If I lend you money to buy a meal and you do so the money is spent on paying for the meal. The good news is that you are paying towards sustaining the restaurant, its employees and suppliers, such as farmers, who provide the resources needed.
Once spent, the money I lent you has gone with no prospect of a return. You owe it to me – it was a loan – but to repay it you must earn or borrow it from someone else. My loan is “non-productive”.
If I lend money to an oil company they use that money to find and produce more oil which they sell. That enables them to pay back my loan and keep some profit themselves with which to pay their staff and suppliers but also to explore for more oil. My loan to them is productive. The simple economics of productive and unproductive money need more attention if we are to discover who is in charge and of what.
Most governments have been borrowing for many years to pay for education, social welfare such as unemployment benefit and healthcare, defense and the costs of government and civil service. It is all expensive but unproductive. Indeed, helping people to live longer is economically counter-productive. However, shooting the retired and the sick as a swift remedy to the problem is not recommended.
To try to convince us that their spending is wise successive governments have referred to it as ‘investment’. Gordon Brown, a former UK Chancellor, was good at making profligate growth of the civil service sound like an investment. It was not, it was a cost. Understanding the difference is quite important if you are to be a Finance Minister. Increasing debt produces short-term benefit which soon disappears leaving longer-term problems.
Mortgaging the future, which we all do one way or another at certain times in our lives, is only viable when we know how and when we can repay the debt. Once it reaches a level at which we cannot repay it we are in trouble. European debt has long since reached that level and recently pumping in another trillion Euros has only compounded the problem.
While all this has been going on companies have mostly been behaving extremely prudently, building their cash reserves against the day they need to invest in modern machinery and software and reducing their dependence on the banks that let them down so badly – in some cases, fatally – when the last economic crisis struck.
So governments are in debt and companies are in credit – almost the opposite of what capitalism was meant to be about.
- A government spent dollar produces no income.
- A company spent dollar produces new revenue.
Interesting to think about how that is moving power to determine the future, even in the most democratic societies.
Now look at the stock markets and you see that they are not so much a roller-coaster ride as a series of sleeping-policemen bumps. Each jolt makes us ask ‘is this the big one?’; each retreat reminds us that there are some worrying waves around even if they do not amount to a tsunami.
What are the forces at work and how will they play out in the coming months?
- Now that productive money is, in most countries, moving from government control to company control and with it some of the power to make things happen, what are the signs of that shift of power inevitable as a consequence?
The UK culture secretary, Jeremy Hunt, is in the process of defending his relationship with Murdoch’s BSkyB shares deal and there are plenty of other examples of how highly valued companies increasingly call the tune in every area from building planning consents to tax changes.
If wealth generation is the sole purpose of life this may not be a bad thing. Those who have made it often know how best to invest it. I question whether wealth generation is the sole purpose of life. Important, yes, but ‘sole purpose’? You frequently say no to that.
Loss of government control is not confined to power moving to wealthy companies. What has happened in the Netherlands is but a curtain-raiser to the events about to erupt in Spain and France.
People Power is as contagious as any disease and entitlement is so deeply entrenched , especially in European cultures, that it will be surrendered reluctantly – or, in other words, only after a riot.
A government keeps control only by coercion or persuasion. No democratic electorate is going to settle for coercion today. Persuasion now amounts to bribery but bribery requires resource (money) to be effective. There is no money left so political bribery will have to come from defaulting on debts. The consequence of this is devaluation of the currency involved but how do you devalue the Spanish Euro while keeping the German Euro fully valued? You either have two Euros (or twenty-seven) or abandon the currency altogether.
There is a third way. You issue more money. You call it Quantitative Easing (QE) so nobody really understands what is happening and you pour trillions of whatever into the money funds supporting the banks. As this is released into the economy the rate of inflation starts to grow, slowly at first, much faster later on until you have hyperinflation with more and more money being created to fuel the declining value of the currency.
What happens then? The poor get poorer and the rich barricade their homes.
It is going to be a bumpy ride.
John Bittleston writes and records The Daily Paradox each day Monday to Friday. You can receive free daily alerts to the URL or weekly updates of all the articles / voicemails published to date. Ask him at www.TerrificMentors.com.
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Link : Power is Following Money, as Usual ~ Challenge