TCS Daily


Reigniting Growth

By Larry Kudlow - January 26, 2009 12:00 AM

The best way to buttress the financial system is to reignite economic growth. Instead of nationalizing the banking system, or making our big financial institutions wards of the state, or interfering with real estate markets through foreclosure bailouts, or expanding any other aspects of Bailout Nation, let's have some pro-growth tax policies.

All our problems can be solved if the economy grows and asset values rise in the process. Growth also will correct the problems associated with asset-backed bonds for mortgage, consumer, student, and other loans.

Right now capital is on strike and so are investors. Let's help them out.

Here are some possible courses of action:

1. Reduce the capital-gains tax rate—or initiate a capital-gains tax holiday—and substantially increase tax write-offs for capital losses. In other words, rejuvenate investor incentives.

2. To promote business investment, slash the tax rate on large and small companies, allow full cash-expensing of capital put into service, and reduce the business capital-gains tax rate.

3. For individuals, my perennial first choice is a 15 to 20 percent flat tax rate. Failing that, abolish the 28 and 25 percent brackets, get rid of the 10 percent bracket, and flatten the code so the whole middle class is paying 15 percent.

All of the proposed government spending is just a transfer of resources. There's no net growth impact. I agree with Harvard professor Robert Barro, who says the Keynesian government-spending multiplier is virtually zero. On the other hand, the Federal Reserve has already created about $550 billion of new M2, which is going to be a big stimulant for the economy.

Almost 30 years ago President Reagan successfully fought inflationary recession with reduced tax rates and tight money. Today we should fight the credit-deflationary recession with reduced tax rates and expanded money growth. Lower tax rates will address the downturn and expanded money growth will offset the credit problem.

If anything, Washington should be curbing its spending growth, not expanding it.


This article first appeared on Kudlow's Money Politic$.
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64 Comments

Make more babies
" Japan in the midst of an unprecedented recession, so corporations are being asked to work toward fixing another major problem: the country's low birthrate. Tell us what you think

At 1.34, the birthrate is well below the 2.0 needed to maintain Japan's population, according to the country's Ministry of Health, Labor and Welfare.

Keidanren, Japan's largest business group, with 1,300 major international corporations as members, has issued a plea to its members to let workers go home early to spend time with their families and help Japan with its pressing social problem. Watch more on this story Video

One reason for the low birth rate is the 12-hour workday. But there are several other factors compounding the problem -- among them, the high cost of living, and social rigidity toward women and parenting.

In addition, Japan's population is aging at a faster pace than any other country in the world.

Analysts say the world's second-largest economy faces its greatest threat from its own social problems, rather than outside forces. And the country desperately needs to make some fixes to its current social and work structures, sociologists say."

http://edition.cnn.com/2009/WORLD/asiapcf/01/26/canon.babies/index.html

Or, recall how legal immigration spurred the USA's many growth spurts.

But this requires cutting taxes on capital and profits and ending welfare.

The solution is easy, but the socialists must sacrifice power.

A slow learner
Larry.. haven't you figured this out yet?

When you use money to grow more money all you're doing is blowing another BUBBLE. There's no magic involved. No matter how muuch money you grow, it's only worth as much as everybody's combined assets.

In fact there's an entire web site devoted to proving this. It's called Mises.org. And those people go to great pains to show us that whenever financial wizards try to make more money than there IS, the only thing that happens is that the amount of nominal money inflates.. relative to the supply of things of actual value.

Asset values can't "rise", as you wish they would. The only way that can happen is if you decide a house worth $100,000 is worth, say, $380,000. And that is demonstrably not a healthy thing. It actually makes us poorer when that happens.

We've been doing this over and over and over again. Let's try something totally different this time, and just make sure that everyone in our society has a decent job and enough of the moolah to keep body and soul together. Once we're all adequately housed and fed a lot of our most pressing social issues will evaporate.

There is something to learn on Mises.org?
It is called fractional reserve banking.

"To the extent that banks lend their own savings, or mobilize the savings of others, their activities are productive and unexceptionable. Even in our current commercial banking system, if I buy a $10,000 CD ("certificate of deposit") redeemable in six months, earning a certain fixed interest return, I am taking my savings and lending it to a bank, which in turn lends it out at a higher interest rate, the differential being the bank's earnings for the function of channeling savings into the hands of credit-worthy or productive borrowers. There is no problem with this process. "

"Let's see how the fractional reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I "lend out" $10,000 to someone, either for consumer spending or to invest in his business. How can I "lend out" far more than I have? Ahh, that's the magic of the "fraction" in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don't have to save up the money myself, but simply can counterfeit it out of thin air. (In the nineteenth century, I would have been able to issue bank notes, but the Federal Reserve now monopolizes note issues.) Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation's money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way. "

http://www.lewrockwell.com/rothbard/frb.html

speaking of slow learners
Kudlows article had nothing to do with creating more money.

It had to do with increasing economic activity.

fractional reserve banking does not "create money"
When money is loaned, there is a new bank account created, but there is also a new debt created.

The debt and credit balance out.

That 'debt' is used to buy things, just like money.

