Means to ease struggle with dynamic interest rates

[sookster]

So this maybe a long one, but I want to thoroughly explain my train of thought when talking about this particular regulation. I think it is really important to explain everything as best I can, because I can already anticipate people from a certain ideology not liking this regulation. But with this regulation not only will the gap between the rich and poor decrease, but there will be less struggle experienced when interest rates are manipulated to combat price trends.

My current understanding of the flow of money (it could be way off), is that The Fed loans an inflationary amount of money to the U.S. Government for treasury bonds and interest that is printed. In order for there to be economic growth there has to be inflation. We all know too little or too much is not good for the economy, but an increase in the amount of available money allows for people and organizations to accumulate more wealth. When the government, through deficit spending, releases money into the economy, the method by which money is removed from the economy is interest rates. Interest rates takes a sum of money and transfers it to the banking sector. When more and more money is taken out of the economy, there is less available money which inherently increases the value of the dollar. This means the rate of inflation decreases whereby keeping overall prices down. Another way to think it through, is that if there is higher interest on loans, there is less disposable income which forces businesses to keep their prices down. Therefore the opposite is true. When there are lower interest rates there is more disposable income which allows businesses to increase prices; there is more money present in the economy decreasing the value of the dollar.

There is more to it of course, but this is where I want to focus for this post. If we were to take the most recent stimulus bill for I believe 780 billion dollars, that capital was pretty much infused into the economy. With such a large influx of money, there generally is enough money for business owners to increase their prices to obtain more profits. The next logical step is to increase interest rates to battle the increase in prices. The problem is that with increase in overall prices, there is less disposable income to payback or obtain another loan. Loans are the driving force for the economy. Not only do they provide funds for various projects that contribute to the economy, but loans are the prime mechanism by which the money supply expands. Without an expansion of the money supply, there is no more economic growth. This can be bypassed by issuing loans with no interest, but this still does not battle the price problem. Essentially, people have to struggle with less disposable income. When getting a new loan it has to be with a higher interest rate, and people have to pay for goods and services that just cost more. For some people, it is a double wammy so to speak.

But this struggle of having less disposable income due to inflation and interest rates, could be minimized if we were to regulate the amount of money a company reinvests into its labor force. In other words, I believe we should force profitable companies to reinvest their profits to their employees. With the added income for employees who work for solvent businesses, the increase of funds would allow for more disposable income. It would also allow for more loans to take place. More loans, more money for the banks, more money for the economy, and more stuff to fuel economic growth. The struggle because of inflation and interest rates would decrease. Finally, the gap between the rich and the middle class would decrease, which would in turn combat inflation for everyone; it would benefit everyone.

I know this regulation would go against principles with regards to big government. I do agree that we need to watch what we regulate. Simply, freedom is crucial for economic growth. In the same token, too much freedom can result into systemic risk. But I think basing decisions solely on whether or not there is expansion or contraction of government power is too simplistic. I think there are good times to increase government regulation, and I think there are bad times to increase government regulation.

I think it would benefit everyone if we forced solvent businesses to payback to their employees.

What do you guys think? Are there any other ideas? Do you think the majority of people would get behind a regulation like this?

 

[WCH]

We're already getting soaked.

 

[csbrown28]

My current understanding of the flow of money (it could be way off), is that The Fed loans an inflationary amount of money to the U.S. Government for treasury bonds and interest that is printed.

The government authorizes the Fed to sell bonds, which are really just promises to pay back the purchaser the value of the bond plus interest. Once the bond is sold the Fed can then authorize the selling of that debt (i.e. make loans) to the government or the public. It's important to remember, as I didn't see you mention it, is that because money is debt, then all money that enters the economy has a date in the future that it must be removed to pay back the debt that originally created it, plus of course, interest. This means that if the fed didn't print another dollar over the next 30 years, then virtually all the money in circulation would be needed to pay back outstanding debt. Failure to borrow means a shortage of money. Massive deflation.

In order for there to be economic growth there has to be inflation.

