Where did our money go?

By Frank-Jürgen Richter

Khaleej Times, October 20, 2012

I was drawn into these thoughts following a recent visit to the UK. Their citizens seem to be grumbling they haven’t enough cash in their pockets with their government pressing on with austerity measures.

Yet the Chancellor, George Osborn, observes that as inflation has fallen slightly most people are better off than a few months ago. But other observations show the average person is spending less (perceiving hardship) so actually accumulating a little more capital: but one cannot directly eat, drink or smoke capital.

Further, in the UK, real wages have not kept up with inflation over the past two years so the people are feeling poor. I felt the UK represented a microcosmic image of most developed countries across the world — hence this opinion piece.

I know that since the breakup of the ‘Gold Standard’ in 1933 we have lived more and more on credit — some would say better and better as our debt increased: they cite better housing (bought through mortgages) and newer cars (bought on credit). But such debts can’t continue unabated, we must pay them off from our incomes, and if our incomes are eroded by inflation and the growth of everyday prices then some of us will surely become bankrupt. Lives will be shattered as foreclosures grab houses and cars. Always it is the poor who are preferentially deprived through the actions of banks and government.

There are many arguments between economists as to the benefits of following the directions of Keynes and the monetarists; allowing prices to determine everything as suggested by the Austrian School (such as Hayek), or even to concur that Marx developed excellent economic arguments by determining both a product and a money cycle. The Australian Professor, Steve Keen, debunks many of the standard theories in favour of the mathematics of chaos. He notes that most governments are throwing money at the Marxian tri-party of producer-banker-buyer. So governments are giving away our money to the banks rather than directly relieving debtors.

This messy business is keenly felt in the UK as it struggles at the edge of the EU/Eurozone problems. There are difficulties with the major international banks who work out of ‘the City’, and with the resistance of High-street banks to lend to new businesses. Meanwhile, many medium and large businesses in the UK are cash rich and who, like many individuals, are simply hording cash. Few know what the future economy will look like, so saving is the order of the day. Meanwhile most small businesses and entrepreneurs are starved of cash as the banks will not offer funds.

I have some sympathy with Big Business — it is they who create the potential for us all to demand goods. And it is our demand that equates to economic wealth, not supply. So it all begins with us as individuals. We demand goods, and use money to lubricate the process. Then having acquired stock we may process it, add our value, and sell it on to others who are demanding.

What we must guard against is greed. Marx decided it was not good for society to accumulate capital as a goal; on the other hand, using capital as a lubricant was a valid use of money. I am not so sure that the increasing bailouts by governments are really useful, as later this debt must be paid-off. It is not yet guaranteed that we are returning to a Keynsian growth scenario, as Krugman would have us believe. Nor is the Austrian School modern mainstream, as collectively we have too weak a belief in allowing free pricing to determine outcomes.

So, yes, the UK is a microcosm of the woes of many countries at the present time — its income disparity is increasing, as in many developed nations (their Gini coefficients are increasing). My own country, Germany, looks to be a rock solid economy, but one may observe difficulties in policy theory and application. And the EU, as well as other large economic blocs in the Americas and Asia, faces micro and macro difficulties. I do not see any immediate resolution until we have removed the general debt as Steve Keen proposes. That will take a long time and there will undoubtedly be many more downturns.

Frank-Jurgen Richter is founder and chairman of Horasis, a global visions community.