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The Solution The role of the Central Bank and the Government when an economy is in Recession.
In addition, apart from any taxation required to provide for an eventual pension, which the "State" may have to, or want to provide to its citizens at a particular "pensionable age," there is the possible requirement that each citizen may have to invest part of their disposable income towards an additional pension to augment their income on retirement. Thus the amount of disposable income left after the provision for all levels of taxation and pension provision requirements is of extreme importance to the well being of the economy. The tax percentage of net taxable income, be it either that of individuals or that of companies is extremely important to the health and well-being of the economy. As a result, government at all levels walks a tight "high-wire act" in determining the outer limits at which taxation can be levied on its citizens. It invariably ends up with " you pay for what you get ---- or you get what you pay for." This system never answers the problem of how one pays for what is required. The inevitable answer to the conundrum --- is the creation of debt. This debt creation can take two forms. One either borrows the money while over-spending against tangible income, or borrows the money in the form of a bond issue before or after these expenditures, relying on either natural economic expansion to repay the debt from higher future taxed income, or creating new taxes to repay either the interest and /or the capital redemption of what was borrowed. It is the formation and the repayment necessity of this debt that mainly concerns us. Let us pursue this line of thought for the moment. First of all, there is domestic debt; then there is foreign debt. One either borrows the finance locally, or from foreign sources. This decision is an important factor. Taking the money from local sources, takes that capital resource out of the “money supply,” while borrowing it overseas does not do so. Local borrowing, especially if subscribed to by means of the utilization of part of that disposable income leaves that much less that is available to both sustain the economic growth of the economy, and as a result stunts the growth of additional job creation. This is not the situation when utilizing foreign funds. However those funds have to be repaid, both the capital and the interest and thus the end results to the economy are similar. There may be an alternative, and it is this possibility that we wish to debate. Let us digress for a moment, and examine several types of “loans” or debt. Governments issue many types of debt instruments or bonds. These are for varying time spans for repayment. However at some stage in time they are no longer required for additional capital expenditures, but are needed in order to meet the required capital to repay maturing debt. In other words they enter the phase of perpetual debt recycling. Borrowing to repay old debt. While Central Banks are the “payers of last resort” in guaranteeing the repayment of foreign debt, they in turn end up issuing debt instruments in order to meet foreign commitments. The reality of this situation is thus equivalent to these debts never being repaid. Said another way, the debt load remains the same if not increased. It is this situation that intrigues us the most. Let us examine several factors that often apply to countries that find themselves unable to repay their foreign debt. Either a portion or the whole of that debt “is forgiven.” The lender in this case is deprived of a part of what once constituted its “money supply.” The borrower at the time this loan (or bond) was raised, in actual fact resulted in an increase of its money supply. An interesting anomaly is thus created where both the loss on the one hand and the gain on the other had little or no detrimental effect to their respective economies. This situation applies as well when actual outright grants are made from one government to another. It seems to be apparent that the movement of non repaid capital into and out of countries has little if no detrimental effect to an economy, provided the value constitutes a very small proportion of the GDP of both the giver and the receiver. Large capital outflows, especially for speculative or investment purposes do have at times a marked influence on respective economies. But it is the tiny proportion of any countries GDP that concerns us when examining the loss or creation of the money supply. Perhaps a better gauge of either “little or no” effect to an economy, would be to use a percentage of the “money supply” or the “money in circulation” as the criteria to be used in establishing the parameter of any desired increase or decrease in the money supply. We are thus getting down to the “nitty gritty” of PRINTING MONEY for a specific purpose or purposes, instead of creating debt and diminishing the amount of so-called disposable income. Lowering taxes and lowering interest rates to enhance debt in order to stimulate a moribund economy is questionable. Taxes leave the discretion of how these funds are spent or allocated, in the hands of government. Lowering taxes and interest rates return this discretionary spending to the populace. However the same volume of money is constant within the system, and one fails to see where the quick and / or constant impact to the economy can be both generated and maintained. The monetary system works reasonably well most of the time. However when an economy is in recession many factors have come into play that requires remedial attention. The standard procedure seems to be to lower taxes and interest rates. It is like it is “etched in stone.” While these are economic tools that serve a specific purpose, they are not the only ones. Apart from this, they have their limitations. In order to determine what needs to be done, one has to analyze or be aware of the situation. Let us name just a few of these. Massive debt creation already exists, and much of this may have been one of the primary causes of a recession. Consequently much of this debt is irretrievably “lost.” Written off as “bad debts.” In whatever manner one computes this; to a large extent it has diminished the money supply. If one had bought shares at a price of $100 per share and sold them for $2 per share, there has been a monetary loss. The same applies to fixed assets. Job loss has a massive impact, not only for the lost income, which dramatically diminishes disposable income, but as well is a loss to tax revenues. A domino effect to the economy results as unsold stocks pile up, which in