A recession is a period of reduction in economic activity. In a recession, unemployment will rise and output fall. A depression is a more severe and longer lasting recession.
Written as a joke:
This graph of GDP during the Great Depression shows a dramatic fall:
If we look at the graph of money supply below, it is easy to come to a conclusion that the depression was caused by a fall in the money supply. Please notice that there was no fall in the government-issued cash currency. It was bank credit that fell. So what determines the volume of bank credit. Bank credit is created when banks extend loans. So bank credit increases when citizens borrow money and bank credit reduces when people pay off loans. If banks issue more loans than they collect in repayments, the money supply increases. If the banks collect more repayments than they issue new loans, the money supply falls. It follows that if the banks are shy about issuing loans, the money supply falls. If the citizens are reluctant to take on more debt, the money supply falls. I could be called a 'freeze on credit' or other covering terms. The citizens might resist the temptation of loans if they are 'maxed out' on debt which translates to a high proportion of their income already being spent on tax and interest.
There is an error in the commonly espoused logic that recessions are caused by a fall in the money supply. It assumes that the velocity remains constant. This same effect can be caused by a decrease in velocity. It leads to the erroneous assumption that to correct a recession/depression, all that is needed is to raise the money supply. This is an erroneous and costly error. A recession is primarily measured as a fall in the GDP. But velocity, money supply and GDP are related as in the following formula:
Money Supply x Velocity = GDP
Thus, a fall in the money supply OR a fall in velocity will cause a fall in GDP. Thus, we get the ridiculous statement that a fall in GDP is caused by a fall in GDP.
The fall in GDP is influenced by falls in velocity or money supply or both. Let us consider the money that is used by business and customers. To get a better understanding, I calculate the volume of Circulating Money. I consider Circulating Money to be money that is moving from citizen to business to citizen to business constantly. I have chosen a time of one month for convenience. For many people, their wage has gone within a week, many shops purchase stock daily or weekly. Many businesses would turn their money over within a month. I use an arbitrary cut off of one month. Money that transacts in less than one month is considered to be Circulating Money and money that is held for more than one month is considered to be Hoarded Money. I was doing some tedious calculations on spreadsheets to obtain values for Circulating Money until I spotted that Circulating Money turns out to be GDP divided by 12. Although this seems odd, it allows us to better conceptualise the movement of money and the actions that might damage the economy. Circulating Money is the money that is changing hands between customers and businesses and suppliers. It is the money moving in the real economy.
Hoarded Money remains stagnant and adds nothing to the level of the real economy. People who have 'more money than they can spend' tend to put money in the bank and leave it there for years. Hoarded Money includes savings by citizens and organizations as well as pension funds and money put into tax havens denominated in national currency. Hoarded Money is generally held by those with 'more money than they can spend'. Circulating Money passes between people quickly and tends to be with people that spend quickly and are thus more likely to have little in reserve.
Most tax is taken in the form of Sales Tax or Income Tax. Both of these taxes involve removing money at the time of a transaction. Thus, these two taxes are removed from Circulating Money. Most tax is removed from the vital Circulating Money. Hoarded Money is almost completely untouched by any tax.
Interest comes from those that borrow, not those that have 'more than they can spend'. Thus, interest repayments are taken from Circulating Money.
Circulating Money moves from citizen customers to business to supplier to citizen wages and variations of this loop. As soon as Circulating Money gets into the possession of someone who has 'more money than they can spend', it becomes Hoarded Money. It is easier for money to move from Circulating Money to Hoarded Money than the opposite.
There is a tendency for the velocity to increase when the money supply decreases. The reason is that the reduction in the money supply is taken from those that 'make good use of it' whilst the hoarders keep their hoards. When tax is increased, it comes from Circulating Money. When interest rates go up, even more money is taken from Circulating Money.
If the banks cut back on lending they continue to collect repayments from Circulating Money with the result that the Circulating Money is reduced.
Economics books tend to mention that the money supply is reduced, but it is worse than that. In the following diagram, a fall in the money supply of 4% has the potential to reduce the Circulating Money by 50%. This has the potential to reduce the GDP in a similar ratio.
