Where Is The Money?

It seems to me…

But while they prate of economic laws, men and women are starving.  We must lay hold of the fact that economic laws are not made by nature.  They are made by human beings.”  ~ Franklin D. Roosevelt.

I am not an economist and will not pretend to be.  Still, there seems to be a considerable amount of what clearly seems like hogwash, to label it politely, being preached by budgetary conservatives.  The U.S. is still recovering from the past recession but at a much slower rate than would have been possible entirely due to their ideological and politically motivated refusal to approve measures necessary to affect more rapid recovery.

Economics at a basic ECON-101 level seems rather uncomplicated: One person’s spending is another person’s income.  Given a hypothetical constant amount of money in circulation, if someone decides to increase their savings rather than spending the same amount of money, that money is removed from circulation and someone else’s income must decrease by a corresponding amount.  The same decrease in income occurs regardless of how the supply of money is decreased: unemployment, lower property values…

Current U.S. economic doldrums resulted from a liquidity trap.  The Federal Reserve increased funds available to banks so as to lower interest rates and make borrowing more attractive.  The intent was to increase the amount of money in circulation but in this case, due to low consumer spending and declines in home values, lowering the interest rate to essentially zero had no effect on the economy.  Business investment remained low regardless of interest rate levels since expansion clearly was not warranted if it did not increasing sales, which has resulted in continued elevated unemployment levels.  As a result of private debt-overhang, debtors have reduced their spending but creditors have not increased theirs – all of which has resulted in a decrease in the amount of money in overall circulation.

Some people who should know better argue that the federal government should adhere to the same rules that apply to everyone else; namely, that expenditures never should exceed income.  This clearly is not reasonable at the Federal level (and probably not for some of the larger states) where priorities require fiscal averaging over a longer period than a single budget cycle.  Our present economic difficulties are attributable not to excessive debt but rather to insufficient spending.  Further reductions in spending will only result in additional economic depression.  Austerity, as demanded by conservatives, is never an appropriate response during an economic downturn (as is clearly demonstrated by the application of that policy in Europe).

If an inadequate supply of money in circulation is the problem, the solution should be obvious.  What finally brought an end to the depression of 1929 also is applicable for the current recession: public-sector infusion of currency in the form of a stimulus program sufficiently large to increase demand to where the private-sector is experiencing sufficient demand to once again begin investing in production capacity.

Hopefully, it will not require another war to persuade fiscal conservatives of the necessity to increase investments capable of high future returns; e.g., infrastructure, education, research, and development.  Admittedly, there are important concerns that should not be minimized including the national debt, monetary policies, and program duration.  Given the political will to act, these concerns can be resolved.

Though large, U.S. debt levels as a percentage of annual GDP are not excessive, our “net international investment position” (overseas assets minus liabilities), the amount owed to foreign countries (such as China) is only about $2.5 trillion – the U.S. produces about $15 trillion in goods and services every year[i].

It should be obvious that something has to be done.  The Congressional Budget Office projects only a 2.4 percent annual growth in GDP through the year 2022 though any annual-growth less than 3 percent is considered insufficient to keep up with current levels of national wealth and well-being[ii].  What needs to be done is fairly obvious; what is needed is the political will to actually do it.

It is time to restore our nation to its leadership position in education, infrastructure, healthcare, and opportunity.  Isn’t it time our elected representatives got down to the task to which they were elected – actually governing?

That’s what I think, what about you?

[i] Krugman, Paul.  End This Depression Now!, W.W. Norton & Company, Inc,. New York, 2012, p44.

[ii] Foroohar, Rana.  Why Stocks Are Dead, Time, 28 November 2012, pp40-44.


About lewbornmann

Lewis J. Bornmann has his doctorate in Computer Science. He became a volunteer for the American Red Cross following his retirement from teaching Computer Science, Mathematics, and Information Systems, at Mesa State College in Grand Junction, CO. He previously was on the staff at the University of Wisconsin-Madison campus, Stanford University, and several other universities. Dr. Bornmann has provided emergency assistance in areas devastated by hurricanes, floods, and wildfires. He has responded to emergencies on local Disaster Action Teams (DAT), assisted with Services to Armed Forces (SAF), and taught Disaster Services classes and Health & Safety classes. He and his wife, Barb, are certified operators of the American Red Cross Emergency Communications Response Vehicle (ECRV), a self-contained unit capable of providing satellite-based communications and technology-related assistance at disaster sites. He served on the governing board of a large international professional organization (ACM), was chair of a committee overseeing several hundred worldwide volunteer chapters, helped organize large international conferences, served on numerous technical committees, and presented technical papers at numerous symposiums and conferences. He has numerous Who’s Who citations for his technical and professional contributions and many years of management experience with major corporations including General Electric, Boeing, and as an independent contractor. He was a principal contributor on numerous large technology-related development projects, including having written the Systems Concepts for NASA’s largest supercomputing system at the Ames Research Center in Silicon Valley. With over 40 years of experience in scientific and commercial computer systems management and development, he worked on a wide variety of computer-related systems from small single embedded microprocessor based applications to some of the largest distributed heterogeneous supercomputing systems ever planned.
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8 Responses to Where Is The Money?

