Читать книгу TOO MUCH MONEY - Gregory J. McKenzie - Страница 2

“When the winds are too favorable, fail not to show

wise caution and haul in the billowing sail”

Horace

If a flashback to 2006 was possible, people might be surprised to note the unbridled global optimism that prevailed at that time. It seemed that anyone could make money and increase their wealth. Absolute poverty around the world had been pushed back to record low levels. Globalization was the wonder of the age.

What is now known, in hindsight, is that financial disaster was imminent. Economists have looked back to 2006 and highlighted two causes of this global financial collapse. The first one was the easy credit provided by the banks. And the second one was the excessive focus on economic growth by governments and central bankers. Put together, these two strategies led to unchecked asset inflation.

What occurred back then was that housing prices doubling within six years. At one and the same time those surplus units who were playing the stock markets also saw share prices rise by as much as half of the previous year’s levels. And middle income consumers began to feel wealthy as their investment portfolios scored huge capital value gains. All this was part of the “paper millionaire” illusion! Consumers were richer “on paper” but this was not real wealth. Debt levels were too high both for business and for households. A financial crash was imminent!

But before we continue let me define some economic terms for the readers who may not have studied economics at university. Even those who are self taught may need to take note of my definitions. The old saying that you can take three economist into a room and get five different opinions is all too true in today's academic world. More often then not they have different basic definitions and assumptions about reality.

So let me start by defining what I take to be the economic definition of ECONOMICS. It is the moral philosophy that examines the problem of rational choice when confronted with scarcity. Going back to the subsistence economies of early humanity, individuals had to chose how to satisfy their needs and wants. Often there was not much available locally to gather up and consume. More often than not individuals had to hunt for basic needs. Starvation was common. Few surplus units existed to bail out any deficit units. Market places were their only source of surplus income. Into just such a world, economics was born. Back then it was a world of scarcity. Most households had to be self sufficient. Moral choices were a matter of life and death.

Today we have an advanced world of plenty. But it tends to be distributed unevenly. Thus trade is necessary to make ends meet. How scarce resources are finally distributed involves moral decision making. Economists analyze the way this distribution functions to satisfy needs and wants. They basically look back at past solutions to past problems of shortages and gluts. These solutions are then tested using mathematical modelling. Forecasting future events based on this scientific analysis is the task assigned to theoretical economists. Making profits in the money economy, from past solutions, is the task assigned to financial economists. Getting social needs and public wants satisfied in the real economy is the task assigned to public service economists. Behavioural economists act as consultants to governments. Welfare economists are the critics of governments.

We all live and work inside the real economy. My definition of real separates economic activity into functions.. For economists who were trained before 2001, the economic term ‘real’ means non-monetary. Some may ask how can money not be real. Well economists of traditional schools of thought, see money as a measurement device; used as a medium of exchange; accepted as a standard for deferred payment; and utilized as a way to compare different currencies. Economists do not see any intrinsic value in money. In fact they called the money we use today ‘token money’. They point out that it only has value if supported by governments. Don't forget that money today can include bitcoins and stored value cards. Here money has been transformed into use in a digital society.

The debit card, cash and the cheque are all only promises to pay. When you use your debit card you rely on your bank to pay the merchant. Using cash, that is legal tender, puts the onus on governments to guarantee payment. Sending a cheque involves many banks in clearing that cheque and paying the right person. But all this is seen to be money in the sense that it becomes a medium of exchange, measure of value and standard for deferred payment.

This leads into my next related definition which concerns the real economy. I define the real economy as concerning the production, purchase and flow of goods and services within an economy. Now the only problem with my definition is that it is misunderstood by almost everyone not trained in economic theory. Even some economist would not accept my definition because it sidelines money to a secondary position. Many of these critics are market based economists and some are academic economists who support the theoretical primacy of monetarism.

Now let me define the money economy. I will first give the Merriam-Webster definition as it is the least controversial definition of this term. Merriam-Webster list the term money economy as “a system or stage of economic life in which money replaces barter in the exchange of goods”. My own quibble with this definition is that it is too broad and very dated. Except in some remote areas of the world, no barter economy has existed for over one thousand years. Even archaeologists date ancient finds by the coins that are buried on their excavation sites. Yet some economist use this definition to claim that the money economy involves everything in economics.