But it still has to be paid back.
Time shifting, not creating.

Got it backwards.
A fractional reserve of 10% requires that the bank must keep 10% of it's deposits in reserve.

As a result, if it has $1000 in deposits, it can loan out $900, not $10,000.

The $900 in the new checking account is balanced by the $900 debt to the old bank.

Even a stopped clock is right twice a day
Yeah, I know what the theory says. But for it to actually work, it requires that people with excess money on their hands-- a.k.a. investors-- find productive companies to bankroll, ones with viable plans for expansion.

And when the consumer base (the purchasers of those goods and services) is glutted with stuff, deeply in debt and just can't consume another thing, THERE ARE NO VIABLE PLANS FOR EXPANSION. The economy is running at max.

So in these cases, if ideologically narrow minded people continue prusuing policies that put more and more of our available circulating funds into the hands of investors, as opposed to Johnny Paycheck, they have to go into investments that are less than prime. By definition. And that's what we've seen happening, over and over again, in our supply side economy. Instead of trickling down, the investment funds mushroom into loftier, more unimaginable pie in the sky returns as it negotiates the upper spheres of creative finance... until it finally reaches the limit of earth's gravity and leaves the planet altogether.

The word for this kind of infinitely expandable money-built-upon-money is derivatives. And the market in such instruments is orders of magnitude more immense than the combined total of all our actual cash on hand.

That makes it a confidence game. And every time, as soon as someone figures out that there's nothing real there, all the air hisses out of the balloon. What we need is a new model.

So then, I think there's something that Lew Rockwell, Murray Rothbard and myself all agree on. This fractional reserve banking and every con game like it only serves to propel us toward the next blowup. Instead we need to get back to basics.

And that would be: whenever an economy is actually expanding, and the worker bees have so much unsatisfied buying power that they need more stuff to consume... THEN is the time to pump investment money into companies with a proven track record of being able to make popular product.

And whenever the folks who work for peanuts and shop at the company store are too deeply in debt to consider buying any more crap, it's a good idea to stop pumping excess cash into companies that are facing an imminent need to closze up shop, lay off the work force and wait out the dry spell. Money sopent finding such dormant enterprises is at this point wasted money.

The cure we need at the moment? We have two trillion dollars worth of crumbling water and sewer mains, bridges, overpasses, highways, dams, schools and other essential infrastructure for our society. Get everyone who's now out of work busy fixing all this stuff up and pay them in cash. That is the ONLY approach that can get warm blood pumping through the arteries of commerce again. You really should know these things.

At the point where circulation is restored, THEN the rich can start getting richer again. Before that point it just can't be done.

Let's try that mind experiment
Okay, we approach the problem by just letting consumer confidence hit rock bottom. Nobody's spending money on anything.

What happens? Stores large and small across the country start going the way of Circuit City, opening up great holes in the malls where anchors used to be. The malls and mall operators start losing money, and the little stores that cluster around the big ones for warmth start getting cold and empty.

No one in the financial sphere is willing to lend any more money to anyone.. they're just not sure that any company or individual is a viable entity any more.

And sure enough, people and companies in nearly every area of the economy start going under. The states experience a loss in revenues at the same time they're being called on to give unemployment benefits to hundreds of thousands of the newly jobless. And the more employers cut back on their own payroll, the more the actual work force, capable of buying more product, is reduced to a skeleton force.

As an economist.. and I know you can put on that hat.. what would you say about a condition where there is lots of supply but very little demand? Don't producers all cut back on production? And doesn't that involve reducing payroll? And doesn't that mean more homeowners fail to make their mortgage payments? And doesn't that lead to more broken neighborhoods full of empty houses?

And aren't all the auto dealers closing their doors now? And aren't all the restaurants other than Mickey Dee's starting to go out of business?

And ultimately, doesn't having too little money on the street, in people's pockets, have the effect of forcing those vendors who still survive to lower the asking price of their goods? That is, don't we enter a deflationary spiral?

Note that we still have about as much money as we had before.. one kazillion dollars, let's call it. But it's all invested in empty shares of crapola. The worth of the investments is so dubious they can't be bought or sold.. because no one knows how to value them. So until trading starts again, the value of much of that stuff is effectively zero. The money stuck there is frozen, it's not growing anything.

Now explain to me this. Since we begin by not buying anything, how do we get to the part where we're growing money again? Isn't trying to "grow money" exactly what got us into this mess?

Increasing economic activity how?
How do you propose to increase economic activity without putting pay into the pockets of out-of-work ex-consumers?

You can reduce taxes on investments to zero, so that everyone who lives off their savings gets to retain every penny they own plus every penny that pile of paper potentially makes.. and it still won't move any home theater systems off the shelf. So Circuit City still goes belly up.. and anyone with stock in that company sees the value of their investment go to zero.

You have to have workers, for the system to work. You can't just starve all those little people, thinking the economy can do better without them. Otherwise the value of every investment just flatlines and stays there.

Which requires faith on the part of the lender.
"I'll gladly pay you on Tuesday for a hamburger today."

