Archive for August, 2011

On Economic Cycles

August 19, 2011

I posted this to Larry Elliott of the Manchester Guardian. The original essay referred to was posted in the Politics Forum of the International Mensa Forums.

I have recently been posting similar things to those you write about to the International Mensa Forums. I take the points you’ve made farther and in a slightly different direction.

I have argued that the venality of financial agents and the seeking after advantage of virtually everyone, individuals to corporations to nations, is similar. The effect is to create imbalance. Trade imbalance comes first, followed by imbalance in the form of debt. And I further argue that imbalance cannot be sustained indefinitely. Adjustment of currency standards was a way of doing this, but with the formation of the European Union this tool was taken away from nations; only the ECB still maintains a floating balance against the dollar. The US can’t really adjust the value of the dollar, because the US dollar is the standard. Asian nations can do it, and do, in order to favor exports over imports. The ECB also tries to keep the euro competitive against the dollar so that exports are favored over imports of US goods.

Money, in the form of dollars or euros or yuan, currency or electronic credit, is not worth anything except in the nation(s) that originated it. Those credits cannot be maintained indefinitely, because inevitably they become worth less over time. I model the modern world economy as a series of cycles within a larger cycle, in which nations rise economically and fall. Eventually the cycles achieve balance through a number of mechanisms.

One of these is the necessity to maintain liquidity in whatever monetary standard is in use. Think of the world economy as a board game in which tokens flow from one side of the board to the other. If one player gains most of the tokens, then the game must end; but in economics, demand for liquidity to keep trade going creates pressure to make more ‘credits’ available. So more dollars and euros and yen are created and fed into trade. The credits that were hoarded on one side of the board are now a smaller fraction of the whole. Their value lessens.

Dollars can be exchanged for other currencies, of course, but inevitably they come back to the US. At one time this largest economy was strong enough to provide a ‘sink’ where the world’s business could be absorbed. But this is no longer the case. That strong economy was based on manufacturing and trade, and now there is little of either. ‘Trade’ is now ‘sales’ on the part of foeigners; the US GDP and GNP are almost identical. Dollars flow out, very little comes in. The US is no longer a nation of manufacturers, it’s a nation of service workers, surviving by doing each other’s laundry. No longer sustainable as the world’s center of exchange, in other words.

Dollars can be used to exchange for other currencies and for purchasing American goods. They can also be used to invest in either T-bills or similar, or to purchase shares of stock in corporations or to invest in businesses. There’s a limit to this, however. When investment becomes too great, governments step in to protect their national interests. In any case, investment only creates more dollars which, again, must be funneled into the US. Nationalization of industries and economic default are two of the catastrophic ways in which cycles adjust to balance.

The only indefinite mechanism to prolong economic activity is by means of balanced trade. This is where that search for advantage comes in. There is no mechanism I know of to balance trade except to wait for the cycles to play out. In the end, nations and empires rise and inevitably fall, balancing the cycles in this way. Should the US ‘fall’ in the near future, economic imbalance, financial chaos, would result. The yuan or euro would replace the dollar, and so all those dollar ‘counters’ so amassed would become virtually useless. Balance is restored, but now with the European union or, more likely, China on top of the financial heap. To prevent this, advantage must be seen as imbalance, and balance short of catastrophe must be sought. But neither individuals nor nations will willingly forgo advantage, and so I expect the cycles to continue to their conclusion.

Jack Knapp

The Economy, Politics, Social Contracts, Taxes, and International Relationships

August 15, 2011

This is excerpted from the International Mensa Forums; I posted it there on August 15, 2011.  It contains my thoughts on current affairs regarding taxation, contracts between government and the citizenry, politics, and the effects of all these on the world.

US taxes need to be reformed. There’s a huge potential there for national income, and I was thinking about this just last evening. The television news program was “60 Minutes”, and it includes numerous interviews with business people and a political figure from Switzerland; not just the newscaster’s opinion, in other words.

The program made the point that the US taxes corporations at the second-highest rate among developed nations. As a result, US corporations are moving their headquarters offshore and keeping their funds out of the US so as to avoid taxes. This is also related to offshoring and outsourcing that has removed manufacturing jobs from the US. As a result of this, I’ve come to believe that the US economic recovery may be delayed for years. It has to do with taxation and how the taxes are used; Americans see the waste and selfishness of politicians and have no vehicle to correct this because of the control that the two major parties exercise over American politics. So their only vehicle for complaint is to withhold taxes, and voters do this.

As an aside, another reason for the recovery to be delayed is that many of the ‘spenders’ in the economy had large credit card debt when the recession began. It’s only foolish in hindsight; banks, merchants, a constant blitz of advertising urged people to buy now, pay later. Many did. If you had a good job, a nice house, a salary that included raises in pay every two or three years, why not plan on paying the cost later when your salary had been increased? But when the economy began to go sour, when the house wasn’t worth what you had paid for it, when layoffs began, all this turned out to be not true. And the ‘spenders’ who had driven the economy had no more disposable income to spend and their credit was stretched to the maximum; so they stopped spending. They won’t spend again until they recover from what they’ve already spent in the past few years.

Back to tax structure: I was thinking that it’s silly to force US citizens and US corporations to be the only ones to benefit from the American economy. Something like a national sales tax or, even better, a gross receipts tax that gets passed on to whoever is selling within America would be helpful. This tax might be offset by whatever federal corporate taxes the company had already paid, so that the result was a tax on economic activity that would be paid by everyone doing business. So long as only native companies pay the taxes, there’s an incentive to be a ‘native’ of Switzerland and just sell your goods here. And that’s why Google and a number of other firms are now headquartered, at least for tax purposes, in Switzerland. In return for raising taxes in this way, corporate tax rates could be reduced and personal income taxes restructured to ensure that all citizens paid at some fair rate. Possibly a ‘flat tax’ could be the way to go here, where all income, from whatever source, is taxed. Currently the wealthiest persons have any number of legal ways to evade paying taxes. That needs to be addressed.

So the US Government is, through unwise tax policy, forced into this policy by citizens who aren’t willing to be taxed and then have their money wasted by venal and corrupt politicians, subsidizing the governments of Ireland and Switzerland and other places. Those tax-evading companies are now headquartered there and happily pay a lower corporate tax than they’d have to pay in the US. Why not? It’s not as if Europe was far away; they’re only a few hours away by airplane. So the executive commutes back and forth from his home to Europe in a corporate jet.

With a more-equitable tax structure, the social contracts made by the government can be funded. Citizens would be happier if they could see that incumbent politicians aren’t using tax money to help get themselves reelected.

I don’t have a practical solution. No politician is going to advocate anything like what I’ve written, because they’d rather keep on pandering to corporations and using tax money for their own purposes and to aid their friends. We need to get the career politicians out, and go back to the time when public service was a duty, a kind of ‘noblesse oblige’. And as for educating the public…fat chance. They mouth the TEA Party’s slogans or whichever propaganda is current, and refuse to think for themselves. It may require a revolution, probably not a bloody guns-and-bodies revolution, but a revolution nonetheless. A powerful third party composed, not of TEA Party or Progressive fringe elements, but of centrists who won’t be the pawn of either extreme element might be able to do it.

I don’t see any good outcome from any of this. Not for the US, not for Europe, not for the world. The stability that depended on the US economy and the US military may be coming to an end.