I don't think this statement is universally true. First there are two types (there are more but to keep it simple) of inflation, cost push and demand pull. Costs are "pushed" higher when there are large scale shortages, be it oil, food, electricity and labor to name a few. Costs rise simply because of scarcity of goods that have widespread demand. The Oil embargo of the 70's is a good example. Demand pull is when people have more money to spend and increase demand for goods. In this case large scale inflation only occurs when the demand for goods and services that have wide spread need can no longer supply at the rate they are being demanded at. This is usually because of a shortage of productive capacity, labor and/ or raw materials....

If new money is introduced and productivity can keep pace without the need for widespread investments (i.e. shortages in labor, infrastructure, capital), then little if any inflation takes place.

We all know too little or too much is not good for the economy, but an increase in the amount of available money allows for people and organizations to accumulate more wealth.

Remember you can have less money but a greater number of transactions or more money and fewer transactions and the effect is about the same. In other words, every time a dollar changes hands, it effectively adds one dollar to the GDP of the nation, even though it's still one dollar. The velocity of money is an important factor when considering the effect of inflation. After the 2008 bust, it's not tat there wasn't enough money, it was that banks had little incentive to lend it. QE, at least in part is about making the lending of money more attractive for banks, thus increasing the velocity of money.

When the government, through deficit spending, releases money into the economy, the method by which money is removed from the economy is interest rates.

The repayment of a bond in the form of interest on the debt has in recent years remove 300-400 billion dollars per year.

Interest rates takes a sum of money and transfers it to the banking sector. When more and more money is taken out of the economy, there is less available money which inherently increases the value of the dollar.

This is where things get really cloudy, because an increase in value sounds good, but generally the restriction on capital means layoffs, defaulting on debt and delay in future purchases (depending on the rate of deflation). Overall it is the contraction of the money supply that caused, or at the very least, made the great depression so bad. Only people with excess money win during periods of deflation.

This means the rate of inflation decreases whereby keeping overall prices down.

I don't think this is the way it works. The price declines because of a lack of demand caused by a decrease in the money supply. Maybe that's the other side of the same coin...?

Another way to think it through, is that if there is higher interest on loans, there is less disposable income which forces businesses to keep their prices down. Therefore the opposite is true. When there are lower interest rates there is more disposable income which allows businesses to increase prices; there is more money present in the economy decreasing the value of the dollar.

Again, this is not a universal statement. It really depends on labor, capital and infrastructure availability.

There is more to it of course, but this is where I want to focus for this post. If we were to take the most recent stimulus bill for I believe 780 billion dollars, that capital was pretty much infused into the economy. With such a large influx of money, there generally is enough money for business owners to increase their prices to obtain more profits.

The problem with this idea is that money of that money went into the hands of very, very few people. Which is why such a large percentage of the recovery went into the hands of just a few percent of the people. Since that small percentage couldn't, by themselves increase demand on goods and services, there has been little inflation,even though the money supply has increased. The money is not finding it's way into the hands of the bottom 80% of the population and the top 20% doesn't spend enough on Main St. to keep the bottom 80% gainfully employed.

But this struggle of having less disposable income due to inflation and interest rates, could be minimized if we were to regulate the amount of money a company reinvests into its labor force. In other words, I believe we should force profitable companies to reinvest their profits to their employees.

I think you close to something here, but I have to disagree, you can't "force" a company to spend their money on employees, but you can incentivize companies to provide work (which is really just capturing capital in trade for labor),but of course this only works if their is a demand for the products the labor provides.

With the added income for employees who work for solvent businesses, the increase of funds would allow for more disposable income. It would also allow for more loans to take place. More loans, more money for the banks, more money for the economy, and more stuff to fuel economic growth. The struggle because of inflation and interest rates would decrease. Finally, the gap between the rich and the middle class would decrease, which would in turn combat inflation for everyone; it would benefit everyone.

I think you see a problem, but I'm not certain you can really see what it is. Too much money is moving to the top and we need a mechanism to allow those at the bottom to re-earn it. When the wealthy remove money from Main street and use it in global capital markets, foreign investments, derivatives, these activities, simultaneously remove money from the part of the economy that most of us live in and money used this way cannot be recaptured by the bottom 80%. In other words, money must circulate from the bottom to the top and back to the bottom. The wealthy earn it though business and the bottom provides labor it get it back....Just rinse and repeat. The problem is not enough money is naking it back to the bottom and the bottom is forced to borrow to make up the difference. This of course only exacerbates the problem in the long run.