My definition is more in tune with a post Global Financial Crisis world. Anyone who lived through the Great Recession of 2008 to 2012, would have noticed how the GFC left areas of the domestic economy untouched. Even whole economies were untouched domestically by the GFC. This is because the GFC directly involved money markets but only indirectly affected markets for goods and non-monetary services.

So let me state this in these terms:

My definition of the money economy is those areas concerned with the creation, exchange and flow of money and financial derivatives within an economy.

This definition will not please monetarists and even those who get their definitions from other dictionaries. But I would counter their objections with observed market behavior. Ever since the pandemic wreck havoc with world economies and almost shut down global tourism, one market has sailed on unchecked. Global stock markets remain at historic high levels of asset valuation. In fact most money market in 2020 only suffered slight bumps along the road to asset inflation. We are yet to see a housing market crisis like the one witnessed in the USA after 2006. In some countries the reverse is happening as 2020 draws to a close.

Now some inflation is good for an economy. It allows for expansion of employment. But too much asset inflation places a strain on free markets. Domestic economies are constructed to thrive on price stability. When prices start rising too fast, most free markets begin to fail. I started my research into market failure, back in March 2005, when I noticed the high share prices. I was so alarmed at what I saw that I moved my retirement savings into fixed term deposits. Yet all around me consumers were spending at an increasing rate. They were using the equity in their home to fund their credit card purchases. Yes house prices were also gripped in a wave of asset inflation.

This brings me to my next definition. After any recession there are calls to increase consumption spending. But if consumers have already overextended their credit card limits, such a call may be sterile. But just what is consumption spending in a macroeconomic sense of that term. I define it as private domestic consumption expenditure. This is the money directly spent by domestic consumers to satisfy private needs and wants. A degree of precision is required because there is also government spending on consumer goods. In a recession this becomes very important. But private consumption expenditure is much larger! It can account for six out of every ten dollars spent in any economy in one year.

At a time when most consumers had already exhausted their savings, any sign of failure in a financial market would cause panic selling. The sub-prime mortgage disaster of 2006 in the USA caused such panic selling. When consumers bought overpriced assets on credit, they were quick to dump those assets at the first sign of failure. Some were even forced to sell, at the wrong time, by their credit provider (e.g. if the share were purchased using margin loans). This then flowed on to their cash balances and forced them to reduce their consumption expenditure.

The free market has no “safety net”. Anyone who failed to pay their loan repayments, and could not access other wealth assets, faced bankruptcy. By 2008, margin loans were going bad and banks were seizing assets like shares and family homes. People in the richest country of the world walked away from homes they could no longer afford. Some then sold shares they could no longer keep. Finally, many lost jobs they could no longer replace. For some people it was all three at once. This story of a middle-income family that lost their home, their shares, and their jobs, was not an isolated incident by 2008. This lasted in some countries until 2012.

Consumers who saw their wealth fall and their income slashed, reduced their total spending. For a time, they tried to protect their lifestyles choices by using available credit options. But a moment comes when there are no more credit options available. When that happens to millions of consumers, any economy will go into recession. This is what happened to the US economy in 2008. Other economies soon followed. The Great Recession lasted for the next four years.

In 2020 there was no financial disaster. This time around it was the real economy that felt the shock wave of shutdowns. First the official lock downs threatened the survival of businesses in three large industries. Hospitality, services and transport industries saw revenue plummet. After this initial fall in economic activity, there was the gradual loss of tourism and trade bookings.

The shutting of national borders was to globalization what a hammer is to a nail. Global trade went into hibernation. The movement of people around the world was largely confined to expatriates trying to return to their own country. Cheap labour was suddenly in short supply. Appeals to nationalism were needed to get idle workers out onto farms and orchards. A new normal was emerging from this new economic chaos.

Yet it was not all bad news for some businesses. Some went from a small start-up stage to global success in just six months. Small local manufacturers were able to meet the challenge of certain global supply shortages. Some lock down fads saw surges in demand for toilet paper, baking flour, road maps, hand sanitizers and surface wipes.

Surprisingly the money markets boomed. Real estate markets fell then recovered.

Even though the rental market became depressed, the residential property market remained resilient. In some countries middle income workers, who were forced to work from home, decided to bring forward home improvements.

With the complex nature of financial markets today, very few private investors can know all the institution databases to check up on an investment. Yet as institutional investors withdrew from risky financial markets in early 2020, private part-time investors moved in to take their place.

