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Monday, 15 July 2019 09:21

Living Beyond Your Means

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     We are often told that people should not ‘live beyond their means’, that is, that no individual person, nor any corporate entity like a business or a government, should spend more money during a given period than they take in as income or as revenue. Doing so is judged to be profligate, irresponsible, and only setting oneself up for pain in the long run. For countless centuries, if not millennia, the balanced ‘budget’ has been regarded as the sine qua non of fiscal prudence and ‘sound’ finance.

     And yet, if we look at our economies over any given period of time, it is quite normal for individual consumers, considered in the aggregate, to spend more than they receive in income, for governments at all levels to spend more than they take in via taxes, and even for businesses, considered again as a whole, to spend more money (thanks to long-term capital investments), than they simultaneously receive as revenue. How can this be? How can we explain the conflict between the common theory (i.e., what should be the case: balanced budgets) and what we observe as a fact in the real world (i.e., unbalanced budgets)? Is it the general tendency of human beings to be congenital spendthrifts? Are humans innately vicious when it comes to the getting and spending of money?

     Quite irrespective of such questions concerning human nature, there is actually a technical economic reason why consumers, governments, and business typically spend, in the aggregate, more money than they receive and do not, therefore, ‘enjoy' balanced budgets. 

     It was C.H. Douglas, the 20thcentury founder of the original Social Credit movement (not to be confused with the more recent Chinese totalitarian surveillance experiment called ‘social credit’), who discovered that, under existing banking and cost accountancy conventions, the process of production, whether public or private, capital or consumer, generates costs and hence prices at a faster rate than it simultaneously distributes income, in the form of wages, salaries, and dividends to consumers. 

     In other words, there is a chronic structural imbalance in the price system and it is this imbalance that causesthe chronic unbalancing of the budgets of the three main economic actors: consumers, governments, and businesses. How does this happen?

     Well, under the existing unbalanced price system, the only way that all consumer production can be distributed in any given period and all of the corresponding production costs can actually be met is if some way can be found to get more purchasing power into consumer pockets. And the only way that the reigning economic regime can do that is to get consumers, governments, and businesses, considered in the aggregate as economic sectors, to run unbalanced budgets as a routine matter. They must spend more than they receive in income or revenue in order to ensure that additional purchasing power will be distributed to consumers (directly in the case of consumer loans, or indirectly through increasing government production and programmes and additional private production, especially capital production – hence the need for continual economic growth) so that financial equilibrium between the flow of costs/prices of consumer goods and services coming onto the market and the flow of consumer buying power can be achieved. 

     The consequence of not supplementing consumer incomes in each economic period to the level that is required to clear the market and to cancel the associated production costs is economic recession: bankruptcies and unemployment. Phenomena such as these will, of course, only further decrease consumer purchasing power in the next period, thus making it even more difficult for the previous level of equilibrium to be sustained.

     Spending more than you earn is actually the necessary means of keeping the economy afloat given the design of its present financial infrastructure. Austerity policies which, for example, aim to curb the expansion of government indebtedness, while they may appeal to puritanical or even to just common sensical notions of restraint, just don’t work unless the slack can be picked up by some other economic sector and those non-governmental budgets can be unbalanced even further. In the aggregate, unbalanced budgets are not a ‘choice’ – unless collective economic suicide be considered a ‘choice’ – but rather a necessity.

     To further complicate matters, since we live currently in a debt-money system, i.e., a system in which – for all intents and purposes – all money comes into existence and/or is injected into the economy as debt or a debt-equivalent, the only way consumers, governments, and businesses, considered again as wholes, can obtain more money so as to spend more than they receive, is by borrowing it. This typically involves borrowing the money from the private banking system directly or indirectly, with the added feature that the banks create the money that they lend ex nihilo.

     Relying on debt-money to fill the gap has many drawbacks however. It is notoriously unstable, with sometimes too much debt-money being issued, resulting in an irrational boom and demand inflation, or with too little, resulting in economic anemia. Since debt must be contracted at a faster rate on average than debts are repaid in order for the re-balancing of the price system to be effected, outstanding debt tends to grow exponentially and become unrepayable in the aggregate, with all of the interest that is charged on it in perpetuity and the consequent centralizing of wealth, power, and privilege in fewer and fewer hands. When debt-loads become too heavy and the various economic sectors are unable to take on any more debt and/or banks are not as inclined to lend, the rate of debt-increase necessary to maintain equilibrium cannot be sustained, and a financial crisis ensures. It also incentivizes all kinds of economic waste and sabotage in the form of forced economic growth, or growth for the sake of growth and not so much for the resulting consumer production – all environmental considerations notwithstanding. Furthermore, since debts must eventually be paid back, the stress of repayment, which erodes consumer income in one way or another, leads directly to cost-push inflation as people demand larger salaries and wages to maintain the standard of living. These increases constitute additional labour costs, however, and these must eventually be recovered by business or governments in the form of increased prices and taxes. As costs/price rise, the buying power of each unit of currency is diminished.

 

 

 

 

But we need not live under a 100% debt-money system; that all money must be issued as a debt or as a debt-equivalent is a human convention and can be changed. There is an alternative. Some portion of the money supply, the right proportion, could and should be created and issued as ‘debt-free’ credit.

It was C.H. Douglas who proposed that the ‘more money’ that the economy needs in the form of consumer purchasing power in order to balance the price system should be injected periodically as a ‘debt-free’ input. Instead of governments, consumers, and businesses spending more than they receive as a means of bridging the gap and borrowing the difference from the banking system (thus unbalancing their budgets), the increase in the volume of consumer buying power that the economy requires for equilibrium could be created by a National Credit Authority and issued to or on behalf of consumers as a kind of ‘gift’. The direct payment would come in the form of a National Dividend and would be distributed independently of employment status. This would allow people to enjoy more and more leisure time; a reality that the physical economy can no doubt afford as we no longer require the work of every able-bodied adult to make the economic machine function adequately enough so as to vanquish scarcity. The indirect payment would come in the form of a compensated price discount at the retail counter.

The benefits of such an adjustment to our financial infrastructure are countless. Business and government could – apart from any expansion required by independent consumer demand – finally run balanced budgets, and consumers, considered as an aggregate, would never be put into the position of having to spend more money than they had received.

But perhaps the most salient improvement – at least from the original standpoint of this article – is that it would finally become financially impossible to live ‘beyond our means’. As a matter of strict fact, it is physically impossible to live beyond our means. If the financial system accurately reflected reality, it would be financially impossible also. What the Douglas Social Credit proposals envisaged was a financial system that, for the first time, would provide an accurate representation of our real physical wealth, both potential and actual (which is enormous). As a result, it would become possible for the community as a whole to live at a much higher standard of living under vastly improved conditions (i.e., increased leisure, greatly decreased financial pressures, and the elimination of the various nefarious effects of the debt-system). In such a world, balanced budgets in the aggregate would, for all intents and purposes, become the norm … not because the various economic sectors would suddenly become virtuous, but because it would become impossible for the economy as a whole to ‘spend more money than it receives’.

Last modified on Monday, 15 July 2019 09:30

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