REPUBLICAN PARTY NEWSLETTER
For a Civic and Constitutional Republic
Issue No 39 Friday 05 June 2009
Highlighting news stories important to the Civic Republican view, particularly those that are overlooked or little covered in the main media.
We know the story behind the failure of America’s two biggest car manufacturers, General Motors and Chrysler. Failure to adapt to the era of more energy efficient cars, continuing to make “gas-guzzlers”, sclerotic work practices, over-extension into the international arena setting up in foreign countries worldwide, amplified pension commitments, failure to innovate and poor management. The inevitable slant that is put on every mention of these two bankruptcies is that somehow in all of it justice is being done. Exactly what sort of justice we may not be so sure of.
Is it the justice of the market place? Is it justice for having succumbed to union pressure for securing greater privileges for employees? More likely the justice that is being done here is the justice that says that those who contribute to the despoiling of the planet will surely get their comeuppance. Those big heavy vehicles look like motorized dinosaurs lumbering into the new era of smaller and cleaner. The justice could be ecological - but more than that. It is the ultimate justice that is dished out to those unfit for the future. They die out according the Darwinian principle of natural selection. No tears necessary then. Good-bye and good riddance.
Or course, everyone recognizes the pain that is going to be caused to the innocent people, who were employed in the manufacturing enterprises that were General Motors and Chrysler, is going to be horrible. The loss of jobs and even whole cities that were dependent on them hardly bears thinking about. Both were world companies. But then, so the story goes, it is all part of the global recession that is affecting millions of people in other places and other industries.
It is remarkable to note the self-assurance that these companies had until very recently. New models were continuing to be developed, including new hybrid petrol/electric cars with surprisingly good performance. Almost unbelievably, General Motors, opened a new plant outside St. Petersburg in November 2008, doubling its Russian production capacity. You don’t do that when you think you are going bust. So even allowing for the bad market positioning, how could things suddenly go so wrong?
Before attempting to answer this question, let us at least give a little thought for some unspoken, if not unrecognized, qualities in the products. While much of the world, and certainly America, is being flooded with non-descript Japanese car design, the Americans still knew how to build cars with style and character. Of course, it is all a matter of personal taste but if you put a Chrysler 300 up against a Lexus, the former has a real street presence, if that is what you want, whilst the latter is so bland as to be pretty unnoticeable. If you put a Hummer up against one of the identikit Japanese 4x4’s, the former makes you look, the latter does not. But, of course, we are not supposed to admit that. It is almost as if there is some sort of inverted cultural imperialism at work here. And American cars are well engineered. They have to be to cope with the immense distances involved in traveling in the US.
But let us return to this idea of justice being done with the demise of these companies. Behind this statement must lie the assumption that money, and the way the economy works, truly reflect underlying realities. So if the figures just don’t add up and the company goes bust this must mean that something was truly wrong, right? The way money works in the American economy (or ours) is felt to model reasonably accurately the way the world actually is, and the way it has to be. Although we are in the midst of the biggest banking crisis ever and that the demise of GM and Chrysler is following on the heels of this, somehow it must be the car makers themselves that “got it wrong”.
We hear the same view expressed in Britain as, for instance, when Woolworths went bust. It also followed on from the start of the banking crisis, but, surely, the company should have closed years ago. It did not deserve to survive. It had no future. Ironically, these arguments are never applied to those companies whose business money is – the banks. They get trillions of dollars of bailouts. The manufacturers and retailers get little or nothing.
What we need to recognize in all of this is that the very economic system that all countries use is fatally flawed. What is happening in the money economy is decidedly not a true reflection of what is happening in the real economy of manufacturing and providing services. The problem lies in the way we create money. Only when we understand and correct this basic feature of our system will what happens in the money economy truly reflect what happens in the real economy.
All but a tiny fraction (less than 3%) of the money we have in the economy has been created by private (i.e. private until they had to be nationalized) banks. All this money has interest attached to which, for most of the time, will be being paid by someone somewhere. This may be paid by individuals but a huge amount of it will be paid by companies like GM and Chrysler. It is the interest payment on loans that the companies had to take just to keep going and innovate (which they did) that created such a big hole in their trading positions. It is instructive to imagine what would have happened to these companies if, things had been quite different and, they had had no debts.
Well, for one thing they almost certainly would not have gone bust. It is the steady accumulation of massive indebtedness that makes the trading position impossible. These debts take three forms. They can be simple loans from the banks, they can be in the form of corporate bonds the companies have issued to raise finance or they can be in the form of shares, which are essentially loans from the shareholders. All these debt carrying loans are entered into and become established features of the company’s trading because money is created in the first place with debt attached to it.
