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.