In the previous graph titled 'Currency and Money Supply During the U.S. Great Depression', the volume of government-issued cash currency did not falter or fall. The bank credit component of the money supply fell precipitously. The graphs of Greece GDP and Money Supply show similar trends. Central created cash currency did not fall.
The bank credit is vastly greater than the volume of government-issued cash currency. Bank credit is created when banks make loans. When a bank makes a loan of a million dollars for a housing loan, it writes one million dollars with a plus sign in the sellers account and one million dollars with a minus sign in the buyers account. At that instant, there is one million dollars more bank credit in the nation, the money supply increases by one million dollars and there is one million dollars more debt in the nation. The debt increases with interest to become unpayable. In this chapter we are interested in the money supply and, by simple deductive reasoning, the money supply will increase when loans are issued and decrease when loans are repaid. To keep the money supply constant, it is necessary that loans are issued at the same rate as loans are repaid. However, interest has been added to the debt and so slightly more loans have to be issued than repayments. Thus, the constant need to increase the debts to keep the system running.
In the graph, the volume of money decreases. M1 is particularly bad and M1 is the so-called 'Demand Deposits' of businesses and individuals. This occurs because the banks issue very few loans whilst continuing to collect repayments. This may occur because the citizens are reluctant to take on more debt, or the banks refuse to lend. Loan repayments are taken from those that 'do not have enough money' and so the repayments are made from Circulating Money. Thus a reduction in money supply hits businesses very quickly.
When the citizens are reluctant to take on more debt or the banks cut back on the issuance of loans, the money supply will fall and a recession or depression will occur. If the money supply remains constant, a recession is a typical result. If the money supply falls, a depression it the typical result. Spain shows a recession. Notice that the estimated cash currency did not fall. Notice the lending habits of banks reflected in the balance between private debt and government debt.
Governments then make a common mistake. If the money supply falls, a recession/depression occurs as businesses lack trading money and capital for expansion and citizens reduce their spending. However, the reverse is not the case. If the money supply is increased, this does not automatically cause an increase in business activity. During a recession or depression, businesses have closed or cut back on staff and activity. It takes a lot more effort to increase production than throwing money into the money supply. It takes time for business owners to regain confidence and new entrepreneurs to acquire the skills to build business. It takes time for the citizens to trust the economy enough to spend at a higher level. To increase business activity, it is necessary to improve the parameters that make business worthwhile. Punitive taxes on business and expanding business is a major disincentive to expansion. Pushing money into the money supply is more likely to increase the Hoarded Money as the hoarders are skilled at getting money and hoarding. Witness a fall in velocity when a government tries to increase the money supply.
During a recession, businesses and citizens have their fingers burnt and will be reluctant to increase business activity. It is easy to assume that it is the money supply that needs to be increased. This is poor logic. It is the Circulating Money that needs an increase in a difficult system where the hoarders will grab any money available to add to their hoards. It is not pure greed, it is that the hoarders have little need to spend and they believe that they need to hoard to have a secure future. (Little do they realise that their hoards have no value, as I shall explain in a while.) An increase in velocity will also boost Circulating Money which equates to moving Hoarded Money to Circulating Money.
This little graph shows a global problem where a greater proportion of global money is being hoarded.
The "Banker's" Depression of the 1930's
Australians all know about the Great Depression and the extremely hard times it brought about; but what of its causes?
In 1930, Australia did not lack industrial capacity, fertile farmland, or skilled, industrious and willing workers, residing in both the city and country. Already, extensive systems of reasonably efficient transport and communications were in place. War had not ravaged the cities or countryside, nor had famine devastated the land and its population. The one thing that industry and commerce lacked was a sufficient supply of money.
In the early 1930s, Bankers, who were the only source of new money or credit, deliberately refused loans to industry, commerce and agriculture. However, payment on outstanding loans was demanded, which led to a rapid decrease in the circulation of real money.