Crocodile Tears for Circuit....
I shopped at Circuit City for years, loved the place. Never held the stock, but considered it when they went on the pink sheets, thinking it might’ve been a decent speculative play, that somebody would go for the brand name. Had I purchased it, I would have accepted the business risk that comes along with ownership.

The truth is CC made two HUGE errors, first, they jettisoned off home appliances. Funny thing about refrigerators, they are recession resistant. You can do without a flat panel, but not something to keep the milk cold. The second was failing to understand that when they decided to compete with Best Buy by being the lower cost retailer, they started competing on price with Walmart.

So it is, Circuity City is following the ways of many others in retail. The employees will eventually go somewhere else, especially the retail sales and technical service people, but its just the nature of Shumpeter’s “creative destruction”. Businesses fail, just as species go extinct. Its not the result of a grand conspiracy or the end of the world.

Then again, I crocodile tears for the unemployed is simply Roy’s way of attaching his venal political impulses to something decent and noble. Afterall, we can’t let a good crisis go to waste, Eh Rham, er Roy?

Of course as usual, Roy has it wrong. Economic activity creates a paycheck, not the other way around. In the leftist mindset, money is wealth, not a claim on wealth. Many claim to be atheist or agnostic, but make no mistake they bow at the altar of filthy lucre.



roy actually thinks that govt spending increases economic activity
"How do you propose to increase economic activity without putting pay into the pockets of out-of-work ex-consumers?"

By putting them to work. Taking money out of someone else's pocket, in order to give to them doesn't increase spending. It just shifts it from those who earned it, to those who vote.


"You can reduce taxes on investments to zero, so that everyone who lives off their savings"

Ever hear of capital gains roy? It has nothing to do with savings accounts.

if it isn't
then the banks balance sheets have to be written down by the amount of the defaulted loan.

That is the problem now.
Banks hold debt they cannot value.

Capital can't gain in a fixed pie economy.
Wealth can't be created in Roy's mind.

$17,100 in loans and $1,900 on hand STILL means 90% of deposits ONLY are loaned, though
$9,000 of the fund loaned are NOT BASE Money.

If ONLY the bankers loan ONLY from BASE Money?

Correction to the above; NOT $9,000 BUT $8100 of the funds loaned are NOT BASE Money
..

Let them eat roots and grubs
You're trying to paint the failure of Circuit City as a one-shot affair.. an isolated business failure due to simple mistakes. When in fact I could have brought up a hundred other businesses, large, small and medium. They're all starting to fail now for one big reason: not enough customers.

"I crocodile tears for the unemployed is simply Roy’s way of attaching his venal political impulses to something decent and noble. Afterall, we can’t let a good crisis go to waste, Eh Rham, er Roy?"

I find this sentiment despicable. The nation is in grave difficulty, and millions of breadwinners are recently out of work. It does very much qualify as a national crisis.. and deserves to be treated as such.

Your way of trivializing the difficulties that have ensued from eight years of pursuing policies that further concentrate money into the hands of people who merely deposit it into the financial markets is just a mechanism for laughing it all off. Dumb jerks! If only they were as smart as you they wouldn't be in the trouble they're in. Right?

"Economic activity creates a paycheck, not the other way around. In the leftist mindset, money is wealth, not a claim on wealth."

No. When the maximum number of people are producing something for others to buy, everyone has work. And everyone also has the means of exchange. I call that prosperity. It's the opposite of what's going on now.

And what's going on now is merely the consequence of a too broadly deregulated financial marketplace, where dubious investments can be traded by the billions' worth and no one is the wiser until they opermeate the entire investment landscape. Plus, of course, too much money being siphoned away from the ordinary marketplace where people shop, and up into the spheres occupied by those who spend their days considering investment strategies.

My father used to say that money's not important.. so long as you have some. But when you don't have any, then it becomes very important indeed. And your glib disregard for those Americans who are tonight being forced to do without, due to market dislocations brought about by the very rich, is IMO a sign of a deep lack of character.

Wrong on every count.
Apparently there are a couple of concepts you haven't heard of. The first is that if you're performing useful work, such as renovating a school, it doesn't matter in the slightest if you're on a government contract or working as a private contractor. In either case you're trading productive work for income.

The second concept is seed money. Economic stimulus, properly applied, not only does useful work, it increases the circulation of money within the community. Because people pulling down a pay check spend their money on stuff. Or on their mortgage.

So as soon as the pay leaves their hands it becomes someone else's profit. And is taxed. And when they spend it, it gets taxed again. And when that person spends it, a third time.. and so on. So it doesn't take very many of these taxable moments to earn the government back 100 cents for each dollar it has thrown out onto the street.

By contrast, when you fail to fully tax investment income (the main kind of income the very rich enjoy) NONE of it comes back. That money is lost.

It's lost to the government, as it doesn't get taxed. It's lost to the economy, as it never gets spent. And when the investment goes belly up.. as they tend to do nowadays, it's even lost to the investor. So its a waste all the way around.

We've done the experiment. And what we're seeing now is exactly what common sense tells us we would see. This kind of "capitalism" is a self destructive engine.

