Money, money, money… the world goes around

Alison Wilding OBE, Untitled, 1990
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By FERNANDO NOGUEIRA DA COSTA*

If the income goes well, the money goes unnoticed when it is used in superfluous products and soon forgotten desires.

Liza Minnelli, after singing the chorus of money, money, in the classic musical Cabaret, tells the advantages of being rich. He says: “money makes the world go round… We can be sure of that when we are poor. If you don't have heating in winter, not even shoes and a coat, you're thin and you ask the fat shepherd for advice, he'll tell you to pray... Like money falling from the sky... But when you're hungry, you have to go into debt to survive!

Money serves two purposes: one, when it only takes the form of money, is to be a unit of account and a medium of exchange. Another, when he contemplates these functions and has enough left over to have a reserve of purchasing power, he becomes fully money.

By having these two purposes, it serves two masters: one who has the objective of obtaining it only to meet the “necessities of life”, generally working for him, and another who has the goal of storing it not only in the form of fully-fledged wealth. liquid, linked to its immediate purchasing power. Since there is money left over, you can accumulate it in a financial reserve, so as not to bear the opportunity cost: losing income in compound interest, if you do not invest it in fixed income.

Throughout history, the first group (those who don't have it in reserve) have been called workers (formal), proletariat (informal) or "the poor". They have only “offspring,” that is, children. The second group, made up of his hoarders, were called capitalists, investors, or simply “the rich”.

The workers-proletarians earn money by selling their time, employed as a labor force. Venture capitalists make more money by "lending" others the use of their money in exchange for a promise to receive an amount above the loan amount (by means of a debtor's debt proof instrument), or a right of ownership in the debt. business (we call it “equity” made up of “shares”), or a real estate property.

These two groups, together with the government (Executive Power and Legislative Power), which define the rules or laws, are the main actors in this drama staged in capitalism. While both groups can benefit from loans and debt, sometimes only one (lender) gains and the other (debtor) suffers as a result of the transaction.

The financial assets of one economic agent are the financial liabilities of another, due to promises of future delivery of more money. When claims on financial assets are very high relative to the money immediately available to service them, a large amount of financial deleveraging will have to take place to fulfill the obligations on the assets.

Credit is, under the confidence of risk assessment, the supply of purchasing power. This is granted in return for a promise to pay. This is the debt. The problem with debt comes when there is inability to pay it. The assessment of whether the rapid growth of credit and/or debt is good or bad depends on whether the credit is directed, directly or indirectly, to the generation of added value and, through it, the debt can be paid.

Since credit creates purchasing power and debt, it is more desirable or not depending on whether borrowed money is used productively enough to generate enough income to pay off debt. Credit and/or debt, when producing enough income to pay for itself and to spare, is rewarding by providing more money.

For example, if a government avoids investment in the infrastructure necessary for the economy and the well-being of society out of sheer conservatism, insistent on not borrowing to build such a thing, it commits austericide (austerity + suicide)! Whether this is good or bad for society depends on judging the burden of public debt against the opportunity cost of not having infrastructure.

You, whether you are a worker or a capitalist, always create a cycle when borrowing money. Buying something without being able to pay for it right away means spending more than you earn. You are not just borrowing from your lender. You are borrowing from your future, as debt can be seen as the anticipation of expected future earnings.

Essentially, you're committing time into your future when you'll need to spend less than the amount earned from using third-party resources in order to pay it back. It generates a cyclical pattern of borrowing/debt, spending in the present beyond what was accumulated before, and then spending less than the apparent spending potential, given the income received in the entrepreneurial enterprise or successful individual work.

This is as true for a national economy as it is for an individual. Lending money sets in motion a series of predictable events. They are capable of repeating themselves in similar patterns in different economies.

In a market-based economy, booms and busts in economic cycles, related to the credit and debt portfolio, occur for perfectly logical reasons. These sequences, however, are not predestined to repeat in exactly the same way, nor last for exactly the same amount of time.

During booms, borrowing supports spending and investment. In turn, they support yields and asset prices. These support new loans for spending, whether on goods and services or for further accumulation of financial assets. Debt increases spending and productivity in generating income.

Borrowing creates self-reinforcing upward movements. They end up reversing to downward movements in feedback. And these are then reversed...

Typically, debt crises occur because debt service costs rise faster than the rate of growth in income needed to service them. This causes financial deleveraging.

Ray Dalio, in the book big debt crisis (Big Debt Crises. Bridgewater), shows four types of levers that public policy makers can use to reduce debt and debt service levels in relation to the income and cash flow levels needed to service them: (i) austerity or spending less ; (ii) defaults or debt restructurings; (iii) issuance of money by the Central Bank to acquire public debt securities or guarantee loans to banks; (iv) increasing the progressive tax burden for transfers of money from those who have more than necessary to the needy.

Each of these levers has different impacts on the economy. Some are inflationary, although they stimulate growth, for example, “printing money”, when in full employment, while others are deflationary, and help to reduce debt burdens, for example, austerity and defaults.

Those levers shift around who benefits and who suffers – and for how long. Decision makers are placed in the politically difficult position of making these choices in dealing with the debt crisis and they are rarely appreciated.

This imbalance between the volume of cash credits and the money supply, that is, the cash flow needed to service this debt, has commonly occurred in the cycles of economic history. It has always been resolved through a combination of the four aforementioned levers. The process is painful for all economic agents. Either it causes a conflict between the worker-proletarians and the capitalist-investors, or it can get so bad that new loans are hampered or avoided. Hence comes stagnation.

Large debt cycles can generate major crises such as deflationary depressions or inflationary depressions. In the former, policy makers respond to the initial economic contraction by lowering interest rates until they approach zero and this lever ceases to be an effective means of stimulating the economy.

Inflationary depressions, in which many debts are denominated in foreign currency, are especially difficult to manage because policymakers' abilities to “spread the pain,” that is, to socialize losses, are more limited. The withdrawal of capital with repatriation or the flight of foreign capital dries up loans and liquidity, in addition to, at the same time, the consequent depreciation of the national currency producing inflation.

If the income goes well, the money goes unnoticed when it is used in superfluous products and soon forgotten desires. If the income goes bad, he and his creditors are crucified as if they were to blame for the problems. Money, money... the world goes around.

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Support and enrichment network. Available in https://fernandonogueiracosta.wordpress.com/2022/09/20/rede-de-apoio-e-enriquecimento-baixe-o-livro/

 

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