This caused a complete standstill; jobs could not be done, goods and services could not be purchased. This ploy by the greedy Bankers placed Australia in the Great Depression of the 1930s, and moreover, placed extensive amounts of businesses, private dwellings and farms in the hands of these same Bankers.
The people, not understanding the system, were in a helpless position, and were cruelly robbed of their hard-earned savings and property; they were told things like "times are hard", "money is short", "everyone is suffering." These same statements come to mind when recalling them being made during Australia's recent so-called "recession".
This was "a 'recession' we had to have," the politicians proclaimed; and one I'm sure the banks loved to have. If you should have the opportunity, a check on how the banks fared during the so-called "recession" will reveal sustained and increased profits, with an abnormal increase in acquired property assets! [330]
"Further, I agree with him (C. H. Douglas) that banks create money, and that trade depression arises from faults in the banking system in the discharge of that vital function." [331]
in a great speech, discussing the panic of 1873, said:
"But, sir, that the panic was not due to the character of the currency is proved by the history of the panic itself. * * * No, sir, the panic was not attributable to the character of the currency, but to a money famine, and to nothing else. In the very midst of the panic we saw the leading bankers and business men of New York pressing and urging the President and the Secretary of the Treasury to let loose twenty or twenty-five millions more of the same paper for their relief." [332]
On the subject of the panic of 1873 to 1877, the United States Monetary Commission says:
"The true and only cause of the stagnation in industry and commerce, now everywhere felt, is the fact everywhere existing of falling prices, caused by a shrinking volume of money. * * * * This is the great cause. All others are collateral, cumulative or really the effects of that primal cause." [332]
"The paper system being founded on public confidence and having of itself no intrinsic value, it is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain. The corporations which create the paper money can not be relied upon to keep the circulating medium uniform in amount. In times of prosperity, when confidence is high, they are tempted by the prospect of gain or by the influence of those who hope to profit by it to extend their issues of paper beyond the bounds of discretion and the reasonable demands of business; and when these issues have been pushed on from day to day, until public confidence is at length shaken, then a reaction takes place, and they immediately withdraw the credits they have given, suddenly curtail their issues, and produce an unexpected and ruinous contraction of the circulating medium, which is felt by the whole community. The banks by this means save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here. These ebbs and flows in the currency and these indiscreet extensions of credit naturally engender a spirit of speculation injurious to the habits and character of the people. We have already seen its effects in the wild spirit of speculation in the public lands and various kinds of stock which within the last year or two seized upon such a multitude of our citizens and threatened to pervade all classes of society and to withdraw their attention from the sober pursuits of honest industry. It is not by encouraging this spirit that we shall best preserve public virtue and promote the true interests of our country; but if your currency continues as exclusively paper as it now is, it will foster this eager desire to amass wealth without labor; it will multiply the number of dependents on bank accommodations and bank favors; the temptation to obtain money at any sacrifice will become stronger and stronger, and inevitably lead to corruption, which will find its way into your public councils and destroy at no distant day the purity of your Government." [333]
"Unrestrained, overshooting issuance of banknotes and credit creation result in inflation, asset inflation, currency depreciation, recurrent boom-and-bust cycles, and banking crises. In the process, bank money (deposits) proves to be unsafe." [334]
"We are at the crossroads of the most serious economic crisis in world history. The economic crisis has by no means reached its climax, as some economists have predicted. The crisis is deepening, with the risk of seriously disrupting the structures of international trade and investment.
What is distinct in this particular phase of the crisis is the ability of the financial giants - through stock market manipulation as well as through their overriding control over credit - not only to create havoc in the production of goods and services, but also to undermine and destroy large and well-established business corporations.
This crisis is far more serious than the Great Depression. All major sectors of the global economy are affected. Factories are closed down. Assembly lines are at a standstill. Unemployment is rampant. Wages have collapsed. Entire populations are precipitated into abysmal poverty. Livelihoods are destroyed. Public services are disrupted or privatized. The repercussions on people's lives in North America and around the world are dramatic." [335]
"A world depression, in which upward of a quarter of the world's labor force will be unemployed, is looming. The biggest decline in trade in recent world history defines the future. The immanent bankruptcies of the biggest manufacturing companies in the capitalist world haunt Western political leaders. The "market" as a mechanism for allocating resources and the government of the U.S. as the "leader" of the global economy have been discredited.
