Too Much Money Chasing The Wrong Returns
There is too much money in the world being invested in all the wrong ways.
The amount of money being created by the Federal Reserve, Bank of Japan and the ECB is dwarfed by the amount of money being produced by Chinese banks and shadow banks.
This money is being spent on unproductive enterprises. About 70% of all sales of Brooklyn homes, for example, are going to hedge funds, investors and international buyers, who are looking for income. In Australia much of the real-estate is driven by Chinese buyers, so Australians buy in the US, because the US is cheaper, and so on.
Money creation is out of control, we are creating vast amounts of money, and then spending it either unproductively or harmfully. As I noted earlier, virtually the entire run up for the Dow can be explained by “Federal Reserve giving rich people money.” In China the money is also going into real-estate, most of it shoddy, and entire rural communities are being forced off their land and into the newly built slums (because, very quickly, that is what they will become. We have a lot of experience with what happens with these sort of planned prebuilt cities: and virtually all of it is bad.)
Money is permission to do things. It allows you to control what people do. Vast leveraged financial games and real-estate purchases intended to create income streams are not productive, all they are doing is moving money around, they are not created new real services or goods which improve people’s lives. Instead they are meant to concentrate money and power, permanently, in the hands of a small class of people and make it so that everyone else has to pay those people to survive: this is about permanent extraction virtually all value from the majority to the minority.
This is not a sustainable economic model. It is creation of money from thin air without underlying economic growth to justify that creation of money. The money is used to buy up control of the system and future revenue streams, but it does so by damaging the real economic health of the majority of people, making them economic cripples. People who live paycheck to paycheck cannot create demand for new products and services, cannot themselves create new products and services, are unhappy and increasingly unhealthy and generally unpleasant to be around, because their lives are unpleasant.
Almost all new job creation in the past seventy years has been in services: aka, McJobs and administrative jobs which create little to nothing of value. What is happening now is accelerating that trend.
When catastrophe hits, and it will, we will be unable to respond effectively, because we will have created billions of economic cripples, of people who, never having been allowed to do anything of significance, never having had any economic agency, and never having worked at a job which wasn’t meaningless, will not easily be redeployed to do what is useful, and needed. The real economy is what people do to create services and products which are good for other people. A de-skilled, demoralized population, in the face of climate change and economic collapse, while it will respond as best it can, will be very hard to mobilize, not least because there will be nobody with the legitimacy to mobilize them.
A basic rule of economic governance is this: when the “private” sector is not doing productive things with money, you must either change the incentives so they are, or simply take the money away from the people who are using it in unproductive ways and spend it yourself. Make every building at least energy neutral, build the smart power-grid, fund electric cars and 3D printers in a big way, create high speed trains, go to Mars, radically decrease carbon emissions, provide a basic income for everyone, fund advanced research, and so on.
The first step to getting out of our current mess, then, is 95% marginal tax rates on all income over 5 million, 90% on all income over 1 million, and a huge increase of corporate tax rates to over 70% unless they are doing what is in the public interest. (Tax breaks on 20% corporate taxation rates do not affect corporate behavior.)
There are more fundamental fixes, mind you, but these are the basic, brain dead fixes that are doable within the current system, without radical changes. This is what basic economics, as understood in the 1950s with slight updates for an understanding of sinks and supply bottlenecks, tells you to do.
Do not give money, free money, to people who are not spending it in ways beneficial to society as a whole.
And take away money from people who are spending it in harmful ways.
Money is a social creation, it is permission to tell people what to do. You do not give money, and permission, to those who use it badly.