Technology has always drastically changed economics, and this time we are putting it on steroids. It is stripping away many flawed assumptions and exposing some basic weaknesses in long-held economic belief.
An example is the failure of QE to entice banks to increase lending. The answer is simple and it’s hard to believe that the people responsible for steering our economy were actually ignorant of it. Banks don’t lend from reserves, so loading up the Fed’s balance sheet with cash had no effect. Banks qualify lenders and the Fed capitalizes the loans as a normal course of business to enable interbank transfers, so what purpose would be served in banks divesting from interest-bearing Treasury bonds to take on liabilities in cash?
As the borrowers pay down their loan principal the lending banks shed those liabilities as quickly as possible to avoid paying the overnight rate on any shortages. Paying off a bank loan actually diminishes the total of money in circulation as any principal included will balance those liabilities to zero. The balance sheet shared between the Fed and Treasury makes this a zero-sum game in terms of actual money creation, which may account for the confusion surrounding its minimal effect on lending.
Another long-held belief being shredded is the assumption that more money in circulation creates inflation. This was true when our dollar was pegged to a fixed exchange rate for gold, but we left the gold standard domestically in ’34, so orthodox economists have some serious ‘splainin’ to do. It should have been obvious that monetary inflation is not possible with a fiat currency, but old and established institutions don’t give way easily.
Even a well-circulated paper titled “Taxing For Revenue Is Obsolete” written by the ex-President of the St. Louis Federal Reserve Bank, Beardsley Ruml, in ’45 didn’t dent the armor of the old school economists and the quantity theory of money persists today in political/fiscal policy. This is partly due to the advantage given to private sector banking by austerity fiscal policy, but that backfires in business cycle downturns when the lack of growth needed to roll over private debt in lieu of public money to retire it becomes an issue and defaults rise sharply.
As technology continues to decimate jobs (China is experiencing unemployment problems from tech also) the traditional economics practiced for the last 40+ years that denies the government’s role as the monopoly currency issuer and the fact that the US dollar is a no-cost commodity to Congress is going to fail us, again. Once the tipping point is reached where the lack of money in circulation is detrimental to corporate profits and the people will no longer tolerate direct transfers of dollars to business, making them irrelevant, the political tide will turn and the people will have to be supported by their government via money creation.
The automatic stabilizers and safety nets that have been whittled away to virtual non-existence will not suffice to quell a bloody revolution, or support supply chains, and the corrupt lapdog politicians will have to come clean with the people that they have been responsible for “any” misery and suffering for decades via corrupt political decisions, not economics. Their propaganda around deficits and the national debt will not satisfy a starving population that can see the entitled few living in unimaginable opulence and hoarding obscene fortunes. Invest in guillotines.