turn results in lower pricing --- lower profits ---and further hiving off of staff. Without going into a long list of detrimental effects that constitutes this chain reaction, the lowering of taxes and interest rates at times adds to the problem instead of solving the problem. Before moving on to the desirability of increasing the money supply and how and when this should be done, one comment may be called for in relating to share capital value losses. One has to question who would pay $15 for a $10 note. Or $20 or $30 or $60 for a $10 note. Be this in Pounds, Reals or Euro, this is what people would never do. Yet this was and is constantly done for share script denoting the intrinsic value of a share. Other terms are “net asset value” or the “basic fundamentals” of value. The underlying basic concept of an economy is jobs and the consequent output of goods and services and the means with which to pay for and sustain its momentum. Goods and services can be imported but the means to pay for these requires local jobs and locally earned remuneration. Without those two factors, no domestic economy can exist. Taking this concept a stage further, no jobs can be created without the expenditure of money, which brings us to the basic requirement of the money needed for this operation. This in turn brings us back to those three words “ THE MONEY SUPPLY! “
While the saying goes that “every little thing helps,” it never the less emphasizes ‘ little things’ and presumes the lack of something else. Recycling a diminished supply of money is a temporary band-aid, waiting for something else to happen. Wishful thinking perhaps. Without a new injection of money into the system it may either be a long tedious economic recovery or even in the end result in an economy much smaller and less robust than what previously existed. In other words, while this tedious progress ensued --- the jobs went elsewhere. The manner in which the money supply can be increased can be accomplished in a number of ways. The two simplest methods is either to re-imburse or re-introduce funds to the banks to replace the money lost by the write- off of bad debts or by a long term “loan” by the Central Bank or Treasury to the government. In the case of dealing through the banks, the Central Bank would purchase these debts (non performing loans) or bonds at either full value or a discounted value. This added liquidity would filter through the system in the form of new loans or bonds in order to generate commercial and domestic activity. Whether there is to be a miniscule interest rate charge made and repayment on either an exceedingly long period of time or on a “never-never” system is left to the Central Bank to decide. Where this is done, there is no control of how and where these funds are utilized. Should it be decided that these funds be given to the government, the Central Bank can and should stipulate where and how these funds are to be used. Repayment, if it is to take place at all, should be far into the future at little or no interest charge. In other words, if an economy can absorb an influx of funds from a foreign source without any detrimental effect to the money supply or the economy, then it seems obvious that if domestically introduced, it should have the identical result. The primary reason for stipulating where and how these funds are to be utilized is to obviate inflation and waste. In both cases, and especially so if given to government bodies, is for the primary purpose of job creation. Thus its basic criteria should be economic activity. To be specific, utilized for infrastructure in as varied a manner and purpose as is possible. The emphasis could as well be on income producing structures such as the building of dams for hydro-electrical production and distribution and water reticulation. The provision of Sewerage treatment and disposal. The building of roads, highways and freeways, as well as bridges. Hospitals and the required diagnostic equipment, schools, colleges and universities for either their necessity or expansion. The list is endless. These span all branches of governance and each and every one of these are job creators, thus expanding a moribund economy without any debt creation or diminution of taxation income. As an alternative or in addition, soft loans to specific industries such as those engaged in the energy field for the costs of exploration and the laying of pipelines could be considered. Perhaps mineral exploitation and /or “R&D” in specific areas of the economy should or could be considered.. It is the job creation with its consequent disposable income that will fuel the economy and add to government tax income. There is possibly one other area that may need to be considered, and that is the social obligation of the government towards the recently unemployed. This would be to extend unemployment benefits to a full period of 52 weeks while recipients seek new employment. What finally remains is to establish HOW MUCH MONEY IS TO BE PRINTED. Before this decision is made one would think that the time span within which this is undertaken would have to be considered as well. Perhaps a good guide would be to determine the total value lost to the economy by the total loss of incomes from job loss and as well perhaps that of all bank bad debt write-offs. Or it could be a percentage of the money supply that either remains in circulation or that difference between what it was and what remains of it. Another possibility may be to determine that expected growth in GDP is say 2.5% and expected inflation at 2.5% totaling 5% and instead of increasing the money supply by the required 5% that it be increased by 2% above that figure. The volume and the period length should be at the discretion of the Committee who determine Central Bank policy. Whatever those decisions are, they should be the guiding principals in leading their respective countries out of recession.
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Let us start with the formation of debt
There are a number of types of governance in a democratic system. They could be
Municipal, Regional, Provincial (or "State”) and Federal or Central
Government. Each of these entities may be entitled to tax the citizenry in some
form or another in order to pay for any goods or services required. Or supplied.
In turn they would have to provide a budget, which would relate to both the
revenue required, and the method in which these taxes were spent. The ideal
situation would be a minimum of taxation, leaving a higher percentage of
disposable income to fuel economic expansion in order to create jobs, which in
turn would create sustainable economic growth.