Is Obama good for the American Economy?

So far I have avoided blogging about a topic in the overlap region between politics and and economics. But after watching a couple of YouTube videos I found on the website of Prof. Franz Hörmann, I have repeatedly asked myself the following question: if I were an American Citizen already and had the option to participate in the Presidential Elections come November, would I vote for Barack Obama? Do I truly believe that Obama is good for the American Economy? And if not, would Mitt Romney be better?

Well, I honestly cannot answer the question about who I’d vote for with certainty. I mean, really, who knows with absolute certainty who they will vote for anyway, if there are still weeks ahead with the potential to reveal important information pertaining both candidates… Yet, I have at least found my disappointment with the current President grow into a sense of disillusionment over the past few months. Here are my thoughts on why I would at least feel much less inclined to be voting for Obama, and why I think that, ultimately, Obama isn’t the President to spearhead the changes necessary to find a way to make a free-market economy work for the benefit of all Americans. What America needs is a President who is not afraid to stand up to the forces that have invaded, pervaded, and perverted the political process, transforming it into something similar to a anchor-hosted regular television show where two supposedly opposing teams vie for “who’s the fairest of them all”.

As far as I can see, the problem is systemic in nature. And my guess is that many people “in power”, both in politics as well as in financial institutions, are at least subconsciously aware of the fact that there is a problem waiting to blow up. Maybe some even have a good idea what the problem is, but it seems that, so far, playing by the established rules seems the preferable choice, and I can see several very good reasons why it seems that way… So, what is the problem?

In short: We, The People, have over time gotten accustomed to how the monetary system is organized to a degree that even just thinking about possible alternatives comes across as “communist”–which is maybe just a different way of saying something like “crazy”, “impossible”, or “un-American”. Furthermore, some of the collectively held beliefs about money are simply false but, given that they support the current system to a degree that were they to be questioned the economy might collapse, no-one dares to bring this up. Let’s start maybe with some of the reasons why we (think we) need money:

Exchanging goods in a free-market economy is simply impractical without a form of currency, some representational good that can be converted into any other good or service we require. In addition, based on the fact that the “good or service” we contribute to society, usually in form of performing well at a job, leads to the acquisition of only relatively small amounts of currency units at a time, an economy with a monetary exchange function gives the opportunity to “save” some units of currency for future transactions, in other words to delay consumption in favor of “investment”. Naturally, for this to work reasonably well, people must have faith and be willing to trust that the value of their savings will not decline too much, and this trust has to be earned, to some degree, by the experience of stable prices.

If those were the only functions of money, we probably wouldn’t be anywhere near this economic mess we are faced with at the moment though. So, what are the problems in the current system? Well, I can see a few of them, and some are probably mixed up, but I will try to single out the root as far as I understand the matter:

But first it is important to know that the control over the monetary system does not lie directly with the people or their representatives, but instead, at least in the U.S. economy, with the Federal Reserve, a public entity which all the same states on its website that, quote, “its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government”. While that in itself may not necessarily be a problem, so long as this entity is given a clear set of instructions and its performance is more or less closely monitored by the sovereign’s representatives, it means that the control over monetary policy is, for some reason, not considered something worth putting into the hand of the elected representatives. One of the typical arguments given is that if the government were allowed to print money, it could increase spending without limits. The misconception in this statement lies in the understanding of where inflation, the loss of value per unit of currency, comes from.

The real problem, I think, lies with the fact that while the central bank, the Federal Reserve, provides the economy with “physical” currency, every regular bank and every mortgage lender creates money out of nothing every time a loan is made. You don’t believe it? Well, here is how it works: if I go to my bank tomorrow and request a loan over $100,000 and the loan is granted, all the bank needs to do is add $100,000 to the number on file in a computer, my account, and that’s it. Well, not quite. In return for this generous act of creating $100,000, I must promise to pay back the money, which the bank generated out of nothing, and pay it back with interest. This promise is a debt the bank puts into their books as well. But from the day the number is added to my account, I have to pay interest, whether or not I convert this number into physical currency or not. And the true problem with this system lies in the fact that to pay back the money with interest, the total amount of money has to increase. And the amount by which it has to increase in any given amount of time, the interest rate, is not controlled by anyone, not even the central bank! It is “set” by the “market”, but in a free-market economy you have supply and demand, but since the money I took out on the loan didn’t even exist before I took it, the supply is endless, and the price should be much lower.

Also, the total amount of money in all regular banks must grow, regardless of whether and how it is spent, simply by the fact that it exists (in the banks’ computers). And given that banks have very little motivation in having people pay back their loans early, as that would lower their profits, both the interest rate as well as the suggested payments are in favor of prolonging the loan term and bank profits.

Now, it is often argued that the interest rate is the price for the risk of the bank, but what exactly is that risk? Given that the money was generated out of thin air only at the time the loan was made, the risk only materializes in the case of a default of the lender, in which case the promise the bank has put into their books has to be written off. But the people running the bank are unlikely to be personally liable should the case occur that a huge number of people default all at once. This has led, in the past, to the incentive of giving out more and more loans even to people who the banks sort of had to know would not be able to keep their promise of paying back the loan, because the risk is deferred to the future, and only threatens the bank, but not the people making the bad decisions. And to top it all off, those “bad loans” were then bundled together into “good packages” and re-sold to investors who wanted to put their profits, in part coming from interest payments of people already in debt of course, to “good use”.

