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Shalom Hamou
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Our Goal: Propose as soon as possible an economy after the inevitable financial crash has occurred. That market economy is free of credit. So it will strip the banks from their relevance. Registration for ☮ La Nouvelle Économie. will be closed the day of the crash at the close of the NYSE,... More
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  • Side Effects, Collateral Damages, and Unintended Consequences. 0 comments
    Jul 14, 2009 6:17 AM | about stocks: AGG, AGZ, BHD, BIV, BWX, BWZ, EDV, IEF, IEI, IGOV, ISHG, QQQ, SPY

    Plea for a New World Economic Order.

    Chapter II, Paragraph 4:
    Side Effects, Collateral Damages,
    and Unintended Consequences.

    "Perhaps the return to a low-inflation environment in recent years in itself explains the intensification of competitive pressures, which has been a spur to the growth of productivity.

    Indeed, the data do suggest a relationship between inflation and productivity growth over the long run.

    But that statistical relationship is modest at best and inferring causality is complicated by a circularity that arises because increased growth in output per hour depresses unit labor costs and, hence, prices."


    Chairman Alan Greenspan
    Productivity.
    At the U.S. Department of Labor and American Enterprise Institute Conference,
    Washington, D.C.
    October 23rd, 2002

    Abstract:

    This paper shows that the quest for productivity, although in the best interest of every economic agent, by increasing income/wealth disparity, precipitates the economy in Keynes' Liquidity Trap. It is, hence, for the sake of its stability, the best interest of everyone that an economy keeps that wealth disparity at a constant level without stifling the productivity of economic agents that arises from free market forces.

    Productivity:

    People tend to think that if productivity is higher the better for the economy. If it is true from a microeconomic point of view, that is not always true from a macroeconomic point of view.

    A higher productivity means that costs are lower and profit higher. But the costs are in fact the revenues of other agents with weaker bargaining position. The more productive an economy, from the capitalist point of view, the higher the income/wealth disparity.

    An increased productivity means a higher income wealth disparity and hence a lower yield of investments and a faster fall in the Liquidity Trap.

    Japan was by far the most productive economy; it felt sooner than everyone else in a crisis tangent to the Liquidity Trap.

    The natural behaviour of man in his pursuit of higher profit and hence higher productivity results inevitably in an increase, over time, of income/wealth disparities.

    Although the pursuit of higher productivity is the only way to insure that supply and demand do clear and hence the efficient working of the economy. It is the duty for the governments and/or emission institutions to make sure that they don't result in macroeconomic changes in income/wealth distribution.

    Globalization:

    Globalization is only one special case of search for productivity: by transferring the production to people with lower wages in their quest for higher productivity economic agents have engineered an increased competition among workers and savings which means a faster decrease of the yield on investments and a faster fall in the Liquidity Trap.

    Moreover their high income/wealth disparity means low cost of capital and low operating cost (salaries), which increase the income/wealth disparity... which means means that the competitive advantage of high productivity country is self reinforcing which is coherent with the observation that trade surpluses and trade deficits keep growing in an explosive manner.

    It is not surprising hence that the flow of trades are going from countries with high income/wealth disparities  and low long-term yields to country with lower income/wealth disparities and higher long-term yields.

    I need to make a remark on China: Although the market for long-term bonds is not transparent it is probable that, because of its high income/wealth disparity its long-term yields are very low and, as Japan in the 90's it is much closer than usually believed from the ominous Liquidity Trap. The hope that demand from China could give traction to western demand is the product of an illusion backed by wishful thinking. The fact that they have floated their currencies, as I will show in Chapter VI, Economic Policy in a Depression, Paragraph I: Non Conventional Arsenal. while slowing the fall of western economies in the Liquidity Trap is, like Japan in the 70's, is accelerating its own fall. A Liquidity Trap in China will create a pandemic and cause the cost of production to fall even further, and, as we already know from the Japanese experience trigger a fall in the value of their currency which will pave the way for global contagion.

    The so called division of labour is nothing less and nothing more than a segregation of production between countries of different disparity of income/wealth, which, over time, keeps self reinforcing.

    It is not surprising, hence, that trade deficit or surplus keeps increasing.

    Factors of Production:

    The Marxist framework states that there are two independent and competing factors of production:capital (K) and labour (L).

    What our framework says is that there is a direct link between the cost of capital (interest-rates) and the cost of labour which is exemplified by the disparity of income/wealth. As the revenues of labour goes down so does the revenues of capital. When both are unsustainably low the system falls in Keynes' Liquidity Trap.