All the assumptions about "self-stabilizing markets" are demonstrably false and outmoded. The rejection of public intervention in the market and the advocacy of supply-side economics have been discredited even in the eyes of their practitioners.
Among almost all conventional economists, pundits, investment advisors and various and sundry experts and economic historians, there is a common faith that in the long-run, the stock market will recover, the recession will end and the government will withdraw from the economy. Fixed on notions of past cyclical patterns and historical trends, these analysts lose sight of the present realities which have no precedent: the world nature of the economic depression, the unprecedented speed of the fall, and the levels of debt incurred by governments to sustain insolvent banks and industries and the unprecedented public deficits, which will drain resources for many generations to come." [339]
"But all these narratives just serve to hide the truth: that the boom/bust cycle is a totally artificial tool of plunder and centralization of wealth and power by a centralized financial system. ... but the point is that bubbles need to be blown so they can be popped and this happens to be the story with which they blew the housing bubble of the 2000's. ...
Blowing bubbles and popping them with alternating inflations and deflations is, with Usury, the Money Power's core business. Each cycle has its own story and derivatives are the story of the Greatest Depression. The worst is yet to come. Years of scarce money, depression and centralization of wealth lie ahead of us. They will undoubtedly manage to spring something nasty on us yet. ...
Only ending banking as it operates today can end centuries of wholly artificial booms and busts.
But this will only become possible when people stop wondering about corruption in finance and start seeing finance itself is corrupt." [337]
"With the worldwide deterioration of living standards and plummeting consumer spending, the entire structure of international commodity trade is potentially in jeopardy. The payments system of money transactions is in disarray. Following the collapse of employment, the payment of wages is disrupted, which in turn triggers a downfall in expenditures on necessary consumer goods and services. This dramatic plunge in purchasing power backfires on the productive system, resulting in a string of layoffs, plant closures and bankruptcies. Exacerbated by the freeze on credit, the decline in consumer demand contributes to the demobilization of human and material resources.
This process of economic decline is cumulative. All categories of the labor force are affected. Payments of wages are no longer implemented, credit is disrupted and capital investments are at a standstill. Meanwhile, in Western countries, the "social safety net" inherited from the welfare state, which protects the unemployed during an economic downturn, is also in jeopardy." ...
"While there is talk of an economic renewal, Wall Street commentators have persistently and intentionally overlooked the fact that the financial meltdown is not simply composed of one bubble - the housing real estate bubble - which has already burst. In fact, the crisis has many bubbles, all of which dwarf the housing bubble burst of 2008." ...
"When all these simultaneous plant closures in towns and cities across the land are added together, a very different picture emerges: entire sectors of a national economy are closing down." ...
"Media disinformation largely serves the interests of a handful of global banks and institutional speculators which use their command over financial and commodity markets to amass vast amounts of money wealth. The corridors of the state are controlled by the corporate establishment including the speculators. Meanwhile, the "bank bailouts", presented to the public as a requisite for economic recovery, have facilitated and legitimized a further process of appropriation of wealth. Vast amounts of money wealth are acquired through market manipulation. Often referred to as "deregulation",... These tools of manipulation have become an integral part of the financial architecture; they are embedded in the system." [338]
We need to study the Circulating Money. I define this as the portion of the money supply that is changing hands within one month and is thus carrying out the duties for which it was invented. Less than 5% of the money supply is created as cash currency by the central bank. The remaining 95% exists as numbers in computers. It did not come from the central bank as the central bank never created this volume of money. People who have 'more money than they can spend' tend to leave this virtual bank credit in bank accounts for prolonged periods. This money is hoarded and not available for everyday trade in the real economy. Traders and most citizens spend their money fairly quickly. This is the active part of the money supply which I call 'Circulating Money'. I define this Circulating Money as money that changes hands at least once each month. The GDP is the amount of money turned over in a year. The velocity is the number of times the money supply is turned over in a year. So it turns out that Circulating Money is one-twelfth of the GDP. Circulating Money is very susceptible to depletion. The Circulating Money is changing hands daily, weekly or monthly. If the money passes to a person with 'more money than they can spend', it is very likely to become hoarded. Almost all taxes are taken from Circulating Money. Bank repayments are taken from Circulating Money. (People with 'more money than they can spend' do not need to borrow money!) Hoarded Money may sit for year after year and the hoarders tend to manipulate the political process to minimise taxation on their hoards.