Given that it is not the interest rate the Federal Reserve charges for central bank money but rather the average interest rate of lenders that determines the amount of additional money required in the system, any inflation that occurs–that is to say the ratio between money in existence and all available goods produced by an economy in a given time–remains largely invisible to the people, until the point comes when those who have profited from the system were to try and “cash out”. And until that point comes, those who “have” will always become those who “have more” and vice versa… In other words, while the current system lasts, all but those “invested” in financial market products will become disenfranchised over time. Even big industry players are suffering from this, which might be one of the reasons for the Koch brothers to support the Tea Party rather than the GOP establishment.

Finally, the belief that our economy is a free market driven by supply and demand is incorrect in at least two regards: First, money cannot be scarce, given that it is created by banks whenever a loan is taken out. And to pretend otherwise so as to keep people in the mood of paying a high price for it is, in my eyes, simply unethical. Second, if people truly had a choice about what “work” they could “offer” on the market, my guess is that certain jobs would pay much better than they do. And the reason that they don’t pay better doesn’t lie in the supply of those services or, put more accurately, in the willingness to do so, but rather in the fact that they seemingly do not require highly specialized training.

Given that our current economy requires people to sell their “workforce” to either acquire currency (cash) or the “right” to obtain money from a bank by having someone “deposit” money into their account, this in the end leads to the potential for a modern-day slavery system, where those people without preexisting means, such as owning monetary wealth or other ways to generate income, or specialized knowledge are essentially forced to sell their workforce at “market value”, which in a industrialized economy drops to ever lower amounts if those who can offer unprivileged services increase in number.

But contrary to talent-searching shows on TV, people who really matter in our daily lives, such as policemen, teachers, security guards, or simply the person who always holds the door open when someone doesn’t have a free hand to do it themselves, will never appear during prime-time, and yet it is those people who truly make our lives better. If our economy were to go through another recession, which it very well might if the burden of debt isn’t brought down to bearable levels, who is going to have a greater impact on my life with their talents? Some “talented” rich kid with the added bonus of being able to impeccably smile in front of the cameras, or yet the hard-working, honest average American who does not expect the system to provide luxury but a simply a decent way of living? I put my bet on the latter “talent” any old time!

And as long as the political debate solely focuses on how to improve the economy for those who are already in power and well off, the general population will hardly ever see any real improvement. So, who would I vote for? At the moment I would say: I wouldn’t vote at all. Maybe if enough people send the message that neither candidate is worthy to lead America out of this mess, the required momentum to rebuild the political process and debate from the bottom up will finally come together. But it seems that we rather prefer to support a broken system based on partially false beliefs, because that way we can at least dream of being rich, instead of being free and happy. What did the Declaration of Independence say again…? I think I have to do some reading!

The relationship between money and entitlement

Personal friends of mine may very well groan… (this topic? again?) — yes, I feel I have to… In fact, I woke up a couple minutes ago and somehow feel that without getting a few words out now, going back to sleep will be difficult…

To begin with, I have a very strong feeling (and could probably find some scientific evidence, although I am happy to leave that for a later discussion) that most people (maybe even all people) have a strong desire (need) for safety and assurance that “things will be alright” in the future. Naturally, no-one can ever truly guarantee that the future will be “good”, but having someone say so (and trusting that it will), gives a sense of safety (assurance).

As a consequence, people are often willing to give up on other needs and desires (including but not limited to the need of acting morally, the desire to be happy in the moment, the overall need of satisfaction and fulfillment) in exchange for that assurance. For instance, if someone were to offer me the assurance that, for the rest of my life, I would not go hungry, that I would not go without medical assistance (should I require it), and that at least all physical requirements my body might have would be taken care of, I think there is a strong “temptation” to accept a relatively high price-tag in the moment for that guarantee. I might even compromise on some very important values that I hold…

And in a society where all of these things (food, health care as well as general provision for bodily needs) can be bought with money, one way of guaranteeing that those needs will be met is by offering me (a lot of!) money

That is, in short, I believe the reason why even relatively wealthy people still have a strong desire to increase their wealth; although it would, in the here and now, seem to be relatively unimportant: all their current needs are already taken care of, and any additional wealth is unlikely to have an impact on their current situation other than adding a number to their sense of virtual safety.