We need to go back to making things to sell to others.. and being well paid for our work. And paying enough in taxes to make sure the infrastructure that enables us to prosper is maintained. That's simple economics.

But when you say "Taking money out of someone else's pocket, in order to give to them doesn't increase spending" you're wrong twice. No money gets taken out of anyone's pockets that doesn't get out back again-- assuming the recovery effort is well crafted. And no money is "given" to anyone. It's earned by one's labor.

In fact you're wrong a third time. Because that money would never have been earned, had it not been injected into the hands of working men and women. Thus every time it changes hands, spending is increased over what it would be had there been no stimulus.

" not enough customers."
And you support the murder of millions of potential customers every year.

Right
"When the maximum number of people are producing something for others to buy, everyone has work. "

Trouble is TOO many are working for the government and 'producing' nothing people want to buy.

Simpleton Economics
No, that's simple economics.

The first is that if you're performing useful work, such as renovating a school, it doesn't matter in the slightest if you're on a government contract or working as a private contractor.

What is 'useful work'? Who determines its utility? Should we renovate the school or raze it and build a new one. Useful isn't determined by Roy's fearless left-wing viscera, but willing buyers. The government can only buy when it taxes (which means taxpayers have less)but then again, Roy is a simpleton and can't figure that out.

Money Fixated
Spare me your overwrought hyperbole. Displaced Circuit City employees will experience a period of unemployment, its sad, but the business failed.

Don't judge these folks as lost.Unlike you, most are young, intelligent and resilient.

You only want a totem for your inane politics.

roy believes that money grows on trees.
Roy apparently believes that govt can create money without cost. That's why he assumes that when govt pays to create a job, there is no downside.

Out here in the real world, we know that before govt can pay the contractor to build the school, he has to take that money from someone else.

For every job created by govt, 2 to 3 jobs are destroyed.

That's reality.

Ditto roy's endless rants about money being put into the hands of working people. As stated above, before it can be put in the hands of working people, it must first be taken out of the hands of working people.

oh how wrong that is
Money grows from cotton boles. That combined with various chemical inks, of course.

Rothbard only gets it half right
Fractional Reserve Banking creates debt but not money.

Actual money is still needed to in order for that debt to be transacted in any meaningful way.

If a bank loans you $300,000 for a construction loan to build a house, yes...they create the debt. But when you use it to cut a check to the contractor to build it -- they have to fork up REAL cash or Fed Funds that they most certainly did not create.

Think about it: If banks could create actual money, then why does the Fed have to be the 'bank of last resort' and make loans available for member banks who need them? This little inconvenient fact of life is what really discredits the Fractional Banking Boogeymen Crowd.

Excess Money?
investors don't have "excess money', they have the discipline.

Anatomy of a bubble
I see you have elected not to comment on the many talking points I've included in my post. Okay.

In 2007, Wall Street brokerages handed out $38 billion in so-called bonuses. Actually, of course, they're sales commissions. So if that's the scale of the commissions, what kind of money flowed into inflating the bubble of valueless paper they sold? The mind boggles.

In 2008 sales commissions were on the same order-- maybe you can look the exact sum up for me. All of which represents money wasted-- misallocated into investment purposes when there were no more worthwhile investments to be found in the marketplace. The money was just burning a hole in rich people's pockets, and several trillions found a home in worthless hedges and dodges.

Imagine how the economy might have looked if, instead, that money had gone toward a different sort of dividend: extra pay raises for the working stiffs that actually create those items of value society produces. Then it would have been spent, keeping employment high.. and taxes paid on this activity that could retire some of our fiscal operating deficit.

Or imagine if this upper bracket income had merely been taxed.. and the revenues used to do exactly what the Obama plan is going to be doing now: rebuilding all those crumbling schools and bridges. Likewise, a laudable stimulant.

Or even just imagine if we had had the good sense to properly re-regulate the investment world, post deregulation. The scams we suffer from today were all perpetuated by people moving outside the traditional lines.. the firewalls we used to have between banking, insurance and investment. And the rogues that collect around such lawless sites got themselves and all of us into trouble as a direct result.

If you go out into the agora today, what you'll find is a vast disillusionment among those very same citizens that were recently enamored of the conservative approach to managing the economy. You guys talked such a good game everyone who was afraid to think about the mechanics of money just assumed that conservative Republicans knew best how to manage our most important affairs.

Now they know better. I would suggest reading and watching some of the mainstream media, to see where the average man's thinking is on the subject nowadays.

Thanks for clearing that up
Once in a while you prove your use. Yes, banks can "create" money.. but only if they're facilitated by a Daddy Bigbucks.. a Fed that backs their bet as soon as a debt gets issued.

Contractors don't just sit on the cash they borrow. They have to pay serious interest. So the moment a contractor gets a draw he starts spending the money as quickly as possible.. so he can finish the job, get paid and get himself back out of debt.

Or at least that's how it worked when I was in the game. Nowadays I suspect there are so many sweethearts between the contractors and the bankers that they just do what everyone in the corporate world does.. indebt themselves up to the max at all times, as a matter of principal.

