Deadly Innocent Fraud in Economic Curriculum

The Abuse of Economic Analysis Model

Throughout in the universities, economic analysis always uses mathematical model in order to depict exact picture of complicated occurrence to become trustworthy for creating consistent hypothesis that can be tested reliably. The paradox is, when economists always use it into broader scope of economic and social phenomenon, the only thing that they will grasp is only the data inside of the scope on the model that they have been used. sadly, they can’t grab other aspects that have effects also into the economy. A case in point is the GNP accounting format developed by Simon Kuznets. Its elements are neither inherent nor entirely objective. All activities are held to be productive, rather than some (such as crime prevention, medical treatment, environmental cleanup costs and warfare) being in the character of economic overhead. The production and sale of cigarettes is counted as output, and the medical treatment of smokers as yet more national product. Crime prevention is counted, but criminal earnings are not reflected in the national income statistics.

The national income and product accounts do not reflect the major way in which the largest sectors -real estate, mining, fuels, forestry, and even banking and finance- take their economic returns, namely, as capital gains. These sectors appear to be operating without earning any taxable profit, and their capital gains are not traced. The accumulation of real estate fortunes and stock-market gains have become the way in which wealthy people, and money managers and homeowners have built up their wealth. But this distinguishing financial phenomenon of the present decade ­­-asset-price inflation- is lost from view by formats that treat capital gains as “external” to their model of how the economy works.

Life-cycle model or with a synonym as economic boom and bust is the mainstream framework which is using self-equilibrating model is becoming underlying in all of the entire economic analysis. With creating policy through on this scope –austerity- some countries such as Latvia and Ireland had experienced a massive growing of debt until they could not afford it anymore. It was caused by two factors, the first is short orientation from financial sector that always creates bubble economy with lending most on the real estate in which in the end only creating asset price inflation and stimulating the debt deflation. The second was the bad diagnoses from their government that was not creating the remedies, moreover, they gave the poison –austerity policy- that was  only making the economy shrinking since the purchasing power down and no money could be spent to encourage the economy run again.

Since the economic analysis model today is limited narrowly on producer and consumer behavior, supply and demand, excluding the analysis of capital gains and the role of debt, the result is only demanding on increasing the risk of bubble economy, inflating the FIRE sector (Finance, Insurance, Real Estate) and adjusting the burden to entire society except 1% top of population that have majority share of bonds, stocks, and real estate –capital gain. It is because of the accumulation of capital gain and the role of debt are not included on economic curriculum while the growing of debt is rapidly faster rather than the growth of economic itself which is caused by inflating of the FIRE sector that absorbs most of society’s saving. The data which was summarized in the United States and Latvia shows that average people spend three-fourth of their income just to pay the debt including mortgage, social security, education and tax. Only 25% of their income could be spent to buy goods and services, furthermore, when there Is no demand, there is no production and economy slumps while their burden to pay those debt is remain the same. This is something we called “debt-deflation.”

 

Debt-deflation

The new understanding on on economic theory traces how industrial capitalism has turned into finance capitalism. It claims that the finance, insurance and real estate (FIRE) sector has created a kind of “balance sheet wealth” not by new tangible investment and employment, but financially in the form of debt leveraging and rent-extraction. Such rentier gains are an overhead that is overpowering the economy’s ability to pay. As a result, the present state of the economy is one of austerity rather than the expanding markets envisioned in earlier epochs. Much like in a radioactive decay process, we are passing through the short-lived and unstable phases of a Bubble Economy and casino capitalism that now threaten to settle into leaden austerity and debt deflation.

This situation confronts society with a choice: either to write down debts to a level that can be paid (or indeed, to write them off with a Clean Slate), or to permit creditors to foreclose, concentrating property in their own hands (including whatever assets are in the public domain to be privatized) and imposing a combination of financial and fiscal austerity on the population. It is the opposite path from that which classical economists advocated and which Progressive Era writers expected. Their optimistic focus on technological potential was thwarted by the political stratagems of the vested rentier interests fighting back against the classical idea of free markets and economic reforms to free industrial capitalism from the legacy of medieval and even ancient privileges and essentially corrosive, antisocial behavior.

Debt deflation also is the major cause of crises. The exponential growth of debt service absorbs the economic surplus, diverting spending away from the purchase of goods and services. This undercuts the economy, leading savings to be invested increasingly in interest-bearing loans rather than in tangible capital formation. If these anomalies cannot be explained, then the current neoliberal logic is part of the problem. Yet no mathematical models depicting this process has been deemed acceptable by today’s monetarist orthodoxy. It reflects the constrained reasoning at the hands of the monetarist school that has monopolized economics departments in the world’s universities.

