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THIS WEEK’S EDITORIAL
TIME TO LIVE WITH COVID: This short video sums up the recent decisions to live with Covid 19 in Norway and Singapore. Their politicians have decided that the virus is obviously not any great danger to the vast majority of the population. That is true. So they are returning to a normal life — no masks, no lockdowns, no coerced vaccinations and no condemnation of the unvaccinated. RATIONALITY — at last.
Reference: https://www.youtube.com/watch?v=_ItkYhFiGBI
PICKETTY AND HUDSON DISCUSS WEALTH DISPARITY: A discussion between Thomas Picketty and Michael Hudson was published on The Saker website on Friday. It is worthy of consideration because the debate is about our financial system and what is happening in regard to wealth accumulation. BOOM has often discussed this in editorials. The fact is that our financial system, inherited from 15th century Venice, has not changed much since then and clearly operates to place more and more wealth into the hands of the wealthy. The end result is the situation that we have reached in the United States where 1 % of the population is estimated to own 36 % of the private wealth. And that number is also (alarmingly) estimated to grow to 70 % by 2030.
Michael Hudson is a famous American economist, Professor of Economics at the University of Missouri–Kansas City and a researcher at the Levy Economics Institute at Bard College, former Wall Street analyst, political consultant, commentator and journalist. Thomas Picketty is a French economist who is Professor of Economics at the School for Advanced Studies in the Social Sciences, Associate Chair at the Paris School of Economics and Centennial Professor of Economics in the International Inequalities Institute at the London School of Economics. He is the author of the best-selling book Capital in the Twenty-First Century (2013), which emphasised the themes of his work on wealth concentration and distribution over the past 250 years.
Picketty and Hudson strive to discuss the matter of wealth distribution in their debate but both tend to follow well worn paths to arrive at their two “solutions” — (1) Global Control of a Capitalist money system/Globalism/Global Governance and/or (2) Communism — more central control — in particular, the Soviet model where all of the money supply comes from a central source and where no private banking system exists. They don’t discuss who (exactly) will be in “control”. They don’t discuss the difficulties in finding the Clever Committee members required to operate such totalitarian systems of money control. Or the political and economic upheavals that would be required to establish such committees.
By the way, please note that BOOM does not admire the “solutions” that either offer in this debate but does suggest you read the debate nonetheless at the link provided. So what do they discuss?
Michael Hudson is at his best when he sums up the problem succinctly.
“The reason that inequality is occurring is that the largest public utility of all, money creation and banking, is left in private hands. Privatized banking in the West is very different from what government banking is in say, China.“
“Government banking would create credit for public uses, for what the economy needs to grow. In the United States and throughout the West, banks create credit to slow the economy from growing, they make loans not to create new means of production and new factories. They make loans against property already in place – mainly to buy real estate already in place. Some 80% of bank loans in America and Europe are for real estate.“
However, BOOM does not agree with his absolutist, Sovietski solution “My solution is to restore banking and credit to public hands to prevent the lending that simply finances asset-price inflation“.
This is a well worn path that Michael explains — “You have to tax the source of the money that pays interest to the banks. That source is mainly economic rent. It’s primarily land rent. If you would tax on the increase in land values, if you’d have a land tax, which is what the whole 19th century was about – Adam Smith, John Stuart Mill and even Marx. You would not have this increased rent being paid to the financial sector to be monopolized by the 1%.”
He does not mention that land taxes already make up a large part of taxation revenues of many States in many nations. And neither does he mention that if you suddenly taxed land much more, then people would stop borrowing to buy land/real estate and a major contraction would occur in the money supply. The result would be a major economic collapse which would not benefit anyone, except the envious.
Then he gives another solution to which BOOM also disagrees —
“The only solution is to wipe out the overall debts that are stopping economic growth“.
Picketty explains why Michael is wrong “It’ll take a major political fight to challenge the political rules of the game and the political institutions to change this.“
And he describes what the financial sector in China is like — “Regarding the Chinese model, you mentioned the fact that the banking system is working a bit more to the service of the real economy and infrastructure and investments, than the banking system in the West. By and large, the Chinese model looks more and more like a perfect digital dictatorship, and nobody really wants to [chuckles] copy this, apart from other government elite, who would like to keep their population quiet and restrict movement as efficiently as the Beijing regime is doing.”
In regard to the failure of Evergrande in China, Michael is right when he says what the Chinese central controllers will (almost certainly) say –“Well, sorry, bondholders, you made loans to a company that was way over-leveraged. Already, the American bond rating companies have reduced their bond rating to junk. You knew what you were buying. Well, you took the risk, you got a high rate of interest, now you’re paying the price.” That’s how markets work.”