Largely caused by the historically low interest rates, high savers were looking for bigger returns on their idle balances. Few of them would know that higher returns implies a higher risk factor. This lack of financial literacy can lead to disastrously naïve investment choices. Unlisted property trusts, margin loan funded share purchases and newly listed equity listings are best left to the professionals. Yet those who support free markets make the claim that investors enter markets with full knowledge of all risks. This is just not the case; it is presumptive of anyone to think that financial markets are easy to read. Recently, I read an autobiography of a market insider who claimed that even the market brokers could not keep up with the details of new investment assets. If the experts could not stay fully informed, then it is too much to expect investors to have the required knowledge. The words “free to fail” seem appropriate in this context.

But what is investment? Again there is a need for clearly defined terms. In general investment can be defined as the creation of capital. This means that investment leads to an expansion of the production of capital goods. But who buys those capital goods? Well again it can be either, private businesses, or, governments. So I define business investment as net private domestic investment. This is then expenditure on capital goods inside the domestic economy, by the business sector, for a given time period adjusted for depreciation.

The adjustment is necessary because replacement investment can reduce gross private investment by half. Older economies usually have aging capital goods. These old capital items must be replaced continuously. But such business activity does not increase productive capacity. Then there is inventory investment. This is common in recessions where businesses have an unintended build up of stock or inventory. So we must be clear what we are talking about when the term business investment is used as a cure for a lagging economy. Usually net private domestic investment will lead to increased economic growth.

Media reports after the GFC and during the pandemic have loosely used the terms: stimulus package and monetary easing. It won't surprise my reader to hear that neither terms are easily accepted by all economist. Instead Keynesian economists would use the terms: fiscal policy and monetary policy. As these two do not completely cover what media outlets are trying to describe, monetarist economists would insist on adding two more terms: incomes policy and external policy.

So what exact definition can be given to each one of these terms. The easiest one is fiscal policy. Simply put, fiscal policy is how governments adjust public expenditure and taxation income. It might help if the synonym of “budget policy” is mentioned. So governments can budget to spend more or less. They can budget to increase or decrease tax. The net effect of these budget choices is called the budget bottom line. That will be called a deficit if the government budgets to spend more money than it receives. A budget surplus is then the opposite. Now income streams are bigger than expenditure drains. A balanced budget is rare but mathematically possible. By some means the amount received as income exactly equals the dollar amount called government expenditure.

Monetary policy used to be easy to define. That once simple definition was that it was actions by the central bank to influence the availability of money. Unfortunately Modern Monetary Theory changed the simple interpretation of that definition. Now monetary policy can be used to buy back government debt instruments and may involve negative interest rates.

Incomes policy is defined as all the government measures designed to alter the income of economic units. Wage determination settings and certain prohibitions make up the bulk of decisions in this sensitive area.

External policy is defined as government actions that affect the trade balance of a country. This may included any central bank actions on foreign exchange markets. It may also include the signing of a new trade deal. Finally it may relate to policies targeting immigration.

Some environmental economists would argue for the inclusion of one more policy issue. That is a separate issue as far as they are concerned. So their assertion is that the climate is changing and we need national policies. This is now generally accepted worldwide. So most governments have a climate policy. This can be defined as government actions to address climate change. The term ecological sustainable development was invented to justify this as an area of macroeconomic management.

Economist may talk about “levers” of policy. The main one they refer to are tax reform, expenditure refinement and interest rate adjustment. Now these are the big three as far as media stories on government action are concerned. Tax reform is seen to be about lowering taxes. Expenditure refinement is seen to be about getting government spending to where it is needed. And interest rate adjustment is seen to be about lowering interest rates.

Of course some Keynesian economists argue that some taxes should be increased. They may also argue that government spending should be universal. Finally these economists argue that interest rates no longer matter because they will remain at or near zero.

Only time will tell who is right in all of this prejudged mix of political biases and ideological prejudices. Keynesian, or neo-Keynesian economists in the Twenty-first century (that's Keynesian economists who reinvented themselves after the shock of Reaganonomics and Thatcherism) will choose tax increases and universal government spending. Monetarist, or MMT ( a version of monetarism that accepts the idea that central banks can but back government bonds) economists would choose lowering taxes and strictly targeting any new spending programs.

