Now that global central banks are finally admitting the reality of modern money-creation, it remains to be seen how long it takes company executives to realise they’re collectively cutting off their noses to spite their faces by slashing costs in favour of hefty dividend payouts.
By doing so they are restricting the smooth functioning of modern global money-making machines and making economies dangerously top-heavy.
The concept of “trickle-down” economics has been seriously tarnished over the past decade by low wage growth globally.
But some low-key admissions from a handful of major central banks strongly suggest economists have for too long had cause-and-effect in their discipline completely upside down and the process is very much “suck-up economics”.
Polish economist Michal Kalecki said “economics is the practice of confusing stocks with flows”.
With regards to money, it’s the confusion between the “stock” of existing money and the “flow” of new credit-money into the economy, and which is more important in sustaining growth.
But if you follow the logical steps of money creation now being quietly admitted to, the current settings of the global economy are more “suck-up” than “trickle-down”.
As in capital holders “suck-up” the trillions of debt-money created by hundreds of millions of global consumers, and you only need to look at the $US1 trillion in wealth owned by one per cent of the global population as an indicator of this.
The existence of “suck-up” economics became apparent in the US in the 1990s as lower-and middle-income households began to stagnate as highly-profitable US companies “offshored” jobs to Asia, only to see the global financial crisis develop as US consumers lost the ability to create trillions of US dollars to feed into the global economy and also repay their loans.
But suck-up economics began to affect Australia too over the past decade as companies cut costs and capital holders leveraged-up on cheap debt to drive house prices beyond the reach of younger wage earners without a capital deposit.
So it’s no wonder the somewhat sheepish admissions by central bankers are dribbling out right on the edges of the public radar, because admitting economic understanding of money has been wrong for decades is one thing, but it’s quite another to throw the primacy of big business in the economic hierarchy into doubt.
They didn’t quite say that of course but that’s very much what the new understanding of money creation implies.
Ordinary people are the prime creators of money as they leverage their long-term earnings potential to buy houses and other goods.
That’s why high “consumer confidence” used to be like a bankable commodity, but is far less so now.
Nationally millions, and globally billions, of working-age, goods-and-services consuming people with ability to borrow money are paramount in the economic process and should be treated as such or the world faces another major debt crisis.
Suck-up economics began to affect Australia too over the past decade as companies cut costs and capital holders leveraged-up on cheap debt to drive house prices beyond the reach of younger wage earners without a capital deposit.
In Australia high immigration rates are all about feeding hundreds of thousands of people with money, creating debt potential in the economy, albeit with diminishing returns as evidenced by GDP growth per capita falling by two-thirds to less than one per cent since 2003.
The causal relationship between the company job-creating investor and wage-earning household borrower may seem like a “chicken-and-egg” question, and in reality it is a balanced, symbiotic relationship.
However, it seems obvious all economic activity revolves around people, without whom there can be no profit.
Sometimes, as in mining, the consumer demand is several steps removed from the actual business activity but always end-user people are required to complete the economic spending chain, be it as users of gas for cooking, or owners of houses built with steel and copper that originated as ore in mines somewhere in the world.
And, in fact, companies can be economically negative if, like many multinational firms, they extract profits while paying minimal taxes or paying much less in wages than they make in profits, especially if the profits are also parked in offshore tax havens.
In one way or another, even if it’s a step or two removed, business is ultimately about extracting cashflow from consumers with ability to spend via wages paid by others and money created from borrowing.
Hence “suck-up economics”.
This is not to say that business capitalism is bad, as long as the proceeds are spread fairly through the economy.
But corporate executives have certainly become misguided in the pursuit of keeping shareholders happy and their bonuses secure at the expense of workers and the broader economy.
Because one company’s cost-cut is another company’s lost revenue, none more so with jobs and low wages.
A person earning a wage and simply spending it on necessities does not “add” anything to the economy unless they are confident in their future earnings prospects and are willing to leverage their wage and credit-ability to borrow money.
Entrepreneurship and business investment are economic-positive when capital is being “shared”, especially in the start-up phase before profits are made.
But once businesses start to extract profits from the economy it becomes less clear, depending on how the spoils are shared.
The point of this is that you can’t control or guide complex systems if you don’t have basic understanding of the primary cause-and-effect mechanisms.
Fund managers and economists have decried Labor’s capital gains tax and negative gearing proposals but spreading the economic spoils wider is precisely what is needed in the Australian and global economies to lift broader prosperity, improve wage growth and restore the ability of ordinary people to sustainably create money.
That is why all efforts should be made to skew policies towards younger, lowly indebted workers.
Some may argue this sounds like an excuse for socialism or communism but it’s not.
It’s simply understanding the causative factors of economic growth that mostly prevailed before the turn of the century, so that the financial system can be maintained.
The monetary difference between savings and loans.
Last month the Reserve Bank followed the Bank of England and Germany’s Bundesbank in clarifying the basic understanding that money is created when banks make loans, because when they do a corresponding deposit is made into the borrower’s account which they then spend in the economy and it settles elsewhere in another bank account.
Textbooks claiming banks loan out customer deposits are wrong and outdated, although that is what some non-bank “shadow-bank” lenders do.
But the difference is crucial in understanding modern, financially dominated economies.
Unless a loan is made by a commercial bank with access to balance-funding via the central clearing system, it is unlikely to amount to new credit-money.
Companies are firstly funded by shareholder capital — existing savings — and profits, and secondly by borrowing. But the types of borrowing undertaken by most big companies is done via bonds, which are also subscribed to almost exclusively with the existing stock of savings in the banking system, not from newly created credit-money.
Of course there are grey areas where banks do create money with loans to smaller businesses, or smaller loans to big businesses, but when it comes to corporate bonds it usually would make little sense for investors to borrow to invest in them, so they do not add money to the banking system, they’re just a transfer of existing deposits.