I’ve used the term virtual on purpose. Why? Well, here is where the relationship between money and entitlement comes into play. Money, in large quantities, represents the idea that, in some future economy, I will be able (allowed) to participate (consume) goods and services (which in my mind truly equated to the sense of entitlement). Don’t get me wrong: for many examples (such as my ability to save money for a while to then buy something I couldn’t afford with a single pay check, such as a car or even a house) this actually seems like (and probably is) a wonderful concept. However, when money is used (or abused?) to generate this “all-purpose” feeling of owning a card blanche (entitlement!) that, in the future, I will be able to simply “use up” goods and services (which still need to be produced for me or be made available to me by someone!), I think that this no longer represents an aspect that was originally meant to be linked to currency (an all-purpose means of exchanging goods and services in the present). And a strong inequality in the distribution of wealth might even be considered a form of slavery (those with little to no money would be forced to produce goods and services for those with more of it, simply to partake in the economy at all, even if they cannot even meet their basic needs with the outcome!).

The major reason for this discrepancy is that, through the market (where goods are priced based on supply and demand as well as the overall amount of wealth and debt in existence, which truly are two sides of one and the same coin), the amount of money required to buy any given good changes over time, and thus the amount of goods and services I am able to obtain with whatever wealth I have accumulated is not fixed (which, if that were true, would then indeed represent some entitlement!) but variable. So, as much as having (a lot of) money might seem like giving a wealthy person a sense of safety, this sense will only be experienced for as long as money doesn’t lose (much of) its value.

Two major problems now combine into a mix which, unless either problem is at least lessened in its impact, I would argue make it almost inevitable that any economy based on a free market and a monetary system where making money available (central bank lending) comes at a cost (interest), will eventually experience a near-fatal episode:

First, those people who “collect” money as a means of safety will never feel they have enough (and rightly so! once the money starts losing its value, all the entitlement they have collected thus far begins to melt for not to say evaporate). And while, deep down, most people probably sense that to be true, they will still deny that truth and attempt to increase their wealth (perceived safety) through collecting more (and more, and more).

The second problem is that once enough wealth has been accumulated (in few enough hands), the “real economy” (that is to say the part of the economy where money is used to actually buy means of production, such as labor and resources) is satisfied when it comes to liquidity, and the surplus of money (in the hands of the wealthy) requires (and irresistibly generates) new forms of “investment opportunities” (to increase the numeric value via interest rates).

From the outside (such as from the perspective of an alien, maybe — told you this is a crazy blog), it might possibly be even quite amusing to see what kind of “products” the engineers (economists) of the financial markets come up with to allow people who “own” large amounts of money (who have earned or received this entitlement in the past) to increase its (numeric, not actual, future-related) value by “investing” it in various way: my favorite so far is still the ability to buy credit default swaps (that is a bit like an insurance, in case some other, actually tangible good loses part or all of its value) without either having to own the actual good (compare it to being able to insure a house that you don’t own, but still having to option to cash in on should it get damaged or destroyed) or some system of transparency (such as a register to at least have a sense of how many of these insurances have been sold, by whom, and to whom).

The real problem is that for every unit of currency that is owned by someone (and considered wealth, let’s say a thousand dollars I have in my bank account), someone else must be owing the same amount of debt (each and every monetary system controlled by a central bank works that way, or otherwise: what good is wealth and entitlement if no-one owes me anything). And given that the amount of overall money seems to be increasing faster and faster (usually leading to price inflation), because the only true gain in wealth is of course growth above the nominal inflation rate, any such system must, in the end, collapse. I would almost go as far as to say that any currency system that does not “reign in” excessive interest rates as well as the ability to accumulate wealth without a specific purpose is to some degree, by virtue of how money works, destined to be unsustainable; unfortunately, in the end, no-one “wins” (not even the rich folks!)…

Do solutions exist? I think so! But the one crucial component to each and every solution I can think of is that people (which means everyone!) must be willing to give up on their sense of safety and entitlement (assurance). This can be done by accepting (much) higher taxation (but also giving up on the idea of a guaranteed retirement payment!) followed by truly reducing wealth and debt, or by hyper-inflation, or by some other means of neutralizing both wealth and debt (haircut on debts by disowning creditors). Why? It’s simply unrealistic to believe that by whatever means in the present anyone could ever guarantee that the wealth I own (effort that was put into the economy by me or in my name in the past without taking it out again immediately or shortly thereafter) will be able to buy me anything in the future (in essence: just as fiscally conservatives are talking about cutting back the social welfare state to end entitlement on the side of the relatively poor, they should also accept that “storing” wealth for a rainy day by the relatively rich is nothing but the same idea, only in form of currency instead of a provision in some law). This is, I think, exactly why an economic contraction (recession) is such a potentially disastrous event: people all over suddenly realize that their future is, inevitably, unsafe, and instead of keeping up the expenditure, they stop using currency in the market place. The reality simply is that no-one knows the exact state of the economy in the future. So it is simply a (partially false) promise if someone says: your needs will be met! (and that is, of course, also true for any other form of entitlement, including social security or Medicare/Medicaid…)

Only if people are willing to ease up on their (need for a) sense of entitlement can an economy run smoothly. What do I think is the best way to achieve this? By having faith in the future, by believing that, as long as humans with a sense of morality and fairness are “in charge”, I will not be “forgotten”. Then I am willing to accept that as good and useful money is for the purpose of exchanging goods and services in the here and now (and near future), I am much better off putting my faith and trust in the people of the future than the money (numeric wealth) I may or may not own by then.