Saturday, February 23, 2013

A wild ride

Suppose I lend you a trillion dollars, and you pay me fifty billion in interest. At the same time, you lend me a trillion dollars and I pay you fifty billion in interest. Our net interest is zero.

Our net interest is zero, but between us we took a hundred billion circulating dollars, and took them out of circulation. If the economy needs those dollars it will have to borrow them again at interest, adding to the accumulated financial costs that already burden the economy.

The result is a concentration of wealth and an increase in the cost of production.

The monetary authority may choose to deal with increasing costs by allowing prices to rise. Eventually, this can lead to an economic "shock" when the prices of imports are increased to compensate for the inflation. If the imports in question are fundamental and in wide use, like oil, the result may be devastating.

After a time, the world will look back on that troubled era and think of the problem as a problem with oil prices when in fact it was a problem created by the excessive growth of finance. The misunderstanding will make this problem a difficult one to solve.

The concentration of wealth is evidence of the excessive growth of finance.


nanute said...

Art, It all sounds rather plausible. And yet, the most recent run up in the cost of gasoline in our domestic economy can't possibly be attributed to inflation. Can it? Magically, refineries are reducing production, or offline. Producers are cutting production and viola, pricing is rising. We've been having this conversation at Woj's place with regard to the interest cost being a factor related to rising prices of goods and services. Is it really the case under the current economic conditions? I'm not so sure.

The Arthurian said...

Nanute, when I wrote of "that troubled era" in the post I had in mind the 1970s specifically, and Steve Keen's remark that inflation took off well before OPEC’s price hike.

As for the price of gasoline these days... After nearly 50 years of policies created in response to an incorrect explanation of the cause of inflation, who can say with certainty what is the cause of what today??? Unwind it all, I say.