So what is this “stimulus program” idea floated by media outlets? Well usually it involves a mixture of direct cash injections and wage subsidy programs. So this is fiscal policy mixed in with incomes policy.

How about “monetary easing”? Well the correct economic term is quantative easing. This is when the central bank buys bonds and other assets so as to inject money directly into financial markets. In the Great Recession this was the main way central banks stabilized financial markets. Remember that the main damage was to the money economy. So monetary policy action was needed. There was some need for fiscal policy but this was mainly to restore consumer confidence.

Cash handouts and tax cuts were the main actions taken. It was business confidence that benefitted from any government bail outs. Banks that were “too big to fail” were given guarantees. Even some manufacturers in the USA were given taxpayers' money. The real economy in the USA did bounce back quickly after 2012. With the USA having the reserve currency status, it was able to sell a lot of government bonds.

Yet even up until 2012, sovereign debt in other countries became an obstacle to increased economic growth. Countries like the Republic of Ireland and Hungary felt the heat of economic uncertainty. Both are small economies that needed exports and foreign investment. They both had impressive growth periods in the first years of this century. By 2010, these two economies faced a long period of recession and government spending reductions.

The biggest weakness of orthodox (neoclassical) economists is their blind faith in the price mechanism. For those still not familiar with the price mechanism, see the Appendix of this book. In deep recessions and depressions, the price mechanism can fail to correct market shortages and eliminate surpluses. Panic buying and panic selling occur at these times of economic crisis. This damages consumer and business confidence. Fiscal policy measures are then needed to restore market stability. eventually confidence returns and economies grow.

In 2008 a ‘Great Recession’ was a lot better than a Great Depression! The bail outs and quantitative easing kept the ‘depression wolf’ from the real economies – well from those countries rich enough to be in the Group of Twenty. Still back then a lot of critics started saying that governments were mortgaging their children’s future.

My answer to these critics is that at least those children now had a future. It is a bit hypocritical to use this taunt if you own a home only because you got a mortgage. Government debts usually last thirty to fifty years. It may less time than that for economic growth to create the wealth needed to pay back this public debt. But if there is stagnation in some countries, then sovereign debts may have to once more be “forgiven” net creditor countries.

Now in early 2020 the US Congress passed a trillion-dollar stimulus package that were sent to them by President Trump. The Federal Reserve moved quickly to match this fiscal stimulus of the real economy with monetary policy support for the money economy. The Fed kept its benchmark interest rate steady at zero to 0.25 percent.

The Federal Reserve Chairman Jerome Powell was quoted as saying that there was no chance of a rate rise in 2020. He committed the whole monetary policy ‘arsenal’ of his central bank to support what he called “the people we’re actually legally supposed to be serving”. By this he meant that the Federal Reserve would seek maximum employment in the US economy and stable prices. By holding official interest rates around zero, the Fed presented the mirage of “free money” to politicians.

What the Fed Chairman did not say was that governments would have to do their bit by raising taxes in the future. It may seem counter intuitive to even consider raising taxes in a deep recession but many economists would disagree. Tax revenue is harder to waist than borrowed money. Politicians are held accountable for every dollar of tax revenue they spend. The same cannot be said for zero interest rated public debt.

In a severe recession, governments must not waste money. The opportunity cost of misdirected spending could be long term unemployment. Too much depends on targeted spending of the public purse. An added bonus is a reduction of hoarding. By taxing those on higher incomes governments can reduce hoarding of idle balances of money. Argentina introduced their “millionaire tax” in December 2020 to cover increased spending on improving health infrastructure. Other governments are considering introducing an inheritance tax. All these fiscal measures may be necessary in countries that cannot borrow enough money from global bond markets.

Fiscal policy may be effective but only a return to economic growth can heal the scaring of so many unemployed people. That will take a lot of time and careful economic management.

END NOTES:

1 Glenn Mumford “Watch for the capital inflow influx”The Australian Financial Review January 19, 2011 (pages 15 & 19).

2 FOCUSECONOMICS“Consumption”www.focus-economics.com/economic-indicator/

3 “NET PRIVATE DOMESTIC INVESTMENT”www.amosweb.com

4 Jacob Greber “Fed ‘not even thinking about thinking’ about rate rises”The Australian Financial Review June 12, 2020 (page 15)

5 Mark Blaug “Economics”www.britannica.com/topic/economics

6  www.merriam-webster.com/dictionary