One of the more interesting, and at least in some quarters, unexpected, aspects of the current financial system is this. In 2007 – 2008 there was effectively a financial meltdown, and to prevent total economic collapse through the big banks failing, Central Banks began printing large amounts of money. The collapse was averted, and we all have our own opinions on how valid that treatment was, but that is not what is my puzzle. Whether the treatment was right or inappropriate is irrelevant for the present, because it worked, at least to some extent.
But now we come to the puzzle. The Central Banks kept issuing more and more money in an attempt to stimulate the economies of the world, and the economies of the world refused to be stimulated. Obviously, this money was not being invested in new business or there would be massive growth of jobs. But that by itself is also not the answer to our current problems because in principle, if all that money was sloshing around, there should be rampant inflation, as too much money would be chasing too few goods and services. But that has not happened either. The question is, why not? At this point we should also remember that inflation arises from too much money circulating at too high a “velocity” – a sort of economic momentum. Perhaps the answer is, the velocity is too low?
I rather suspect that is the case, and there is a very good reason for this, and, as readers of my writing, either blogs or futuristic novels might guess, the problem lies at least in part with giant corporations.
Ha, some will groan: the favourite whipping boy. But I am afraid it is true, and we can put numbers on it. The problem is as follows. Giant corporations have been running their transactions through tax havens. According to a report I have seen that quoted the US lobby group Citizens for Tax Justice, America’s 500 largest companies hold more than 2.1 trillion dollars in cash in countries such as Bermuda, Luxembourg, and so on. The origin is various tax rorts, by which all taxation occurs in a very friendly environment for tax.
Now, the problem then is they cannot bring that money back to the US without having to pay the IRS tax on it, and since there may well be no tax treaties with these tax havens, had they levied any tax, the corporation might suffer double taxation. Either way, the corporations seem determined to leave the money where their own countries’ tax departments cannot get at it. There are two reasons why this might lead to the velocity of that money becoming near zero. First, most banks in tax havens will not have the skill to do anything with it. Second, the corporation could want it back in a massive slug, so the bank has to hold it. No need to feel sorry for the bank, of course. It should levy negative interest rates on it.
Accordingly, 2.1 trillion dollars is effectively taken out of circulation. That is a huge amount, and is quite capable of accounting for why the issuing of so much money has had so little effect. Of course if that 2.1 trillion dollars suddenly started moving again, there should be serious consequences on the inflation front. All of which means that as only too often in economics, or at least as seen by governments, the left hand seems to ignore what the right hand is doing. It is impossible to stimulate the economy by putting money into it if roughly the same amount of money is being secreted away for some other reason.
What can be done about that? In my futuristic novels, my answer was to have a common tax rate throughout the Federation of countries, and agreed no double taxation. That meant that corporations would try to pay the right amount of tax in the given country because it was good for their image, and there were no downsides. A Federal government made that a lot easier to implement, but common taxation is something that could be agreed, except it won’t because the tax havens would be out of business.
May I now wish everyone all the best for a happy Easter, irrespective of one’s religious feelings. As for me, on my Monday, I shall make another scientific post, resurrecting my relativistic cat paradox, to explain what is involved a little bit more clearly, and to respond to the various comments I have received, both at the end of the previous post, and also from other sources where something like that was posted.
ianmillerblog 
Why Giving To Banks Is Not Enough
What was the cause of the 2008 financial crisis? The immediate cause was the collapse of Lehman Brothers an investment bank which was central to the US bond market. A number of other banks and “shadow banks” (entities with lots of money non officially banks but still lending massively) were in the process of going bankrupt. The US government gave money as needed (“TARP”). Then, to reimburse TARP, and because TARP was not enough, Quantitative Easing was engaged: the central banks bought properties (government bonds) of the private banks at prices over market.
Why did the banks go down? Because they lent to people and projects which could not reimburse, from California to Spain. The big money went to the richest: for useless airports, or buying financial derivatives such as Credit Default Swaps… That’s where the biggest losses were.
Some of this lending was outright corruption. For example in Spain and Greece (but also in the USA, although, by definition, there is no corruption in the USA, even when past presidents make hundreds of millions of dollars).