  1. Great blog post, it’s helpful information.

  2. auntyuta says:

    ” . . . As a result of private debt-overhang, debtors have reduced their spending but creditors have not increased theirs – all of which has resulted in a decrease in the amount of money in overall circulation.”
    I have one question: How can creditors be made to increase their spending in ways that are beneficial to the economy?

    • lewbornmann says:

      Happy New Year…
      I am not an economist but from undergraduate Econ-101 classes and econ texts I have read, when a nation is caught in a liquidity-trap, as the U.S. and several other countries now are, the federal government needs to stimulate the economy through public-sector investment. Only following an increase in demand (consumer spending) will the private-sector correspondingly increase investment.

      The stimulus should be primarily into national infrastructure. The U.S. stimulus took too long to implement and was much too small considering the size of the U.S economy though it was sufficient to prevent the U.S. from slipping into a full 1939-style depression. In addition, much of the stimulus was in the form of tax reductions that either were invested or used to reduce personal debt-overhang.

      Federal interest rate reductions, the more traditional method of economic stimulus employed by a national bank, are ineffective when the prevailing interest rate approaches zero percent. Other methods, such as currency devaluation (as employed by Australia during the 1996 Asian economic crisis) also are unavailable to a free-floating monetary system such as the U.S.

      One of the most critical things to remember is that austerity (as implemented in Europe and recommended by U.S. conservatives) is never advisable during an economic downturn. The time to balance a budget or national debt reduction is when the economy is prosperous — not now.

  3. auntyuta says:

    If the wealth of the 10% richest people increases immensely, this may be as it should be in some cases, but then if they are people with a social conscience wouldn’t they then try to invest some of their wealth in projects such as infrastructure to create jobs and prosperity for the rest of the population?
    It seems to me that there is a limit as to how much governments are ‘allowed’ to go into debt, but maybe not if there’s a war on?

    • lewbornmann says:

      Many of the wealthy do have a social conscience — think Bill Gates — but as observed by Wallis Simpson, “You can never be too rich or too thin”. While the anorexic demonstrate that people in fact can be too thin, I can not think of any counter-argument that someone can be too rich. Much of the time, wealth is simply invested in such a manner as too further increase the investor’s personal wealth. The U.S. is a consumer-based economy (as is Australia) and investing has little immediate affect on consumption. There is little incentive for increased production or hiring.

      Governments can not continue deficit spending indefinitely (though Japan does not seem to have had any difficulty) but there are mitigating circumstances. It frequently is desirable to stimulate the economy to increase the GDP: higher GDP, higher federal income. This also “could” have a sometimes desirable effect of moderate inflation effectively devaluing the debt.

  4. auntyuta says:

    “Much of the time, wealth is simply invested in such a manner as too further increase the investor’s personal wealth.”
    Wasn’t America’s railway system established with private investments? And didn’t the investors profit from it?
    “There is little incentive for increased production or hiring.” How could this be changed? Actually, I am thinking more about national infrastructure (which creates jobs too), not so much about incentives for more consumer spending. Why should governments have to pay for new infrastructures when they are not allowed to collect more taxes?
    And why should governments have to sell off for instance electricity works to pay off debt when these works are excellent for profit making? Shouldn’t the aim of governments be to keep assets which are profitable? And I reckon water resources and responsibility for clean air should be for governments to handle, not the private sector! There should be enough safeguards built in so that government officials aren’t tempted to become corrupt,
    I know my comments are rather idealistic and not at all what reality looks like.

    • lewbornmann says:

      Most social and technological progress is the result of private rather than public investment. Contrary to conservative beliefs, public funding is not only appropriate but necessary to effect recovery when within a liquidity trap and the supply of available money can not be increased by further reductions in Federal interest rates. Public funding also is essential in the initial research and development of new technologies until it is sufficiently mature to attract venture capital investment.

      The U.S. transcontinental railway system was built with private investment but only after that investment was guaranteed to return a high profit through very beneficial property rights adjoining the rail right-of-way.

      As for government ownership of utilities or other corporate entities, I suggest you consider the economic affect in Great Britain of Margaret Thatcher’s policy of returning those industries to private ownership. While Margaret Thatcher’s leadership style might be somewhat controversial, there is little doubt what she accomplished was largely necessary.

      It also is entirely appropriate for those in government to set high standards for public utilities and private industry: air and water quality, electrical rates, transportation safety or fuel economy, food and product safety, etc… It also is understandable when private industry complains about imposition of more stringent standards as it obviously can affect their profitability.

  5. lewbornmann says:

    I was not able to translate your comment. Please let me know what language you are using and I will try again…

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