Why more equal economies are more efficient and require less stimulus

In a properly balanced economy, as money flows upwards towards the richest 1%, it would be recycled down to the bottom again through spending, fair salary payments for workers in profitable corporations, investment in new businesses creating jobs, new employment, taxation etc.

The more money is recycled back downwards, the less borrowing is needed as incomes would be higher, and less borrowing would be unsecured (borrowing would be backed up by higher income and asset prices) and fiscal lubrication and quantitative easing become less necessary (as higher base incomes create demand), so real inflation (the increase in overall money supply) becomes less necessary.

But over the past few decades, because of ever increasing and extreme income inequalities within highly profitable companies and the marked decrease in tax rates paid by extremely profitable companies and extremely rich individuals (in the USA and elsewhere because of increased leverage by the rich on lawmakers), hardly any of the money coming into the system is being recycled back downwards again as trillions are hoarded by corporations and the extremely rich.   Thus more borrowing, quantitative easing and fiscal lubrication is necessary to maintain demand and growth, while any new money (introduced by central bank lending) in turn flows up to the growing reserves of the corporations and the super rich.

The problem with this top heavy scenario is that it requires ever more cash to be pumped into the system, which leads to a bubble in the value of cash as it is hoarded at the top of the pyramid, valuable only in that it is scarce to the general population, even though in reality it is not scarce at all.   This drives real inflation (the ever increasing amount of money pumped into the system).

Central banks supply money into the system through lending and take it out through charging interest.  But the super rich corporations and individuals at the top of the pyramid with trillions in reserves don’t need to borrow in order to invest. They are effectively removed from the loop of the central banks’ monetary cycle, as the banks generally put the money in at the bottom and take it out at the bottom.

The ever growing trillions the corporations and super rich have in reserve is essentially a separate economy beyond the reach of the central banks’ interest rates. 

My suggestion is this: Stimulate the healthy circulation of money throughout the whole system by giving the corporations and the super rich these options:

1) Either they invest a portion of their reserves in employment creating industries or pay massive taxes on those unused reserves.

2) Either they moderate the salary gaps in their companies or pay massive tax on their profits.  See my blog “Economic responsibility in our lifetime” for a basic introduction salary-gap moderation and its many benefits.

3) In this scenario (1 and 2 above), as money flows down and demand grows separate from any reserve bank lending, price increases (not caused by inflation of monetary supply but by better monetary distribution) might make it necessary to remove some of cash from the system through taxation instead of just through bank interest rates, which would in any case take mainly from the bottom again.
Importantly though, because these initial price increases are not caused by increased monetary supply but by better monetary distribution, long term real inflation would actually be largely reduced.

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This entry was posted in capitalism, economics, employment, equality, financial, leadership, politics, prosperity, socialism, South Africa, wealth creation. Bookmark the permalink.

2 Responses to Why more equal economies are more efficient and require less stimulus

  1. Pingback: Is the SARB increasing inequality? | Buddy Wells' Blog

  2. isaac says:

    I loved the two articles I read. .The cost of inflation control and the system of letting money rotate to prevent borrowing from external markets

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