I guess there is no news for you that we are currently in a deep financial and economic crisis. However, in order to get out of it, we at first need to understand its mechanics. This understanding by itself will clearly imply the right direction. As follows you will find some simple key points for thinking and moving forward.
The first point: roughly half of the economy is real economy and half of the economy is money or, when putting it otherwise, money is half of each transaction; as such, money functions as an element of infrastructure, enabling us to exchange products and services comfortably, and with low transaction costs.
The second point: money is debt marked as an entry in computer systems (results from the principles of how it is created via partial reserve system -- in US e.g. only ca. 3% of the money is in cash); if there is debt, there is also money, and conversely -- no debt, no money.
The third point: according to the current monetary system, the amount of money owed and to be repaid by real economy to the banks each year is growing exponentially; the reason is that interests shall be paid for loans, but the money for paying interests has never been issued (only principla amount has been issued) -- so, interests can be financed only by new debts (incl. prolongation and refinancing of the existing loans).
The fourth point: in real economy the resources used for production (such as capital and labour) feature a diminishing marginal product, meaning that starting from some certain point, each new unit of the resource added will result in a lower average product per resource unit (as a simple example, just imagine 10 men digging a 20 meters long ditch vs 100 men digging the same ditch -- given other things equal, in which case one man can be more productive?); money as debt can also be considered as one of the resources -- the more there is money in circulation, the less output there is per each dollar, euro, etc.
Conclusion no 1: when considering together the exponentially growing debt amount plus interests to be repaid each year, and the decreasing average product created by the real economy per each borrowed dollar or euro, it becomes apparent that at some point the economy is not able to produce sufficiently for fulfilling its credit obligations; that's the point where we unavoidably enter into a deep financial and economic crisis, where a considerable amount of loans has to be written off.
Conclusion no 2: given the above described system, there is only three ways for dealing with the crisis:
a) make everything to restore and increase the amount of money in circulation (via decreasing interest rates, money injections, government guarantees etc. -- the measures that may easily result in the need to print new money);
b) increase the productivity of real economy, i.e. make everything to ensure, that the output per each unit of borrowed money would increase; or (the best option)
c) combine (a) and (b).
As a result, the economy is still in debt, although on a new productivity level. The party starts again and continues until the music is playing.
Conclusion no 3: This may be a short-term solution (and solution for this time), but does not work in long-term perspective. Hence, when increasing the productivity of real economy, let's focus to the more sustainable areas: comprehensive education, infrastructure, communication, more effective processes, new technologies, environment etc. In parallel, we need to think of how to make money to a more effective infrastructure element (or how to use it more wisely).
- Article Word Count: 604
- |
- Total Views: 61
- |
- permalink