Hoarded Money is a massive drain on the financial system for numerous reasons:
Because 95% of money is created as bank credit at the time of making a loan, more bank credit is needed to keep an adequate supply of Circulating Money. To create more bank credit more loans have to be issued. Loans are then hung on anything that can hold a loan. If the public cannot be prevailed upon to take out loans, the government has to step forward and carry more debt. Without increasing the debt to banks, the Circulating Money cannot be increased.
Under a crisis situation, Hoarded Money has the potential to avalanche into the Circulating Money. The crisis can trigger a hyperinflation situation involving the rapid movement of Hoarded Money into Circulating Money as the hoarders purchase anything that isn't money.
I shall boldly state that: Hoarded Money has no value. Although this may seem to be a silly statement, consider my reasoning: When Hoarded Money is converted to Circulating Money, it dilutes the pool of Circulating Money. Thus, Hoarded Money only has value when brought back into circulation, if a similar amount of Circulating Money is turned into Hoarded Money. On the limit, a huge resumption of Hoarded Money will destroy the value of all money and may even destroy the money system. Scary will be the day that all the money in tax havens gets churned into the real economy. All money will be destroyed. At a velocity of 1, 92% of money is hoarded. Catastrophe awaits.
Only by reducing Hoarded Money through taxation and otherwise, can debt be reduced under a debt banking system. The money supply needs to be controlled for the benefit of the real economy rather than for the benefit the speculators. Money was invented to enable trade and overcome the inefficiency of barter. It was not invented to be stored by hoarders and speculators. Hoarders and speculators do not realise that their hoards rely on circulation to give value to their money.
The hoarders do not realize that their Hoarded Money only has value because there is Circulating Money in a real economy. Any damage to the real economy damages their Hoarded Money. Any big move of Hoarded Money into Circulating Money devalues all money and creates the risk of a hyperinflation collapse. Hoarded Money only has value if converted to Circulating Money if an equal amount of Circulating Money becomes hoarded. I cannot find any reference to this anywhere. Any large movement of Hoarded Money into circulation (as might occur in a crisis) will cause the value of all money to fall and is effectively like the buildup of snow on a hill ready to avalanche causing hyperinflation. Hoarded Money creates the avalanche situation necessary to foment hyperinflation.
To find the ways to create a Recession, one only needs to look at the definition of a recession. The simple approach is to reduce the GDP. It turns out that Circulating Money equals one-twelfth of GDP. [GDP=Velocity x Money Supply. GDP is money turned over in a year. Circulating Money = money turned over in a month. Therefore, Circulating Money equals GDP divided by twelve.]
To damage Circulating Money:
Turn Circulating Money into Hoarded Money.
Let people with 'more money than they can spend' put more money away as savings.
Encourage savings and hoarding.
Fail to tax hoarding and saving.
Fail to tax interest on hoardings.
Give favourable tax arrangements to those with 'more money than they can spend'.
Tax money from Circulating Money
Increase Sales Tax or Income Tax or other taxes on Circulating Money. (However, for the most part, the government spends the money back into society, but not necessarily in a useful manner.)
Tax business profit rather than business income. Business income is the money the business owners take as living expenses. (Depreciation on money already spent is a bad practice. It restricts expansion and sends businesses scurrying to the money lenders and it causes companies to sell shares and give dividends.)
Remove money from Circulating Money. (This is the best was to destroy an economy.)
Let the banks cut back on lending. The banks will continue to collect repayments which will come from Circulating Money. This will decrease the Circulating Money very rapidly. (Hint: People with Hoarded Money do not need to borrow.)