 

Short-term or Long-term?

“Free market” means central planning by the banks and high finance — by Wall Street, the City of London, Frankfurt, the Paris Bourse and centers further eastward. Their plan involves untaxing rentier income and wealth, headed by land-price gains (the “unearned increment”) and financial deregulation. This shifts the allocation of capital and policy planning out of the hands of government into those of the banking sector.

This financialization of the economy (and indeed, of the political system) is more centralized than public planning by elected officials. And whereas government planning tends to be long-term, financial planning under neoliberalized conditions is hit-and-run. Whereas government planning is supposed to promote capital formation and full employment, today’s financial planning makes returns by stripping assets, inflating asset-prices (the Bubble Economy) and minimizing the return to labor relative to rentier returns.

The question is whether finance will promote economic growth and rising living standards, or create unproductive credit and use government to enforce creditor claims by imposing austerity reducing large swaths of the world population to debt peonage. The longer we look back in time, the more clearly we find this issue defined. During World War I, for example, British economists debated whether German industrial banking, based on equity financing and long-term relationship with clients, was superior to the more hit-and-run Anglo-Dutch-American merchant banking that had evolved out of trade financing. After the Allies defeated Germany, banking in most countries took the Anglo-American path. The stock market has remained a game for insiders rife with fraud. Banking has focused on real estate mortgages and takeover loans for properties and companies already in place.

Central banks are potentially able to create money and credit together while conventional banks are able only to create credit. Basically, If central banks are deprived of this opportunity to create credit, governments must rely on commercial banks to finance their budget deficits –their interest. Since three-fourth of the conventional bank’s lending is always spent on FIRE sector, it will be impossible creating long-term planning such as creating capital formation based in the dependency on commercial banks. A lot of academic journals and books found when the private sector, financial sector, and government have the same vibration, everything could be achieved such as Germany in the beginning of twentieth century. When one of them is missing, especially when one part (i.e. financial sector) has more authority rather than the others, don’t expect the extraction of economy will never be happened.

 

The Radical Ways

TINA (There is No Alternative) is the jargon that had been popularized by Margaret Thatcher back then. She was conducting the repression for doing the austerity policy to be implemented. Now, I give the same jargon with the opposite paradigm in which contains the three options that is contradict with usual understanding for sure. The first is positioning the central banks not independently. The second is introducing two currencies as a vehicle to trade and finance. The last is taxing land as a struggle to eradicate the speculation activities to avoid the debt-deflation.

First, putting the central banks under the control of the government is creating a good circulation of interest and resources, money and credit, that are needed to be allocated into the economic program specifically without having any restrictions from international interest –Washington consensus. With doing that, it could be reducing the number of misallocation of resources that is proposed for creating the long –term planning –capital formation. It is also eradicating the number of speculations from private banking that always doing for uprising the debt through inflating the FIRE sector –short-term orientation. When doing this is undoubtedly hard to be done, we could nationalize some of private banks to ensure the realization of long-term planning will be easiest to be controlled.

Second, separating the currency in which the first is focused on trade and the second is focused on finance, is the best way avoiding direct impact on exchange rate. Mostly, developing countries only use one currency to do all of the economic activity which is based on gold and dollar as an underlying. Since most of them have the foreign debt that imposes them to always convert their currency to dollar in order to repay their debt, creating new money it means reducing their ability to pay because it will be reducing the value of money and expanding the number of the debt when they use only one currency. Creating one currency to financing strategic projects (underlying based on equity) while let the another one as a trade currency oriented (underlying based on gold/dollar), is the best way shaping the capital formation in the fastest and efficient way. And the result is constructing the economic resources –employees- will be utilized in the maximum capacity and creating significant development in economic growth. This is what happening in China with its Yuan and Renminbi.

The last is taxing the land, it can be restricting the speculation of inflating the FIRE sector in which only creates the debt deflation. Since the neoliberalism excluding the debt role inside the economic analysis, the tendency for creating the public policy is only austerity. This policy have been shifting the tax from the land to the real economy –employer and employee- and burying the classical understanding that opposed for that (rent seeking economy). The result is the financial sector monopolizing the entire of mortgage debt in which burdening the society with the debt in which someday it couldn’t be paid. Shifting the tax from real economy to the land is minimizing the role of speculation, avoiding the debt deflation since the society have more money to be spent for buying goods and services. Consequently, shifting tax burden will enable the forming of capital formation. Finally, the tax revenue that will have been obtained, it could be spent for providing the social security which is pivotal for backing the society achieving better standard of living.