Part of the solution is for the government to stop borrowing money from the banks. The video linked above is fairly accurate (though some of it is a little dramatic). The government needs to take back the money power, that is, the government needs to print it's own money and use that money to maintain it's budget. This would virtually eliminate the need for taxes, except as a way to maintain near 0% inflation.

 

[imagep]

The government authorizes the Fed to sell bonds, which are really just promises to pay back the purchaser the value of the bond plus interest. Once the bond is sold the Fed can then authorize the selling of that debt (i.e. make loans) to the government or the public. It's important to remember, as I didn't see you mention it, is that because money is debt, then all money that enters the economy has a date in the future that it must be removed to pay back the debt that originally created it, plus of course, interest. This means that if the fed didn't print another dollar over the next 30 years, then virtually all the money in circulation would be needed to pay back outstanding debt. Failure to borrow means a shortage of money. Massive deflation.




I don't think this statement is universally true. First there are two types (there are more but to keep it simple) of inflation, cost push and demand pull. Costs are "pushed" higher when there are large scale shortages, be it oil, food, electricity and labor to name a few. Costs rise simply because of scarcity of goods that have widespread demand. The Oil embargo of the 70's is a good example. Demand pull is when people have more money to spend and increase demand for goods. In this case large scale inflation only occurs when the demand for goods and services that have wide spread need can no longer supply at the rate they are being demanded at. This is usually because of a shortage of productive capacity, labor and/ or raw materials....

If new money is introduced and productivity can keep pace without the need for widespread investments (i.e. shortages in labor, infrastructure, capital), then little if any inflation takes place.



Remember you can have less money but a greater number of transactions or more money and fewer transactions and the effect is about the same. In other words, every time a dollar changes hands, it effectively adds one dollar to the GDP of the nation, even though it's still one dollar. The velocity of money is an important factor when considering the effect of inflation. After the 2008 bust, it's not tat there wasn't enough money, it was that banks had little incentive to lend it. QE, at least in part is about making the lending of money more attractive for banks, thus increasing the velocity of money.



The repayment of a bond in the form of interest on the debt has in recent years remove 300-400 billion dollars per year.

This is where things get really cloudy, because an increase in value sounds good, but generally the restriction on capital means layoffs, defaulting on debt and delay in future purchases (depending on the rate of deflation). Overall it is the contraction of the money supply that caused, or at the very least, made the great depression so bad. Only people with excess money win during periods of deflation.


I don't think this is the way it works. The price declines because of a lack of demand caused by a decrease in the money supply. Maybe that's the other side of the same coin...?




Again, this is not a universal statement. It really depends on labor, capital and infrastructure availability.



The problem with this idea is that money of that money went into the hands of very, very few people. Which is why such a large percentage of the recovery went into the hands of just a few percent of the people. Since that small percentage couldn't, by themselves increase demand on goods and services, there has been little inflation,even though the money supply has increased. The money is not finding it's way into the hands of the bottom 80% of the population and the top 20% doesn't spend enough on Main St. to keep the bottom 80% gainfully employed.




I think you close to something here, but I have to disagree, you can't "force" a company to spend their money on employees, but you can incentivize companies to provide work (which is really just capturing capital in trade for labor),but of course this only works if their is a demand for the products the labor provides.




I think you see a problem, but I'm not certain you can really see what it is. Too much money is moving to the top and we need a mechanism to allow those at the bottom to re-earn it. When the wealthy remove money from Main street and use it in global capital markets, foreign investments, derivatives, these activities, simultaneously remove money from the part of the economy that most of us live in and money used this way cannot be recaptured by the bottom 80%. In other words, money must circulate from the bottom to the top and back to the bottom. The wealthy earn it though business and the bottom provides labor it get it back....Just rinse and repeat. The problem is not enough money is naking it back to the bottom and the bottom is forced to borrow to make up the difference. This of course only exacerbates the problem in the long run.

Part of the solution is for the government to stop borrowing money from the banks. The video linked above is fairly accurate (though some of it is a little dramatic). The government needs to take back the money power, that is, the government needs to print it's own money and use that money to maintain it's budget. This would virtually eliminate the need for taxes, except as a way to maintain near 0% inflation.

Pretty awesome point by point response, and 100% accurate.