Imagine an alternative economic system, where instead of the banks creating money, the government created it and spent it into the economy. In the first place this has the obvious difference that taxes will be lower, for, instead of trying to “balance the books” by extracting tax revenues from companies and citizens, money is created as necessary. (I will return to the “as necessary” in a moment.) Companies thus will immediately be better off and so can find the money for investment without needing to borrow so much. Individuals will be better off and so will be better placed to spend so keeping companies’ orders healthy. But this might sound too good to be true. Does it not perhaps mean that the currency will be devalued if the government simply “prints’ money in this way?
In fact, this would not happen and to appreciate why this is the case we need to appreciate just how differently private bank-created money is from government-created money. In the first place, as has been stated, the former carries debt and this imposes a massive (and increasing) burden on the economy. But there is, in addition, a major difference in the way that the money created enters the economy.
As it is now, the banks create money when they make loans. Now some of this will be for companies to invest but this, under most years since the 1980’s, has been dwarfed by the amount that has gone into property and other non-productive assets. Now the disastrous problem with this is that the price of property gets pushed ever higher as more and more money is created by the banks. This is great business for the banks for it inflates their business sector but it is bad for pretty well everyone else - and very bad for the economy in general.
Just look at this from the point of view of your own personal finances. How nice would it be if house prices were at 1970’s levels. Impossible? Not at all. The major factor for boosting house prices since the 1970’s is the banks creating money. If they had not done that prices could not have inflated as they have for the money would not have been available.
Consider now what happens when the government creates money. If it does this under present policy it effectively gives the liquidity to the banks under the “quantitative easing” policy, but that is simply daft, as it allows the banks to retain their power over the economy. Under a sane policy the government would simply spend the money directly into the economy. This could be for capital projects (as Obama is now doing) or by giving it to the needy, pensioners and the like who, not being very well off, would not save the money but go out and spend it.
The vital point to understand in this is that asset prices will not overinflate, as they do now with the banks creating money, and so there will not be the need to create masses and masses of money. This is the point about “as necessary’ referred to above – much less newly created money will be necessary. Furthermore, the government will be much closer to balancing the books that it ever has been. The result will be benign conditions in which industry can flourish without massive debts and businesses that (under the current mad regime of banks creating money would be insolvent) would be robustly solvent, well-capitalised businesses.
This is the method for money entering the economy that we must propose. It will transform our lives and it will make us reevaluate totally what businesses have to do to be viable.
So would it have meant that GM and Chrysler would have been free to keep pushing out gas-guzzlers? There is no simplistic answer to that as the whole way that market forces would work would be so different. In fact, for the first time in history true competitive market forces will take on the powerful role that the banks have denied them. Bank created money creates such a distorted system that we really can only guess at what will happen once market forces can operate without the banks forever trying to unnecessarily push up asset prices and extracting debt and interest from all and sundry.
The examples of the American car companies have been primarily used in this piece because they are the most conspicuous current examples, but, of course, the same kind of arguments also apply to the British LDV van company which is in the process of being put into liquidation. Indeed the same arguments could be used in order to analyze the British car industry of old which, having been one of the greatest in the world, is now virtually non-existent.
But why in this have German, French, Japanese and other country’s car industries survived? Japan in the nineties had a decade long recession - but how many companies like Sony or Toyota were wiped out? These countries all share the same malign way of creating money, but at the same time their banks have a quite different attitude to supporting companies and it is this factor that for the present that has allowed them to come out on top. That said, if Japan had had a benign way of creating money it would never have suffered its recession in the first place.
To come back to the US car giants, will we ever learn to feel nostalgic for the gutsy looking Chrysler PT Cruiser? Perhaps we will eventually look at it differently, when we learn to see that the failure of the American (and British) car industries is not simply a failure to create the right models for the market. The essential problem lies in giving the power of money creation to the private banks. We cannot speak of the Hummer being wrong for the market. Its creators were trying to survive in a shifting, distorted market that no one could possibly make sense of. If GM and Chrysler failed we may come to see them sometime in the future as magnificent, tragic, and less blameworthy, failures.
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……. …….until next week
*It is not that Republics can’t change should the long term will of the people desire it, but that on fundamental constitutional issues such as this they only change gradually. Republicans are conservatives (with a small “c”).
*This practice has lead over the last few years to an intense crisis for the bank buying the "security" often did not know how well the loan was secured. In a huge number of cases this has been not very well and so the banks who bought the "securities" were taken for billions, such is the level of their incompetence and greed.
*See P25 The Grip Of Death by Michael Rowbotham published 1997.And up to date figures for April 2008 show HBoS holds just 6% capital against debt "assets". The figure for Barclays is a measly 5.1%. (Moneyweek 2 May 2008. p.4). Exactly how much of this "capital" represents solid "non-toxic" capital assets is a question many would want to ask. The banks themselves are unlikely to know.