August 13, 2012


Trickle down economics has left us all thirsty!

By Melvin J. Howard

Most advocates of the “trickle down” theory often overlook a key part about our monetary system, is that it is a ZERO SUM GAME, because our money is entirely based on debt. The more of a positive net money balance I have, the more of a negative balance someone else has. I can put my positive balance to work earning more money, while I either sit around and do nothing, or go and work for more money. So the most likely situation for a positive balance person is that their positive balance will keep growing. Also, in the zero sum game, means that someone else’s balance gets more negative. The negative sum person would be unlikely to get a loan to start his or her own business, and so would have to go work for someone that already has money. Under current wage structures and interest rates for "high risk" customers it would be difficult for many negative balance people to ever get to a positive balance position no matter how hard they work. They have the added disadvantage that they can’t put a positive balance to work earning more money. Most likely their balances will get more negative, while the people that already have money will get more money to balance out the zero sum game.

With positive money balances always earning a positive return on capital, combined with no requirement for redistribution of wealth, which is implicitly prohibited by neo-liberal policy because it eases such governmental intervention, the results are clear. The rich will keep getting richer and the poor will keep getting poorer, and the more interest bearing debt-money you "invest" in developing nations the worse (not better) the situation gets.

Those that believe that the "trickle down" effect will result from investment in poorer (more negative balance) countries and neighborhoods demonstrate a poor understanding of the monetary system. In fact they believe in something that cannot possibly materialize, and is evidenced by the consequences of investment in developing nations. This situation is compounded by the fact that the banking system must not fail. What this really means is that the major section of the world-banking sector - namely the Western financial institutions - must not fail. This would actually be disastrous for rich and poor alike, as in the great depression. To reduce risk of banking system failure (which ultimately comes from sudden loss of confidence or trust in the system) institutions such as the IMF and World Bank have evolved into mechanisms for preventing banking system collapse. Unfortunately, however, what these mechanisms amount to is transferring the cost that could collapse the banking system outside of the banking system. And these costs end up being borne by those who have the least say in the financial system. This actually distorts free markets where, ideally, investors take personal responsibility for the risks they assume. Those that support so-called free market ideology and think that today's markets are actually consistent with this ideology are seriously misguided as proof by the recent global financial crisis. They overlook the biases and distortions built into today's markets, making them very inefficient and highly volatile.

Along these lines, it could be argued that much of the hardships forced upon the people of Indonesia and other Asian countries after the Asian financial crisis were the result of excessive risks taken by Western financial institutions in search of large returns or profits. It turned out that if these institutions were to bear the full costs of the risks they took leading up to the crisis then the whole financial system may have faced collapse. Through the IMF bailouts they effectively passed these otherwise bankrupting costs to parts of society that would not threaten the financial system, because they are not costed in its accounts. This, as usual, meant the poor, workers and Mother Nature, who form the balancing item of the biases built into today's unfree and inefficient markets.

Banks are supposed to manage risks to prevent themselves from going insolvent or losing market confidence. Regulators and supervisors are supposed to be watching to make sure they actually manage these risks both in their own interests and to avoid broader financial crises. In this fashion the regulators should represent the public interest to ensure that banks are not taking such excessive risks that the public may eventually have to bail them out to avert a financial disaster. But more and more it seems that crisis prevention and exercise of the precautionary principle are being pushed out the back door in favor of the wishes of a global finance sector that wants less supervision. It prefers a system of cure (in the form of bailouts) after risk taking gets out of hand, to the publicly preferred system of prevention whereby financial players take on less risk and accept lower returns.

This preference for cure over prevention is encouraged by the bailout mechanisms. One "cure" (or bailout) leads to another crisis down the track, leading to another bailout, another crisis and so on. For every bailout income and wealth gaps increase, because the funding of the bailout must come from places that are not accounted for in the financial system. This is simply because the financial system would be put at risk if the full costs of the risk taking were born by it. Then investors would lose confidence and the whole financial system may collapse. The costs that do not appear on financial accounts are additional burdens to the poor and excessive natural resource extraction. In effect, that is what funds bailouts so that the cost of the bailout will not hit the books of the financial system. This is the mechanism whereby risk takers do not take full responsibility for the risks they assume but rather pass that responsibility on to those outside the financial system. This system of cure over prevention obviously provides higher overall returns to the banking system than would a corresponding regulatory regime focused on prevention.