Cut back on credit to businesses.
Implement anti-business policies such as Basel Three.
Implement austerity measures.
(I have listed taxation above, but tax is generally spent back into society. Tax makes a difference when it is taken from Circulating Money rather than Hoarded Money.) Trumping the previous items is one way to create a recession faster and more effectively than any other method. The most effective way to reduce the Circulating Money is the reduction of bank lending whilst the banks continue to collect repayments. Banks create new money that they lend to citizens. Then they collect back more than they lent. If they collect repayments faster than they make new loans, they will instantly create a recession with remarkable ease. Anything that you do to cut back on lending will cause a recession. If the citizens will not borrow, it is necessary for new credit to be released by some other means. One way is for the government to borrow and spend more into society. Another is for the Central Bank to create new credit and purchase government debt in the form of bonds. This is a little tricky to understand. If the government issues bonds and they are purchased by organisations, they are purchased with existing bank credit. If bonds are purchased by the Central Bank, they are purchased with new credit created specially for the occasion, and thus the money supply is augmented. The Central Bank can purchase any bonds from any source and fresh money is released into society. However, if the money is given to a large organisation, it is likely to become hoarded and give little help to a struggling real economy. Money is only carrying out its designed purpose when it is circulating.
The rate that banks were lending to the private sector fell below the level that they were collecting repayments. This had the potential to dramatically reduce the money supply. Debt was forced upon the government to maintain the money supply. The circulating component of the money supply fell as did the GDP. Much of the freshly created money got into the hands of people with 'more money than they could spend' and thus became hoarded. Because a fall in the money supply will cause a fall in Circulating Money, does not mean that the reverse will increase the Circulating Money. Such is the ingenuity of the hoarders that they will appropriate any increase in money supply.
Have a careful look at this graph:
The graphs show the dramatic expansion of government debt to unpayable and uncollectible levels. Quantitative Easing involved the Reserve Bank purchasing Government Bonds which released fresh money into the money supply adding greatly to public debt. Money enters the money supply when banks make loans. Unfortunately, when they cease making loans, the money supply falls because they are collecting repayments faster than they are creating new money through loans. Because the government ceded its authority to create money to private banks, the government cannot increase the money supply through any action of its own. It can instruct the central bank to issue new cash currency, but this only makes up under 5% of the money supply. If the banks are not loaning to the public, it becomes necessary for the government to load itself up with debt to the private banks. Typically governments borrow money by issuing bonds. When these are purchased by a bank or central bank using freshly created money, the money supply increases. If the bonds are purchased by individuals or institutions, payment is made with existing bank credit and no expansion of the money supply occurs.
This demonstrates that the only way to increase the money supply is by increasing debt. The government does not increase the money supply by creating money. This situation can occur because the government no longer creates the money supply and thus has no control over the magnitude of the money supply.
It is impossible for a government to prevent recessions without a modification of the money creation system. The government makes less than 5% of the money supply. Banks create 95% of new money as bank credit. Only banks can prevent recessions.
To prevent a recession it is necessary to ensure that Circulating Money does not decrease.
The best way is to ensure that the government runs a public bank. By this means, the government can inject new money into the economy as needed, by spending on infrastructure. At the first sign of a recession, the government can crank up pre-prepared projects.
Cut taxation on Circulating Money, particularly Income Tax and Sales Tax. These need to be replaced with Land Tax, Wealth Tax, Hoarded Money Tax (Demurrage Tax), Death Tax, and an all encompassing but very small Transaction Tax on ALL transactions including financial transactions. A slightly higher tax should apply to share transactions. Business tax should be changed to a true income tax rather than the current 'Profit Tax' currently masquerading as an Income Tax. Income derived from 'making money from money' should taxed at twice the rate of the tax on income derived from personal effort.