A great strategy, perhaps, during the go-go years. But not so hot when the music stops and you have to pay up all of a sudden.

Head buried in the sand
"Displaced Circuit City employees will experience a period of unemployment, its sad, but the business failed."

An isolated circumstance, right? Then what are we to make of the other nearly five million jobless who are currently depending on unemployment checks? If new jobs are not in place for them by the time their benefits run out, that's another several million foreclosed homes on the market.
And several million jobless and bankrupt families that still have to be fed. And that involves a choice between extended welfare benefits or massive social unrest.

We live in extraordinary times. Set aside the fact that it was caused by the poor investment strategies employed by private sector investors. Those times are over, and we need to move on.

What we need now is wiser government-led investment strategies. And as we are a nation of, by and for the people, I can think of no better beneficiary of those strategies than people. We need jobs now, not in a year or two or three.

Oh, but money DOES grow on trees
I'd have thought even you would understand that basic reality. Money gets created by the Fed.

Read Mises.org on the subject. Or, even closer, read Zyndryl's comment above, 'Rothbard gets it only half right'.

And when the government spends on margin, as it does at an alarmingly increasing pace, it doesn't tax the working class to fund the expenditures. It asks the world to contribute some of the trillions they've made selling their wares to us. And they buy up our debt to a gratifying degree, even in the midst of the current crisis.

In fact, even with the rate somewhere around 0.03% now, they continue to prefer it to any other investment out there. It's the only one that's not considered hazardous. BTW, that kind of return means you loan me a thousand bucks. And at the end of the term I pay you thirty cents. Isn't global finance an incredible mechanism for creating wealth?

Our working class is taxed to a far greater degree than the idle rich, living off investments taxed at oreferential rates. But even so, we're not taxed as much as we might be. All we pay, for the most part, is interest on the Debt. And with rates this low (don't tell me that's by accident) even that payment is within our budgetary constraints.

So the strategy I would recommend would be for the Fed to stop inventing new money to pour on the heads of the ignorant bankers who've wasted so many trillions (about seven trillion just in the US banking system). I'd cut them short unless they showed strict accountability.

Instead government should take control of the money supply directly, making sure that it all goes toward wages spent for productive work the country needs in its public infrastructure. THAT money will in time come back in the form of revenues at the national, state and local levels.

One last thing. You're probably also unaware that the strategy being recommended is not to just borrow and spend, borrow and spend the way we've been doing under the Republicans. It is to balance the budget over the business cycle, rather than on an annual basis.

That is, we pour money into the economy when times are tight. Then when we hit the good times again, we take it back out through serious taxation.. particularly directed toward those sectors of the economy who are doing the best from the stimulus.

I would expect that once again, those favored sectors will be finance first and foremost, followed by the major corporations. Thos would see serious tax increases, bringin the budget back into balance.

roy's inability to understand basic economics
While the Fed may run printing presses, the Fed does not create value.

Your keynesian analysis fails, because keynes was over thrown 30 years ago.

Pumping money into the economy does not stimulate the economy, for the reasons I have given repeatedly. Never, not even once, has there been a stimulus bill that resulted in an economic improvement. Even FDR's treasury official was forced to admit that after 8 years of pump priming, there had been no improvement.

Talk to Zyndryl about this..
..maybe he'll be patient with you.

It's not the Fed's job to "create value". It's to provide liquidity. And that's just what it does, increasing the money supply whenever the economy slows down and needs a little more lubricant. If value is ever created, that gets accomplished by whoever gets the seed money.

Of course people, being who they are, just love having lots of money. So that normally the Fed, since its creation, has provided a lot more liquidity than the economy actually needs.

And even worse, they tend to provide it only to their friends: bankers. So as a result the banking industry has been first at the trough, every time. The mission this time around should be to keep the money lenders out of the loop.

What I'm proposing is to inject the money in a different place, in the hope that we will see different results. World War II was an excellent example of stimulus being provided on a scale that was sufficient to pull our economy out of its slump. What we're going to be doing this time, hopefully, is the same thing, only without the war. Instead of bullets the federal money can be spent on genuine needs, and the same buoyant result is very likely to occur.

Keynes, we're seeing, is enjoying a sudden resurgence in esteem in everyone's eyes. We tried Milton Friedman for thity years and look where we are now. It's time for the other team to take a turn at bat, to see if they can straighten the mess out.

Fools and their money are soon parted.
I wonder how many 'invested' their bonus money with Madoff?

I suspect many bought new apartments, new cars, went on nice vacations and maybe a few invested in college funds for their kids.

Why are you bitching? It was money that was spent. Isn't that what is important about money, spending it as quickly as possible?

That's why I don't see a significant economic impact by Madoff. He either spent the money himself or paid off the lucky few who got in on the ground floor.

Bottom line
You can't regrow wealth. Not by financial shenanigans. To create real wealth you need demand.. because without it, there's no use in putting up a supply.

Both the authors and the peanut gallery in here all seem to think that they don't need consumers. That wealth is just a little club that the wealthy can belong to, and forget about the rest of the world. But we've tried that experiment.. and the results are upon us now.

