economies are growing yet admit that the majority of their people have seen no improvement in their economic lot since the recession. For these leaders and their economic wise men, the economy is no longer the people. Their economy is defined as the nominal GDP figure, even when the growth in that tally is produced by the over-inflation of financial asset prices. For them, financial paper is more relevant than the welfare of the people. With leaders and economists like this at the helm of affairs, we are in for it unless we get out of it. More on that next week.

 

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