Lending Credit Instead of Money

Here is a clear explanation of how we got into this economic mess.  Note the scare quotes around the word "money."  The problem is known, too much claim on too little asset, but the specific solution, return to asset-backed non-interest industry, is not stated.

When the Chinese voluntarily entered the scheme of getting paid in non-redeemable claims to non-existent US manufacturing output the edifice took on a whole new dimension. The paradox of accepting these claims is so absurd simply because had China and the vassal states not accepted them, they would continue to be money good; securely backed by a healthy manufacturing base. It wasn’t until the Americans were free to issue unlimited amounts of ‘dollars’ that these claims lost their soundness in a rambunctious belief in the never-ending global supremacy of US manufacturing.

But Boeing is shifting production to China.  We no longer make toasters or shoes.  We are a service based economy, managing all of the pretend assets, or serving coffee to those who do, and it is failing.

This brings us back to the previous post, where we suggested the end-game will be one where global manufacturing powerhouses such as China, Japan and Germany will discover their overexposure to exports to the same extent that the US is overexposed to its service sector. As Americans start to save more, invest it domestically and rebuild their manufacturing base global exporters will be forced to do the opposite. Needless to say, this change will not come voluntarily, but through recession, financial crisis and necessity. Excesses must be liquidated at some point, no matter.

Exactly, but does everyone (anyone?) understand the nature of the savings is non-usury, asset-backed credit extension?  That investment is in a family-owned toaster factory?  USA cannot make this transition as long as its rules and regulations, patterns and practices in law and culture is "get big or get out."  We subsidize an army of lawyers who work to protect the Gates family fortune from market forces, and then another army of lawyers to assure small businesses cannot continue, if one manages to thrive, after the founder dies.

The writer is clearly using a pseudonym, but here he repeats and awful error:

Modern monetary policy thereby violates the most sacred principle in a market based economy; namely that production creates its own demand. Only through previous production, either your own or borrowed, can one express true purchasing power on the market place.

Say never said that, Keynes said Say said it.  But that error is posited just before this:

The central bank does not need to worry about such trivial things. They can manufacture the medium of exchange at zero cost and express purchasing power on the same level as the producer. However, consumption of real goods and services paid for with zero cost money must by definition be pure capital consumption.

Ungh....  a true believer in usury.  "The problem is zero cost money."  Credit is tally, not medium of exchange, and zero cost credit is healthy, if asset backed, and harmful when not.  Also harmful, if there is interest involved.  Once someone accepts interest as legit, it is impossible to arrive at a sound plan for recovery.

But this is good:

In its final stage, investment give way for speculation, and suddenly finance is the most important industry, pulling the best and brightest away from every corner of the globe, just to find more ingenious ways to maximise capital consumption.

It al depends on how you define wealth, and the reigning definition is the wrong "personal accumulation."  He goes on in the fourth segment to make some definitions: productive debt, counterproductive debt and destructive debt.  Again, in economics, people are constantly making up definitions on the fly, confusing readers and getting nowhere with their arguments.

Throughout history the US economy used to be leveraged, on average, 1.5 times GDP; total credit market debt fluctuated more or less within a tight range of maximum one standard deviation from its long term mean. Prior to 1971 the only time debt levels really got out of hand was during the Great Depression on back of a 45 per cent decline in nominal GDP. Total outstanding debt, in dollar terms actually fell by 12 per cent over the same time span.

This is a good review of who what where when, but the problem is again, once one accepts usury as legit, it is impossible to work out a solution.  C'est la vie.

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