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A Modest Proposal To Save The World

Submitted by Charles Gave via Gavekal Dragonomics,

The last few years have been some of the most intellectually interesting of my career as the post financial crisis period has seen policymakers test the limits of economic theory, and push well beyond. Inspired by their example, I would like to post my small contribution to the sum of new knowledge that this era of extremes has thrown up.

The starting point of this journey is that I was not smart enough to graduate in mathematics; instead I opted for the “dismal science”. I have never understood why Niels Bohr, the great Danish physicist, claimed to have dropped economics for nuclear physics, as the former was too difficult. As every modern reader knows, economics is easy and has the advantage of not requiring any great knowledge of philosophy, history, or the social sciences in order for the basics of the discipline to be grasped.

What any student with an eye to getting on in the world should realize is the core truth underpinning right-minded economic analysis: the value of assets in a properly constituted economic system is a direct function of the money created by the central bank. All other knowledge is subsidiary to this key insight. I know this to be true because the great minds of Princeton declare it to be so, and who am I to argue?

This insight results in the key truth that money equals value. It therefore follows that the more money that is created, the more value there is in the system. The trick for policymakers, of course, is to prevent too much of this happy juice from getting into the real economy since there is still the irritating possibility that 20th century-style inflation will break out. And this is where zero interest rates, the elixir of the enlightened, comes in. The application of ZIRP leads to an almost infinite velocity of money coursing through the financial system. Financial geniuses, of which there seem many in our era, are able to constantly package and resell assets in a near limitless value creation exercise (remember value=price). Strangely enough for reasons not explained by my teachers, it seems that in the real economy ZIRP pushes the velocity of money to near zero.

But who cares? Certainly not the rich. They benefit from asset prices going through the roof and can hire poor people for a pittance. And why does no one call time on this great game? You do not have to be a conspiracy theorist to see that most economists are agents of the wealthy. There can be only one outcome so long as the money supply is growing and interest rates are kept at zero (okay, we should add the proviso that the new money not be allowed to reach the real economy as the increased demand cannot be met, as quite rightly no investment in fresh capacity has taken place). Yes, the only way for asset prices to go is up.

As the discoverer of these great truths, Lord Keynes has clearly shown that a lack of demand is always and everywhere the result of excess savings by those kulaks tight-fisted enough to clog up the system. Faced with such unreasonableness, the only solution is to lower interest rates to zero, or better still make them negative so that demand from the next century is brought forward to today. And of course, just as Stalin sought to eradicate the pesky kulaks who insisted on hoarding a few farm animals, so the solution to over-saving has to be the euthanasia of rentier.

Needless to say, this move will adequately deal with the lack of final demand created by the aforementioned rentiers. There are some sideeffects from such enlightened policies in that savings will effectively dry up. And since every student knows that savings=investment, then investment must plummet and the poor will struggle to find jobs. Fear not, however, the rich will continue to enjoy La Dolce Vita.

But why stop there? Some of these simpleton kulaks may mistake their economic insecurity as a good reason to save more not less. Imagine such foolishness. Hence, the solution must be not only to confiscate their return on capital through ZIRP, which is a tax on the poor since for the most part the poor have no assets, but also to confiscate the actual savings.

As such, it seems that the ultimate aim of policy must be to transfer the nation’s entire wealth to an ever smaller number of rich people, most of who work in finance. Perhaps this is as it should be, since as already noted, money and only money can create value. Hence, the final mission of any truly modern government must be to redirect the inventory of savings for the benefit of the rich (while, of course, claiming it is acting for the poor). Interestingly, Europe’s socialists and the Democrats in the US have the ideal political cover to carry out this important exercise.

And this, of course, brings us to Greece and my own big solution. The lack of final demand in that benighted country shows that Alexis Tsipras must manage an economy suffering from not enough government spending. In response, Athens should issue unlimited sums of perpetual zero coupon bonds, which will be bought by the European Central Bank. Next, the Italian, French and Spanish governments should follow suit. The proceeds can be transferred to local government districts in order for civil servants to be hired in earnest. The effect would be to greatly boost the local GDP, by the amount of the salaries paid to the civil servants, while the debt-to-GDP ratio will fall accordingly. The Bundesbank will be happy.

Of course, the simple minded (non-economist fellows) might wonder who will buy this paper. The answer is simple: the authorities must slap a 100% reserve requirement on all products held by insurance companies, banks and pension funds, and ‘hey presto!’ bond issues will be oversubscribed. Of course, if the choice is between a zero coupon perpetual bond and shares in the stock market, I have no doubt that the Dow will be at 100,000 in no time. At the same time, since the only competition for the perpetual zeros will be cash, the use of bank notes will need to be outlawed. Some smart fellows have already started working on this highly progressive idea.

The only thing that I do not understand is why it has not yet been adopted. It must be the fault of incompetent politicians, advised by poorly trained economists. There is no other explanation.