Quantitative Easing, just like TARP, gave to the richest people in the world. However, as a class, it’s these people, the bankers and shadow bankers, who had caused the crisis. And how? Because they lent… mostly to their friends, who, also, were the richest people in the world.
Thus, overall, the treatment for the 2008 crisis was to transfer more money from We The People to the richest people in the world.
A good example was that the left-adulated Barack Obama lowered the tax rate of the 400 richest US taxpayers by 20% (source: myself, 2009, and the new York Times, 2016). Apparently Obama thought G. W Bush had caused a crisis by taxing the wealthiest too much. Obama is a great believer in “trickle down”, the theory implemented by Reagan, according to which, making the rich richer makes the poor better off.
So a crisis caused by the rich lending too much to the rich was solved by having the public lend to the rich who were at risk of becoming poor.
By the end of 2013, in the USA alone, Quantitative Easing enabled private banks to create 26 trillion (yes, that was a “t”) dollars of lending.
But the banks lend only to the rich. And the rich keep their money to themselves. Tax havens and anonymous companies are only a part of the problem.
Patrice, I agree with most of what you say. My argument was only that this was a contributing factor. The banks lending to the rich merely exacerbates the point I was making because the rich are sitting on it, or secreting it away somewhere else. Buying up offshore assets, for example, does nothing for the US.
I don’t know about Obama’s tax policy, but the fact is, trickle down simply does not work – it is more “flow steadily up”.
Your posts are always interesting and worth reading. Happy Easter, Ian.
And happy Easter to you too Audrey.
Ian,
I was going to add a comment to your post at Patrice’s blog, but thought I’d stick to your topic of the thread;
The reason the economies refuse to be stimulated is that the money doesn’t circulate. Like fertilizing fields, you have to put back what you take out. Even Henry Ford paid his workers twice what he needed, because he understood the had to afford the product, for the system to work. As my father used to put it, “You can’t starve a profit.”
As for inflation, the last time we had much of it, supposedly it was cured with higher rates, but that slowed activity and reduced the need for money, as much as it reduced the supply of money.
About the time it came under control, about 82, the federal deficit under Reagan reached 200 billion, which was real money in those days.
So what is the difference between the Federal Reserve selling Gov bond back into the market, to pull money out of it and the Treasury issuing new bonds, which also soaked up excess liquidity?
Mostly what the Treasury took out could then be spent in ways the private sector wouldn’t spend it and so serving to stimulate the economy. Consequently much of the excess money sloshing around in the system is stored as public debt. So anytime you hear politicians rail about the debt, remember it’s all for show.
Now to budget is to set one’s priorities and spend according to ability, but that isn’t how the government does it. There they put together enormous bills, add enough extras to get the votes they need and then the president can only pass or veto it and given the interests at work, vetos can be overridden.
If they really wanted to budget, they could break these bill into their various items, have every legislator assign a percentage value to each one, then put them back together in order of preference. The president would then draw the line at what would be spent.
This would divide power and spread it further around the legislature. There would be like ability to override the president, because there would be far fewer recipients for the few items on the line.
Of course this would completely destroy the system we have now, but since it appears obvious that excess money in the system is in the hands of those with an excess of wealth, given they are who buy the most bonds, if the government were to threaten to tax excess money out of the system and not just borrow it, people would quickly find other ways to invest excess wealth.
as most people save for fairly general reasons, health, children, education, retirement, etc, then they would invest in these future needs and since it couldn’t be individually allocated, as with the current savings system, this would mean investing in stronger communities and healthy environments, as a form of wealth, aka, the commons. As opposed to treating them as resources to be mined.
We treat money as both medium of exchange and store of value, but in the body, the medium is blood and the store is fat. Store fat in the circulation system and you have clogged arteries, poor circulation tot he rest of the system and high blood pressure to compensate. Which describes the problems of a bloated financial sector that doesn’t effectively circulate value around the larger system and loose money to try to compensate, but which mostly further clogs the system.
There was a time government was private. It was called monarchy and it was assumed “mob rule” could never work, so they could abuse their function endlessly. The economic circulation system of finance is currently at that stage.
Have to get back to work. Horses don’t know holidays.