When there is an increase in economic activity, then everyone prospers.. and you can say that an increase in collective gross wealth has occurred. But that's not what has happened in the real world.

What happened was that too great a share of our no,minal wealth (dollars) left the ordinary street circulation and went into increasingly sophisticated investment vehicles.. derivatives, futures, hedges and the like. And as there was a proliferation of new strategies aimed toward attracting an increasing number of investment dollars.. while the amount of actual wealth to be divided up remained pretty much the same.. the value of the stock became diluted.

Further, greed drove so many of the participants to excess that a complete systems failure was assured.

Now we have to start over again. And only a total fool would recommend doing exactly what we did before: force all the money upward until it only existed within the financial sphere.

Profits from sales create real wealth. The provision of an infrastructure that all can share creates real wealth. But hedges against the bets others make are just gambling devices. Vegas is the ultimate Land of Broken Windows.

School board decisions
This one must have slipped past me. It's worth a response.

"What is 'useful work'? Who determines its utility? Should we renovate the school or raze it and build a new one. Useful isn't determined by Roy's fearless left-wing viscera, but willing buyers."

The public school system built the school. It owns and operates the school. And the Board of Education has sole discretion, with the advice and consent of the local jurisdiction, parents and taxpayers, as to whether the school is to be renovated, closed or torn down to build another one. There is no buyer, there is no seller.

We have local building codes to tell us whether or not a school meets code requirements. And if it doesn't, the need to repair the deficiency is obvious. This is pretty basic stuff.

Once the school board determines which approach is to be used, renovation or demolition and reconstruction, they need to look for the money. And if it's not already there in the state budget, a school bond issue needs to be put before the voters.

Buyer, seller..? You're really out of your element here. No wonder you distrust government so.. you don't have any idea how it works.

Money is not wealth.
That is the mistake you keep making.

Do you think, that maybe, the government created too much money?

When you read Rothbard's account if the 'crisis' in 1907 it is striking similar to what has happened today and the solution, the FED has not solved the problem and will only perpetuate the problem.

There is certainly enough demand in the world for capital investment to create more wealth in countries like China, India and in Africa. What inhibits such investment are the governments that cannot, or will not guarantee property rights diverting that capital to other areas.
Your buddy Hugo is a fine example of how to drive away investment capital. Mexico does a fine job as well.
On the other hand, capital has been flowing to Dubai because investors can trust the government will not steal it.

It's Banking stupid...not Taxes...
Hey Roy,

Economic expansion is fostered by an accumulation of individual companies growing and hiring people. Small and medium sized entites that have not yet exploited all their market opportunities are best able to do this, of course. Large companies have typically already saturated their own natural share of the industries they play in.

Under our form of financial capitalism banks are assumed to create the incremental funding required for these small and medium scale enterprises to underwrite their working capital needs faster than retained earnings support. The technical word for this is "leverage".

Giving any of these players a tax break somewhere down the road would be nice for them if they ever got there. But their access to funding is fundamental to their decisions today to invest and to expand on what they have been doing successfully. Insofar as our financial system is deleveraging and the banks are hunkering down waiting for the government to make its next move...such smaller companies can simply not find the money they need to invest. It is being pulled out into portfolios of cash equivalents and very safe bonds. That underlying lending mechanism...assumed for our capitalism to operate...has been disabled.

We cannot grow our way out of this recession until the banks are "made to" function normally again. This probably cannot happen short of their nationalization. They know it and they are all just sitting there waiting for it. In the meantime paying themselves their bonuses...simply because they survived up to now.

It is faith, or who do you trust?
The headline in the paper today was about car loans. Only those with good credit scores >600 are being approved. Apparently banks are trusting the credit bureaus but they are not trusting their customers. And as you suggest, why should they take the risk?
If there are any sound banks out their they could be making a fortune on lending as the Fed is giving money away.

Credit Bureaus are part of the problem...
Of course, the Credit Bureau was a creation of the banking industry to be used as a tool by the banks to enforce their financial hegemony over American consumers.

The banks are all holding onto their cash as much as possible because the competitive play for them today is raw survival as the government wades in and executes the weak among them. Cash is strength. Borrowing cash against their asset portfolios...expecially from each other...is pretty much out of the question. Insofar as banks lend money to anyone it must be virtually risk-free. Interest rates are historically low and they cannot make enough margin lending money to justify letting their cash out of their hands.

Note that this tightness and the rapid deleveraging of the financial system generally makes it difficult for small business players to borrow money from anyone. Not only directly from the banks but from anyone who must ultimately organize such loans with bank funds. And that ends up being everyone. Including the wealthy.

Cutting taxes won't bring their customers back
I thought your leadoff sounded odd, since my post was about investment banks and not about taxation. But you point to something that I think masks a serious underlying problem.

Simple me, I used to run a company, a very small one. And I always liked keeping an adequate cash reserve on hand so I could stay in business through a downturn. I knew if I didn't, I'd be forced to borrow money from someone else.. and have to dance to his tune.

That's considered "old school" today. All the major corps like to stay mortgaged to the hilt. They're just like all the homeowners, who like to finance present spending through their reverse mortgages.