The task required is to increase economic activity which is measured as GDP. This requires an increase in activities of business or of government. This can be forced by the government starting projects or by featherbedding business so that business activity increases. The usual statement that 'recessions are caused by fall in the money supply' is nearly correct but ignores velocity. It should be written: 'Recessions are caused by a fall in velocity or money supply'. GDP equals money supply times velocity, anyway. However, velocity is usually static at this point. When the money supply falls, it is invariably the Circulating Money component of the money supply that falls as this is the area where taxes and interest are removed. The reverse, however, is not the case. An increase in the money supply will not necessarily raise the economy because the velocity is very likely to fall. The reason being that much of the money supply increase goes to the Hoarded Money component of the money supply. It is much easier to turn Circulating Money into Hoarded Money than the opposite. Hoarded money is owned by people that have 'more money than they can spend'. Thus, great effort must be applied to ensure that money finishes up in the hands of traders and business people and that restrictions on business are reduced. A reduction in interest rate helps but so does a reduction in business taxation. Particularly punishing are depreciation expenses and income tax generally. Some regimes collect sales tax on an accrual method where the business pays sales tax on money that they have yet to collect. Glaring idiocy is apparent where government demands taxes on a shorter time frame than they take to pay business invoices. Simple delay of tax payment would help business expansion. Some system could be created where business can deposit taxes in advance and gain the right to delay payments when needed. On average, the government would get taxes earlier but would leave businesses with greater flexibility. The following little graph demonstrates that income tax is counterproductive to tax collection. Decreased income tax rates can actually increase the tax collection:
I will have to spend some time to see if I can graphically demonstrate that Sales Tax has the same effect. The logic is certainly there that these two taxes are counter productive to the real economy.
Businesses need money before they can make money. Due to punishing tax and land monopolisation arrangements, business runs to the money lenders to finance start-ups or expansion. Thus, adequate credit is needed for recovery. Banks often prefer speculative lending, particularly for housing investment, over business lending. If you cannot persuade the private banks to support business by means of available credit, you should consider a National Development Bank. A National Development Bank is a bank owned by the government on behalf of the people. It lends money for viable projects at all levels of society, from hydro-electric plants to an owner operator with a hydro-steam weed killer to replace poison systems. Here is a good policy example from the English language version website of the Development Bank of China as an example of national development bank policy:
The mission of the State Development Bank of China consists in raising the competitiveness of Chinese economy and citizens' standards of living. The main spheres of the Bank's activity are as follows:
- Development of infrastructure;
- Support of basic industrial sectors;
- Support of new, modern economic branches, including the promotion, development and application of new technology and innovation;
- Assistance in a balanced regional development, urbanization of rural areas;
- International cooperation, support of the activity of Chinese companies at foreign markets.
The State Development Bank of China functions in the form of a state joint-stock company fully owned by the state.
The Bank's activity is directly subordinate to China's highest state executive body - the State Council.
In 2011 the State Development Bank of China created six rural banks, the main purpose of which consists in supporting agriculture and developing China's rural areas.
[10078]
One of the problems recovering from a recession is that businesses were burnt and many will have gone to the wall. Those that survived will be reticent to expand and new start-ups will take time to 'learn the ropes' before they can expand to fill the void left by collapsed businesses. So a good tactic is to avoid the recession in the first place.
A recovery also requires that customers have money to spend. However, most people get their money in the form of wages, so a boost to business provides the necessary increased income. A reduction in income tax also helps.
The best way of effecting an economic recovery is the incentivise economic activity. It is not merely a matter of forcing more money into the economy by increasing the money supply. To do so is a very good way to increase the Hoarded Money held by those with 'more money than they can spend'. It is necessary to reduce taxes on employment, business, transactions and economic activity and replace them with taxes that do not damage entrepreneurial activity. These include Land Tax, Death Taxes (of up to 30%), Inheritance Tax, Demurrage Tax, Financial Transactions Taxes, Taxes on Unearned Income, and a very small Transactions Tax on ALL transactions. The very small Transactions Tax would be less than $1 in $1000 (0.1%). Land Tax is essential. Land was provided freely by nature for all living creatures to share, although religions claim the benefit for a god. Some land security is required for business and family security, but the advantage of land titleship has been commandeered by those with the access to credit to subvert the ownership so that they can collect rent for land provided for all. If the rent were partly payable to the government, there would be a dramatic fall in the economic activity destroying activities. Sales Tax and Income Tax are variously described as being disincentives to business, but they are worse than that. These taxes subtract directly from the essential Circulating Money, immediately destroying business activity. The recipe is to create an atmosphere that is encouraging to business activity and has the minimal restriction on suitable legitimate business activity. To this end, the availability of credit should not be a barrier to suitable entrepreneurial activity. Lack of money or credit will stifle economic growth and recovery.
