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Too Much Money Chasing The Wrong Returns

2013 November 26
by Ian Welsh

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 creating 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 of 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.

16 Responses
  1. S Brennan permalink
    November 26, 2013

    Yep, sounds RADICAL!!!

    Yep, sounds like that hippie radical Ike, circa 1959.

  2. Dan Lynch permalink
    November 26, 2013

    Ian, you are channeling Huey Long. 🙂

    Functional Finance says tax revenues do not pay for spending, since a government that creates its own currency can spend with keystrokes, limited only by inflation. So in theory, our governments could “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” without new taxes on the rich.

    However, you make a good point that money represents power and real resources (“permission to tell people what to do”), and the 1% are misusing power and mis-allocating real resources. I can agree with that. So even though our governments do not need little pieces of paper, we the public do need to control our national resources and power, so we can use those things for good purposes. Hence there is certainly a moral and practical justification for taxing the rich, aside from the financial issues.

    I would only suggest that we should tax most forms of wealth, not just income. Land, financial assets, art, yachts, etc..

    Huey’s “Share the Wealth” program at the link:

  3. Ian Welsh permalink
    November 26, 2013

    Who has money matters. You tax because money is permission to buy government among other things.

    Also, I am not an MMTer, and I do not agree with MMT on some key points. There should be a relationship between money and economic activity.

  4. guest permalink
    November 27, 2013

    Functional Finance says tax revenues do not pay for spending, since a government that creates its own currency can spend with keystrokes, limited only by inflation.
    No, there are plenty of good reasons to tax rather than run the printing presses. If you double the money to where a dollar loses 50% of its value, then everyone holding money is taxed 50%, rich and poor alike (who are not holding much money, but they do suffer and their perception of the damage done to them is probably much greater than the reality, thus making them resist this option). Soak the rich and spend it on the poor, or just on improving general society, and stop making excuses for why we shouldn’t do things the rich don’t like (so neoliberal). It’s the right thing to do, it the simple thing to do, and it also gets rid of the rich so they can spend less time selfishly working against the common interest and more time fighting for individual and collective survival like the rest of us (like they should be).

  5. kilroy permalink
    November 27, 2013

    “Money creation” is a pretty loose term for the Fed buying up massive amounts of bonds. Paraphrasing Warren Mosler (<—-major MMT guy) "If I have a lot of money, say 5 million in the bank and my neighbor has 5 million in bonds, no one says, oh poor guy he only has bonds. No, he probably belongs to the same country club."

    It's intellectually dishonest to say it is *new* money when the Fed buys up bonds. New money in my opinion would be a good thing, especially if directed at lower income groups, but Q.E. is just a somewhat forced conversion of existing assets.

    Now, as for the rest of your argument, you are absolutely correct; it matters what happens to those assets which have been converted to cash.

  6. kilroy permalink
    November 27, 2013

    Sorry, I should have said it is a misunderstanding to say it is *new* money when the Fed buys up bonds. I don’t think anyone is being intellectually dishonest.

  7. November 27, 2013

    There is just so much that we could be doing now, that we have to be doing now, and we aren’t. I’m starting to write up a plan for action because I feel like I need to do something and formulating strategies and projects is something I like… but its slow going.

  8. hidflect permalink
    November 28, 2013

    The whole problem can be summed up by the phrase, “malformed incentives”.

  9. John Puma permalink
    November 29, 2013

    Only the government can impose/enforce those tax rates.

    But one of the major “returns” of that excess money is/has been, precisely, the control of government.

    Nothing will change unless and until that control is eliminated.

    How is that to be achieved?

  10. Formerly T-Bear permalink
    November 29, 2013

    @ John Puma

    How is that to be achieved?

    Spontaneous rebellion is unlikely, conditions are becoming too remote for its occurrence.

    What is most likely is the collapse of the complexity which supports the establishment, its wealth and its power. As each social pillar is weakened, e.g. education, law, economic status and security, the closer systemic collapse becomes until some (likely trivial) tipping point is reached at which point prognostication fails. It is extremely unlikely reasoned considerations of reestablishing complexity needed for maintaining economic (or political) function can be restored or modified once collapse is underway. It will be a long and rough ride, fasten your seat-belts, it will be a unique moment in world history. This estimate is only an opinion of future conditions FWIW.

  11. don permalink
    November 29, 2013

    What explains the conditions described: surplus capital moving around globally in search of profit without production (rentier), resulting in greater concentration of money in the hands of an elite minority? There must be some explanation for this: lack of profit in production, combined with global overcapacity?

    And just how will the proposed changes (electric cars, etc.) come about so that power rests with the “people”? How will the disadvantaged/exploited take that power? How will “we” obtain state power to bring about the massive change in policy/practice? And how will this dramatic shift in power and socioeconomic change not simply result in rising aggregate consumption further taxing natural resources and environmental limits (e.g. climate change)?

    Go into these two factors to take it to the next step.

  12. Antifa permalink
    November 29, 2013

    Enough money is permission to tell governments what to do. That’s our current billionaire problem.

    The blind pursuit of More has reached its end game, globally. As a very few end up with all the More, the More itself becomes meaningless. Yet it will go on into madness and beyond.

    For lasting, real change to happen there has to be an overarching moral and ethical purpose to how our species handles ourselves. We do not have that right now.

    There has to be a Why that no one can argue against.

    The capitalist Why is that greed is good, that it magically creates the best possible result through the invisible, magic hand of the free market. Feh. All it actually does is rape the planet.

    Greed can never serve as the meaning of human life. Especially not when our collective greed is plainly killing tens of thousands of other species, polluting our biosphere, and it may well kill all of us.

    Religious reasons for Why will not serve for everyone, because we can never all agree to the same worldview of what happens after this world.

    We can all agree that while we’re here in this world the Why that makes immediate and lasting sense is that we are living on an orbiting rock with a thin, living biosphere that we absolutely depend on for every breath. And we have to collectively see that it continues, that we all make it — us, every other species, the atmosphere, the water, the mountains, the worms, the soil.

    Or we likely won’t make it. It’s a life or death issue.

    That goal of keeping our planet going — not greed, not money, not power to tell people what to do — is what economics should be centered around.

    The only question for a real human being is,

    “How’s our planet doing?”

  13. VietnamVet permalink
    November 29, 2013

    You have written an excellent series of posts on money. There really was a coup in the West that no one dares to mention. Enron was the harbinger. The authorities’ attitude and belief is that it is their privilege and right to make as much money as they can, legal or not. Damn the consequences for society and the world.

  14. November 30, 2013

    Well said! We have mal-investment and moral hazard from sea to shining sea. Sadly, I don’t see an end to our current situation until the Fed is reigned in, or abolished once and for all. What’s so surprising is that in country which is supposedly the leader of the free world, we have given so much power to corrupt, clueless people. The Fed in particular deserve all the criticism we can throw at them. When it comes to promoting failure, they’ve taken it to a whole new level!

  15. gizzardboy permalink
    December 1, 2013

    How does “go to Mars” get in a list of productive uses of money?

  16. December 7, 2013

    We’ve already gone to Mars multiple times. Sending humans doesn’t add much, and for the cost, we could learn a lot more by sending unmanned probes all over the solar system.

Comments are closed.