    Unions and Class Struggle:

    The Marxist vision of class struggle and it by-product, unions, are the most ill devised means of protection for the poor. and restraint of the explosion of income/wealth disparity. The competition of the poor in his search for wages is another poor. How could they both compete and join forces. Hence it is the case that the bigger the income/wealth disparity the less unionised the work force is. This idealized view of mankind does not pass the test of reality.

    Unions like minimum wages laws are cartel organizations. As such they are unstable and have no chance to achieve any useful purpose.

    Unemployment:

    As capital competes with labour in order to produce the highest present value if work does not produce a profit that covers the yield of long term investment it is not used. This explains unemployment. It is hence logical that, outside the Liquidity Trap, the lower the long-term interest rates, the lower the unemployment rate.

    Fiscal Regulation:

    The general perception is that taxes decrease the income/wealth disparity. This is an illusion.

    Taxes are used to buy weapons infrastructures... It is the corporations, the rich that get the contract. 

    Taxes are used for education. The purpose of education in our society is to make workers more productive.

    Moreover the tax laws are not uniform and, due to the many loopholes resulting from the competition from different countries  savings go where the return is higher and the tax smaller. Moreover most of the taxes are passed on the customer so the end result of the taxes in controlling income/wealth disparity is almost nil.

    General Interest, Private Interest and Externalities:

    As we see it is generally the case that the interest of the economic agent goes against the interest of the system.
     

    "he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value,
    he intends only his own gain, and he is in this, as in many other cases,
    led by an invisible hand to promote an end which was no part of his intention."

    Adam Smith
    An Inquiry into the Nature and Causes of the Wealth of Nations IV.2.9
    March 9th, 1776


    “Capitalism is the astounding belief that the most wickedest of men
    will do the most wickedest of things for the greatest good of everyone.”


    John Maynard Keynes, 1st Baron Keynes of Tilton
    June 5th, 1883 – 21st April 1946
     

    However, contrary to Adam Smith belief, it is not true that "by pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." Sometime he does sometime he doesn't.

    It is hence the duty of government to correct these dysfunctions, notably by correcting the drift in income/wealth. It is the only systemic risk there is.

    John Maynard Keynes called this the management of externalities, when a public entity perform actions that are needed for the common goods and can't be performed by private entities as these activities can't be profitable:
     

    "The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all."

    John Maynard Keynes, 1st Baron Keynes of Tilton
    June 5th, 1883 – 21st April 1946
    The End of Laissez-Faire IV 1926


    It is my pretence that once the income/wealth disparity is kept at some constant value the other actions of governments will become unnecessary as most of them result from the necessity of correcting the dysfunctions of capitalism. The clear outcome is that. as a result, governments will be smaller not bigger. It is hence only natural that governments should have a vested interest in not achieving this goal.

    Beware: I am not saying that the income/wealth disparity should be 0, which would render free market ineffective and would be simply impossible to manage even from a mathematical point of view

    I am saying that inequalities linked to birth should not be reinforced by human intervention namely the invention and usage of credit.

    A common belief is that the bigger the reward the more productive the agent. This is simply not true, the agent looks to maximise his present value. Weather he receives $x or $x000,000 (after his opportunity cost of time, which itself is a function of income/wealth disparity) as a result of his work is irrelevant to his decision and hence to his productivity and contribution to the common good.

     

    An Internationale Saving Glut!
     

    All of This Stays True Until the Poor Becomes Richer Relatively to the Rich.

    Extreme Economic Conditions Call for Radical Solutions.
    The Controversial Innovation Since John Maynard Keynes and Milton Friedman.

    It is of the Uttermost Importance That, When the Crash Comes, Which will Necessarily Take Place at Some Point in Time, we Restore as Fast as Possible the Economy by Implementing our Plausible Alternative Solution as to Minimalize the Economic Sufferings of the People. To That Order I am Building Redundant Social Networks. Please Grow the Networks!


    You Can Comment on This Chapter Here.

    I Will Incorporate Any Meaningful Contribution Into my Tract and Credit the Author.
    If you Believe you can Make a Significant Contribution to my Work Please Apply Here.

    I stand ready to give some sort of exclusivity for my future articles in exchange for substantial coverage.
    Otherwise read the Publisher Agreement.

    The Tract will be ready to go to for edition on August 1st, 2009. I am looking for an editor.

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