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Categories - Copywriting - Shopping - Free Online Business Help - Telecommunications Services Articles: Finance - The Economic Problem and How to Fix It The problem with the economy seems pretty clear. It exists on borrowed money. Every single penny in the economy is on loan. Try doing that at home. When the money to be loaned is created, the money to pay the interest not only isn't created, it can't be. The only way to pay the interest is to keep generating growth and creating and borrowing more money, which always creates more interest liability with no money to service it. When a population is ambitious and productive and the GDP rises, since the population generates 70% of the economy through consumerism, the task of buying the increase in GDP falls on them. Even if the population’s income has increased along with the GDP, they must pay for the interest that is passed onto them in the form of higher prices and their purchasing power is limited. If their income has not kept up with the inflation caused by the associated increase in the money supply caused by the increase in GDP, they must borrow the money themselves. The spendable income to debt ration used to be at 90% but it is now at a whopping 130%, indicating that consumer income has not kept track with the GDP or inflation. The population’s wealth and ability to generate commerce has been stripped.
In this situation, when a natural slowdown or relatively minor hiccup like the sub-prime mortgage crisis occurs and the amount of interest being paid is too high, in the absence of growth, the cash needed to generate commerce is even more rapidly stripped by the service of debt and its interest payments. With the largest economy in the world and the amounts of money that must be borrowed to support it plus pay interest on previous loans, this is most likely to show up in the U.S. first.
While trade deficits and offshore manufacturing are eye catching and compound the problem, they are only symptoms of what the real problem is. When excessive money is generated through irresponsible lending along with its extremely high interest rates, the actual money supply is reduced by the resulting inflation and interest payments. Companies cannot afford to keep their labor costs relative and their products affordable. The economy demands that the companies seek the uncertainties of offshore manufacturing while simultaneously reducing their market with domestic layoffs.
Of course, countries whose economy is largely supported by trade surpluses are going to suffer quickly when the U.S. economy can no longer consume. These same countries, because of their surpluses, have the ability to recover more quickly assuming that they invest their surpluses on their own domestic growth. To make their recovery longer lasting, they should not saddle their economy with interest as they distribute their surpluses. In the U.S. we are going to see much more pain before we see any gains. Many banks, companies, and debts are going to have to disappear before the population has money to spend.
More borrowing to support a stimulus is only going to delay or prolong the problem. The way to make the recovery faster and more permanent in the U.S. is to, instead of allowing other banks to purchase good loans for pennies on the dollar, absolve debt as the banks close. This will immediately make the money that is already in the economy available and eliminate the need to increase the money supply by adding debt and interest. Tax breaks will also be beneficial but only if the government reduces its budget correspondingly. The other problem that the U.S. is now facing is that, while the money supply has been increased by 70% in 3 months, the banks are holding it. Since this additional money was loaned out by the Federal Reserve, another way of thinking about it is that the nation's debt has almost doubled in three months. The country's GDP has not increased, but it has been hocked for 70% more. If the banks release this money through more loans with more interest, what was worth $10 in October, will cost $17 today. Banks must be somehow prevented from dumping this on the economy when it begins to recover and reducing the value of the dollar by 50% overnight.
This system of introducing money into the economy by borrowing it insures that you must grow or die. It is bizarre that a country would borrow its own currency from a private bank and pay interest on it. This monetary policy is a dead end street and we will continue to suffer disasters every 80 years or so as long as it exists. The government has to introduce money to the economy for free via tax breaks and technology investments relative to the growth rates of GDP and the population. This will reduce or eliminate inflation and insure that the money stays in the economy to generate commerce. We will be able to suffer slowdowns and money drains from trade deficits caused by unfortunate legislation without them turning into a disaster.
Banks are not the economy. They do have a place in it, but it is not the dominant one that they enjoy today. When this happens they strip the economy of its wealth.
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