Funny thing, though. None of these financial geniuses were able to figure out that if there were ever a slowdown in business, they couldn't borrow any more money. Because in both cases, whether CEO or Harry Homeowner, their enterprise was suddenly worth less than the debt they had accrued against it.

So today they're all going down the tubes. I think there's a lesson to be learned from all this. Maybe you will be in agreement.

BTW I agree heartly with your last comment. The failures among our banks very much need to be nationalized. If the government is buying them out of trouble without taking over their management, the kid has not learned his lesson. He wrecked the Corvette and Daddy just gave him another one. Right?

Barking up the wrong tree
You keep hammering away at the message that money is not equivalent to wealth.. as though this was some mantra I disagreed with.

Well, I do not. Just as I told you last time you brought it up, wealth and capital are two different things. Now, may we proceed?

In a place like China there is relatively little need for overseas capital investment, for the reason that the Chinese themselves have so much of the stuff they have to stick it in the mattress of T bills. They can finance their own expansion.

Likewise places like Iran or Venezuela have their own sources for capital: oil profits. They also have very large, very poor populations that suck up resources in the effort just to house, feed and educate them.

Nonetheless Venezuela has enough spare capital to finance the Banco del Sur. So I think they're not a total disaster.

Dubai certainly has been a money magnet. But I think you will find that construction there has currently stopped.

It's amazing how many discredited fantasies roy clings to.
...

I was talking to Larry K...
Roy,

It depends. If you already have a business that makes good money and if you are already in that part of the global foodchain that makes best sense for you then you are not going to leverage your opportunities and the things that you do successfully with borrowed funds...that must ultimately come from some bank somewhere for the system to expand.

Because your company is not going to grow faster than you are able to underwrite its working capital with retained earnings and you are not going to suddenly double your workforce, increase your system inventory or take on more receivables from big players who will pay you slowly. In short...you don't need the money. And you are not one of those players who will grow this economy out of trouble, either.

However, our form of financial capitalism absolutely relies on substantial incremental expansion among our smaller corporations...funded by new capital created by the banking system. Or the mature US economy itself cannot grow much faster than 1%-2% in a good year...insofar as it is dominated by the major industrial companies...producing commodities and consumer goods.

We can export into the developing rest of the world and into places like European countries when their stronger currencies make our products cheap. But we need to be more and more competitive because lots of guys out there are already getting very good at making world class goods. They relentlessly cut into our profit margins and our share of global markets.

Managerial Capitalism such as we practice is focused on a small universe of entities we have purposefully allowed to grow much too large to fail without serious damage to the entire economy. We watch the Dow...and that's only 30 companies. We saved the banks...maybe only 10 really big ones. The Fortune 500. The 435 Congressmen. Our 100 Senators. The President.

The rest of us are their human resources. Their taxpayers and consumers. Their soldiers and their over-qualified, underpaid labor pool. Meat for the elite.

This is not a class struggle in the sense of revolution in the streets. However, our economic rights are being violated and our financial freedoms are being denied us. We need a capitalistic paradigm shift to fundamentally return capitalism to all the people. We are astoundingly wealthy here in America. Each of our extended families. It's true. Why then are we still dominated by strangers who treat us so poorly? This is the problem to be solved.

And the answer is more about a downsized...almost tribal...Libertarian approach to capitalism that does not try to change the nature of sovereignty...than anything socialistic where households depend on a government that mostly wants to rule the world at the point of a sword. Let them keep their military hegemony.

Stop talking to me about the Pursuit of Happiness. I'll take care of whatever that means to me...myself. Give me back my natural (John Locke) rights of Life, Liberty and Estate. Otherwise, I will take those freedoms back.

Tell Larry this
FB, You make an excellent point. When investment funds are going where they are supposed to, they get in the hands of smart entrepreneurs who want to grow their business-- AND are in a business where the market is not yet fully satisfied.

Under those conditions the missing nutrient is investment funds.

This is not, however, a useful rule to be applied in all instances. One might think all we needed to do would be to apply more and more nutrient, and the economy could grow, and grow, and GROW just like a prize dahlia. Because under our model, the only limit to growth was a lack of expansion funding.

Of course, it's only a model. And it only runs well in an enclosed laboratory world. Real-life investments in today's saturated marketplace pay off only when there is (a) an unmet need and (b) great management.

Unfortunately we've been living in a world where (a) there are very few unmet needs left and (b) a humongous surplus of cash looking for a home-- ANY home. That has given rise to a classic speculative bubble, where too much cash is chasing too few really smart investments. And so the capital has found homes in trillions of dollars-- an insane figure-- of speculative hedges, futures, derivatives, supposed "asset-based" securities and assorted air-ware.

When it all exploded, we found there was very little of substance there. Not exactly nothing.. but so little that what remained of the paper couldn't even be accurately valued.. yet. I wouldn't buy it, you wouldn't buy it and no one else would buy it. That's why they're trying to sell it to the government. The government's the only client big enough and stupid enough to take the whole load off their hands.

