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Our ROI monetary system needs to be overthrown

September 13, 2010

Unemployment, poverty, and insecurity have plagued the world for as far back as we can see and they continue to do so today.  Real unemployment in the US is at least 16.7%, one in seven Americans are in poverty, a majority is living in great uncertainty, and states and cities across the country are facing the threat of bankruptcy and drastic cuts in services.

The political, economic, and media elites have no solution.  Government spending is no longer a politically feasible prop for the economy since all serious people believe the deficit must be reduced.  We are diminished now to a meager policy of hope that private wealth can somehow be induced to spend.

That the world can be in such a condition is astounding since our technology is such that material insecurity could certainly be eliminated.  There can be little doubt we have the technical resources to provide a far, far better world.  Why then are we living like this?

I believe one of the top culprits is our faulty understanding of money / purchasing power.  Counter to what some would have us believe, the subject of money and finance is not overly complex.  It is however, deeply clouded with confusion over the logic that applies to individuals versus the logic that applies to societies as a whole.  Although not widely realized, the logics are completely different.  Those who support the misguided current understanding  are wittingly or unwittingly propping up a status quo that benefits only a very small number of wealthy elites and unnecessarily imposes sub-optimal living conditions on the great majority.

The system is failing us.  The only times when unemployment and insecurity were not major issues were those relatively short periods of massive credit expansions.  For all practical purposes, one can see these expansions as great private printings of money through bank credit.  These periods have always been followed by economic recessions and depressions as the printing press inevitably stopped.  Unemployment, poverty, and insecurity are endemic since only rarely can the level of needed purchasing power be maintained.

It’s useful to think of the monetary orthodoxy as a Return on Investment (ROI) regime.  Purchasing power will not expand unless those who own money believe it will be repaid with interest.  Views on the future economy are everything.  This applies not only to private investment but also to public.  Society is expected to borrow whatever funds it wishes to spend beyond taxes and such borrowings are limited by the ROI logic in that future tax collections must be able to support current borrowing plus interest.  Living standards for the majority are therefore captive to ROI.  Expansions of purchasing power – either through private or public spending – are considered debt that must be repaid at a profit to the lender.  Like debt, expansions today must be countered with contractions tomorrow as the debt is repaid.  And like debt, expansions will not occur if future repayment seems unlikely.

This ROI logic sounds reasonable when we think in terms of an individual but when we view society as a whole, it becomes completely nonsensical.  An individual can be in debt to another but how can society be in debt to itself?  Why should society require future contractions as a precondition of meeting its needs today?  The technology exists that would largely eliminate insecurity and provide a much better place to live.  How can we justify poor or marginal living standards when we have such amazing capabilities?

The major culprit is the ROI logic and it must be confronted.  I’ve discussed this issue in several posts and won’t go on at length here.  (See the post ‘Deficits Don’t Matter and others within the Monetary / Fiscal tab.)  But to summarize, we have control of the currency and do not need to borrow or tax in order to spend.  Spending must not be seen as a debt but rather a monetary operation that should be adjusted as conditions warrant.  There can be no such thing as societal debt – the concept only applies at the individual level.  Society should finance its spending through monetary creation and cease doing so when needs are met.  The only risk is inflation but that’s a problem only when we’ve reached capacity constraints.  There’s no reason to think it’s beyond our ability to monitor and control it.    Spending should be cut back when we’re approaching capacity which provides a sound basis for inflation control.

If you’re not familiar with this line of thought and are seeking ways to achieve a better society, please give serious consideration to this argument.  It goes against all accepted ideas of orthodox finance but it’s totally sound.  There’s no reason for austerity except within the narrow and dismal confines of the ROI system itself.

But the public debate is fully confined to the ROI view and only two options are permitted – a life or death struggle for jobs and prayers that private wealth can somehow be induced to spend.  This results not only in massive insecurity but also to an unstable and brutal global system of international competition.

Paul Krugman’s article in today’s New York Times is a good example.  He focuses on what he sees as an undervalued Chinese currency and advocates pressure to increase its value.    First, it seems doubtful that such a policy would provide much benefit.  An increase in prices would hurt the consumer and it’s hard to see much in additional jobs given the enormous wage differential.  Many US exports also contain Chinese imports so it could increase the price of US exports and therefore hurt export jobs.  But the real problem with this argument is not its unknowable eventual ramifications but that it accepts the underlying ROI logic in which purchasing power is seen as dependent on a competitive struggle for scarce jobs.  It ignores the reality of a virtually unlimited capacity for production that is only matched by a correspondingly limited amount of purchasing power.  Krugman’s call for a struggle with China implicitly represents a view which sees China as responsible for stealing a somehow fixed supply of purchasing power from the US population.  This is inherently wrong.

We must come to understand the true nature of purchasing power and condemn the ROI monetary logic.  Purchasing power should be expanded to meet our needs and to build a better society.  It can be done in a highly democratic form that avoids centralization of state power and it’s the only basis for a true global peace.

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From → Monetary / Fiscal, US

One Comment
  1. Calculating the return on investment as being the mere rate of return, while neglecting the total return is just plain stupid or worse. The final result does not matter, just the rate?

    It’s like selling the family farm to have a party.

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