Ensure Peaceful Atmosphere Conducive to Businesses
Businesses flourish under peaceful atmosphere and favorable government policies. Who will need to invest in a country torn apart by terrorists or with a fear of terrorist attack every other day or is a nurturing ground for terrorist activities? Hence be hard on terrorists and separatists, no compromise on this aspect by the countries who want their economy to flourish. Ensure a peaceful atmosphere conducive to business activities. Else, it is obvious that businessmen pull their investments to migrate to a country where they could make profits and see their capital investment grow. [341]
No Bailout Plans for Any Companies Except Banks and Insurance Companies
Steps to stop recession for governments, companies and individuals. We've already seen the flaws, inefficiency, unproductivity and failures of socialist economies. Do you want to test that again with innocent taxpayers' money? Was it the public who got the share of profit of these organizations' profits all these days? A government cannot spoon-feed each and every commercial organization that is falling down. [341]
The setup of the money system is such that banks could conceivably create recessions on demand. In excess of ninety-five percent of money is created by banks as credit and so, the volume of credit in society is controlled by the rate at which credit issued by banks. If the banks reduce the issuing rate below the rate at which they are collecting repayments, the volume of credit in society will fall. Thus, the banks could conceivably purposely reduce the rate of issue of loans and cause a recession. This is dangerous. It is situation over which the elected government has no control even though it will get the blame for the bank created recession.
As debt levels amongst the citizenry build up, there will be a reluctance and perhaps, inability for the citizens to take on more debt. The issuance of debt will slow whilst repayments will slow and the nation will naturally fall into recession. Thus, there is a natural tendency to fall into a depression when increase debt levels become unsustainable. Remember that increases in money supply require an increase in debt. If more debt cannot be created, then the money supply will fall. This is a natural effect when private banks are given the right to coin money.
It is commonly worded that the stock market crash of 1929 caused the Great Depression. This is misleading. In 1929, the stock market crashed. The banks recalled loans. This caused a fall in the money supply. We can use a little more logic on this to realise that the banks had been lending in large quantities for speculative purposes. They were recalling the loans that they had made to speculators that had used the borrowed credit to purchase stocks and shares. This is a classic example of inappropriate bank lending. The volume of credit pushed into a limited volume of shares had caused the share to rise in proportion to the volume of credit. When the banks stopped lending for this purpose, the share fell in value. Recall of the loans then collapsed the share values and also led to a reduction of the money supply. Credit should never be allowed to be used for the purchase of shares. Lending of credit for speculative gain is a massive danger to the functioning of the real economy.
This is conveniently reworded as housing investment. When I arrived in Perth in 1976, 96% of housing loans were given to owner-occupiers [340], which means young couples. The latest figures state that 64% of loans go to owner occupiers [340]. This means that one-third of loans go to persons buying their second, third, fourth, fifth ... house. This annoys me because houses are places for people to make a home and raise a family, not for personal gain of speculators. Persons are buying these houses under the guise of 'personal investment' with the expectation of a rise in house prices. If the house price did not rise, they would not do it. Lending increases as speculators see prices rise, further pushing up the prices. When prices have risen too high or wage take a tumble, the house price falls and lending decreases. This is likely to happen in a cyclical manner causing booms and recessions. Negative gearing needs to be stopped and tax on capital gains needs to be factored into annual tax returns. No tax benefit should be allowed at any stage. The effect of houseing speculation is that periodically house loans are freely given for increasing house prices, then there is a contraction of loan issuance causing a fall in the money supply and particularly a fall in the Circulating Money.