They don't even talk like they want control! And anyone.. ANYONE.. in their right mind looking at such a purchase would both insist on taking control of the banks they rescue and pay as little as possible for them. Market price, in their weakened condition, would sound about right.

If they do that, then some day when they're able to turn the thing around, the taxpayers may realize some slight gain on their investment, from selling the banks into private hands again.

As for job creation, here's what anyone with an IQ in the three digit range would say:

Each year George Bush was in office, an average of 393,000 jobs were created. Barely enough to keep pace with expansion of the labor market. Each year Bill Clinton was in office, 2,900,000 jobs were created.

Let's go with whatever magic Bill Clinton was using.

In a mature mercantile economy
You make a lot of useful talking points. Like this:

"We can export into the developing rest of the world and into places like European countries when their stronger currencies make our products cheap. But we need to be more and more competitive because lots of guys out there are already getting very good at making world class goods."

Of course as those foreign markets mature, and more and more of their people join the workforce, eventually we'll see their public with enough cash in hand to be able to buy our purchases. Theoretically. Only let's ask ourselves this: how will they be gainfully employed earning all that money, if not by supplying sufficient needs to meet their own society's demand?

Face it. If someone wants to sell his wares to the Vietnamese he'll be running into stiff competition.. from the Vietnamese. They're not going to buy his stuff. And I'm not going to invest in his startup.

In fact, here's what a huge chunk of that investment money actually DOES do for us now: it effectuates mergers and acquisitions.

That is, it doesn't satisfy some imagined need in the overseas markets that won't even be there for another ten years.. and it doesn't increase the total volume of US commerce in the slightest. Instead it borrows huge sums to buy out the competition in the predator's home industry, fires half the work force and puts the rest to work paying off the financed debt accrued by their own seizure.

You see this over and over. One flagrant instance now is in newspapers. All the papers that were formerly making excellent returns (and we've had a number of them making better than 12%, even in the internet age) have been gobbled up. Each consumed paper has had to reduce staff, put out a smaller paper and in general trim everything you'd want to buy their product for.. just to pay off the bankers who financed the takeover.

Here's another: I used to like to eat lunch at Roy Rogers. I also often ate at Gino's, because they'd let you use the salad bar to trim out their hamburgers.

It was great, having that choice. So naturally Roy bought out Gino's.. and closed them all down.

Listen to this logic. He could have just CHANGED NOTHING. Then he'd have owned two very popular and profitable burger outlets. Instead he chopped his revenue stream in half, by closing all the Ginos. Over the next year he converted about half these boarded up Ginos into new Roys.. sometimes only a block away from an existing Roy. The other shops were just excess inventory until finally he started selling the decaying husks off to competitors like Church's, or KFC.

Do you see the logic in this? It's capitalism devouring itself. It's competition gone insane. And these CEOs are among the most highly paid in the business, going off on quixotic adventures that are all but guaranteed to lose horrendous sums of money.

Our excess capital would be far, FAR better directed into employees' pockets. Then marketplace demand could return, and business could get back to normal.

Erratum
I think I was a little sloppy in my last post, comparing job creation numbers under Clinton and under Bush 43. Try this instead:

"Over the whole of the Clinton administration, the economy added 22.7 million jobs -- 237,000 per month.

Over the whole of the Bush administration to date, the economy added only 5.8 million jobs -- 72,000 per month.

But, the White House says, the first two years of Bush's presidency shouldn't count because there was a recession and 9/11 affected the economy. It's only fair, the president's supporters say, to start counting since August 2003, and forget about his first 32 months in office.

Fine, Krugman said. Bush's monthly average, using the cherry-picked timeline, still trails Clinton, 172,000 per month to 237,000 per month.

Krugman concludes, "Did I mention that the Clinton job boom followed an, um, increase in taxes?"

http://www.talkingpointsmemo.com/archives/055266.php

Consumer is still the boss.
"When the body was first made, all the parts wanted to be the boss.

The brain said, "since I control everything and do all the thinking, I should be the boss."

The feet said, "since I carry man where he wants to go and get him in position to do what the brain wants, then I should be the boss."

The hands said, "since I must do all the work and earn all the money to keep the rest of you going, I should be the boss."

And so it went with the eyes, the heart, the lungs, and all the other parts of the body, each giving the reason why they should be the boss.

Finally, the a$$hole spoke up and said it was going to be the boss.

All the other parts laughed and laughed at the idea of the a$$hole being the boss. The a$$hole got so angry that he blocked himself off and refused to function.

Soon the brain was feverish and could barely think, the feet felt like lead weights and was almost too weak to drag the body anywhere, the eyes grew bleary, and the hands hung useless at the sides. All pleaded with the brain to let the ******* be declared the boss.

And so it happened; all the other parts did all the work and the a$$hole just bossed and passed out a lot of crap.

THE MORAL: You don't have to be a brain to be a boss, just an old *******.

Alternate moral: No matter how well things are going, it can all be shut down by a single *******. "

http://www.jokesunlimited.com/jokes/who_is_the_boss.html

Alternate moral: Customers don't have to borrow and buy and can shut down the economy.

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