Then Michael goes on to suggest closing down offshore banking centers — in BOOM’s opinion, this is currently not a practical or realistic option because the United States benefits the most from this system of international money creation overwhelmingly denominated in US Dollars or in Euros (which is arguably a US Dollar Proxy). This option may exist in the halls of academia where Michael lives but not in the real world in which we all live where hundreds of US military bases exist to protect the dominance of the US currency in global transactions. And where the trade in weapons and energy, mainly settled in US Dollars, also perpetuates that currency’s dominance.
Then Picketty suggests wealth confiscation and “redistribution”.
This is fraught with political and social problems. It’s not clear where the Clever Committee will be found to do this. Easy to say — not so easy to do from a political viewpoint. It could mean jumping from the pot into a very nasty fire.
Then Michael suggests the taxation of inherited wealth and says that Picketty also suggests this. But he, quite rightly, points out the unpopularity of such a policy — going way back to the early 19th century of Saint Simon to illustrate this.
Sadly, Picketty then introduces the globalist agenda of Totalitarian climate control — “We have to make some of the energy sources just illegal. We have to keep some of the oil in the ground. We have to stop looking for new oil and gas.” I don’t know if he has ever looked at the origins of our energy system in its entirety and its almost total dependence upon conventional energy — for example a solar panel cannot make a solar panel and an electric car is still made from steel, aluminium, rubber, silicon, plastics and glass. Mining, blast furnaces and agriculture with all their attendant supply chains are still essential. Fertiliser is energy dense. Heating is energy dense. Transport is energy dense.
Picketty then launches into a Sovietski world vision “Whether it’s rent, or energy, or financial assets or housing, we need to have a permanent circulation of wealth and power. Taxation of wealth will be a permanent, progressive tax on net wealth, which, in effect, will wipe out all the biggest wealth right away – say up to 90% tax per year for millionaires”. He fails to mention why anyone would do any work in such a system or take any financial risk which was the ultimate downfall of the Soviet Union — a lack of productivity which became rapidly terminal after 70 years of steady progression towards Zero.
And nowhere do they mention Intellectual Property and its global legal protection as the greatest source of wealth creation and accumulation in the 21st century. Google, for example, has not enriched itself through debt and the ownership of physical assets.
A comment at the end from a reader summarises the situation succinctly — “Without motivation and some amount of greed, no one will do productive work. See: old Soviet Union. Everyone punched in on time, and out on time because the bosses were so strict with time. What they did with it, did not matter. Why? because there was no incentive to do more, or for doing more.”
The Soviet economy was well summed at the end up in the phrase — “we pretended to work and they pretended to pay us”.
Reference: https://thesaker.is/debate-michael-hudson-and-thomas-piketty/
THE BOOM SOLUTION: BOOM has considered all of these matters in many editorials as long term readers know. The best solution is to repair (and restore) the balance between Credit Money (money created as a bank loan and principally collateralized against pre-existing physical assets) and Sovereign Money (money created, interest free by the State and distributed directly into the real economy of goods and services provision).
In our modern world, that will require electronic cash created by the Treasury. This is where BOOM’s Quantitative Boosting (QB) solution comes to the rescue — a form of electronic money free of interest costs, in national currency and injected straight into the real economy (not via the asset markets) to move towards a 50:50 balanced money supply. At present, in the advanced economies Credit Money is 98% of the money supply and Cash is just 2%.
That ratio is at the very crux of the matter and until it is fixed, our financial system will generate more and more wealth for the wealthy. The end result will be more social inequality, social upheaval, political upheaval and distress. Ultimately, we will be back at the Gates of the Bastille and the guillotines will be erected for the upper crust.
QB Explained
https://boomfinanceandeconomics.wordpress.com/2019/12/15/boom-as-at-15th-december-2019/
and BOOM’s Perfect Economy
https://boomfinanceandeconomics.wordpress.com/2020/01/18/boom-as-at-19th-january-2020/
Read all about it in the FULL EDITORIAL …. http://boomfinanceandeconomics.com/
In economics, things work until they don’t. Until next week ………… Make your own conclusions, do your own research. BOOM does not offer investment advice.
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QB sounds clever but it won’t change human nature. People will abuse credit if they can.
The entire problem arises from securitization of debt. This method leads to over-allocation of money. Take for instance college education a complete disaster. Take home mortgages that lead to the 2008 financial crisis. Take commercial real estate that has lead to a massive over-supply of retail. And the list goes on and on. Banks need to keep the loans they make, not sell them off with phony bond ratings from the rating agencies.