If you buy a dress on your Visa card or organize a consortium to buy a company, the same thing happens—debt creates money. In every transaction, there’s profit to be taken off the top.
A perfect example of the transformation of our society into a credit economy is the change in the way we finance higher education. States, and even cities, used to be in the business of building universities that were free, or nearly so. These were financed, up front, with tax money as an investment in our human infrastructure. Then, in 1965, the student loan program was invented. This changed the higher education business into a debt creation business and created a whole new creditor class, college graduates, who, were handed, along with their diploma, debts of ten to fifty thousand dollars or more.
The number one industry in America today is the money business—debt swapping. In a closed economy, that might have a positive effect, as people look for something to do with their money.
The first is that the Ayn Rand fantasy is a fantasy. For the most part, when people with millions of dollars get an extra hundred thousand, or several hundreds of thousands, or even millions, they invest it passively, in financial instruments and real estate.
I’m writing this on a Mac. When I bought it, the money went through American Express (which took a few points) to Apple’s headquarters in Cupertino, California, where Steve Jobs dipped in his ladle, then the rest poured out though the hole in the bottom to China, where it was actually made.
That’s the economy that the statistics describe.
Lots of money is moving. As it passes through the company, the company profits. The company isn’t going to build anything, so profits are spent on executive compensation. The actual work is outsourced (the money flows out), and no jobs are created. Nor does the actual business grow very much either, except as a middle man, taking American money and passing it on to foreign businesses (and oil producers).
Remember those old movies, with 200 men at the factory gate? A foreman inside with three jobs to give out, saying, “You. You. And you. The rest of you, go home.” Those three lucky stiffs didn’t demand health insurance, pensions, or job security.
Now it’s India, Bangladesh, Malaysia, the Philippines, Mexico, Honduras, China, Korea, and many others at the gate. American companies tell their workers they have to be competitive. Not only do wages go down, but benefits begin to disappear.
This is combined strong anti-union and anti-worker efforts by government, supporting the anti-union and anti-worker efforts of major corporations.
This may be bad for America as a society, but the people in the money business love it.
Really high inflation, and worse, runaway inflation, is, of course, a threat to everyone. But moderate inflation, with rising wages, favors debtors and hurts creditors.
So how can you pump out money while keeping inflation down?
In Bushenomics you do it by keeping a lid on earned income. Even driving it down. Millions upon millions of people earning a little bit less take away from the pressure of a few people earning millions upon millions more.
That, along with, the flood of low cost goods from low wage countries, helps balance out the inflationary pressure of rising costs in certain particular industries, like oil, health care and higher education.
If we are to invest public funds—through government borrowing or spending or through simply spending tax revenues —we have to be aware that rich people running around with bags of money won’t necessarily do what is good for the wealth of our nation. They may run us into bankruptcy, the way the smartest guys in the room ran Enron into bankruptcy.
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