Regards,
John Brodix Merryman
A number of good points there John. The main point I was trying to make in the post, though, was not to solve the economic issues of our time, but rather to ask the left hand to cooperate with the right one. If unintended consequences are not avoided, no strategy is secure.
Ian,
A big part of the problem is the “bottom line.” Everyone is out to “make money,” without really taking the time to understand what money is. It’s essentially an enormous voucher system, to which nothing is more destructive than enormous amounts of excess such notes, but since capitalism has mutated from being a system to efficiently transfer value, to the creation of capital as an end in itself, it is self destructing.
Money is a contract; Every asset is backed by a debt, so in order to create money, then enormous amounts of debt have to be created as well and less and less concern is being given to the viability of that debt.
So the unintended consequence is an enormous bubble of debt, being created by taking value out of the economy that will supposedly pay it off. Think student loans.
Yes, Brodie, but central banks seem to think that by printing more vouchers they can get the system working better. The issue is very complicated because the money supply is trying to do too many things. The great depression was largely caused by the few sitting on too much money, so there was too little left for everyone else.
Ian,
I’ve wondered if FDR wasn’t as concerned with putting that unemployed money to work, as he was with putting the unemployed people to work.
“Buy Bonds.”
Obviously I don’t know, but from what I hear about FDR, and from what I have heard from now dead relatives about the great depression, I give FDR the benefit of being majorly concerned about putting people to work. However, to do that, he had to put unemployed money, as you put it, to work as well. There are all sorts of theories on economics and money. I tend to think of money like oil in a motor; if the right amount is circulating, things go well, too little and the engine seizes up, and too much and it blows up. Of course there is more to a good economy than getting the money circulating properly, but getting the money right helps.
Ian,
Not criticizing FDR, so much as pointing out the larger equation.
You are quite right about money as lubricating the engine of the economy and needing the right amount. I use the analogy of blood. It functions as a medium as well as regulating heat.
A big part of the problem is that we experience money as quantified hope and it is politically useful to provide as much hope as possible. So we have a culture built around the premise of money as the implicit goal to life.
Unfortunately that is not how it actually works. As I’ve argued previously, we tend to view life linearly, but it functions cyclically. Similarly we think of money as a goal, it reality it is a contract, in which every asset is backed by an obligation.
Prior to money, saving value had much more carrying costs and so people were much more economically connected, as it only made sense to spread one’s immediate fortunes around and it was reciprocated.
With money we can be much more economically atomized, with everyone having their own savings. While this makes us much more independent of those around us, we are more dependent on that larger system. This financial system mades the larger economy possible, but it still has to maintain some equilibrium.
So if people began to understand that it really is a form of gigantic multiparty contract and we no more own those bills in our pocket, then we own the section of road we happen to be driving on, then we might better understand it as the tool it is and not treat it as a religious icon.
And understand why letting it collect in giant stagnant pools is extremely unhealthy for the entire system.
Indeed. Besides the giant stagnant pools, however, the politically induced gushing tap is not much of an improvement. Your comment about savings is indeed interesting. We may save to keep ourselves going when we are old, and less capable of earning, but politicians also see savings as something to raid, through inflation, and by other means. There is no easy answer. However, I just saw a TV program on Richard II of England, and if we think we have it bad, we have no real idea!
Ian,
Which cycles back to my earlier point and the larger economic dynamic.
We try to save wealth as large numbers of these notes, which is complete nonsense, as they are simply promises from everyone else, whom we have emotionally isolated ourselves from.
We have a general idea of what we save for; Housing, healthcare, children, education, retirement, entertainment, etc. While we cannot predict our specific needs, they do tend to average out across the population, so if we invested in these needs, it would require a more publicly centered communal system, in which we stored value in the commons, as a stronger community and healthier environment.
So much as the ancients spread value around, as hoarding it was too costly, so too would we go back to that more cyclical reciprocity, as organic community, than just focus on our individual goals, which en mass create bubbles, as everyone moves in the same direction.
And how we encourage people to do this, is for those governments issuing the money and thus responsible for maintaining its value and function, is to tax excess notes out, unless they are being invested back into the community as viable infrastructure.