Tract on Monetary Reform: Monetary Policy

Sept. 26, 2010 - PRLog -- When we create investments through the use of non conventional monetary tools, that is Quantitative Easing, all the other conventional and non conventional tools having being exhausted we create more investments from those who can enjoy the credit that is those who can emit bonds, if those really use those credits to invest, when most of them use that credit to buy back stocks and/or to distribute dividends and or to roll their previous debt and/or make acquisitions (M&A). Those successful borrowers are those who can emit corporate bonds down to those who can emit junk bonds.

Those with lower credits can't borrow and are closing down their businesses decreasing both demand for investments and demands as they lay of their workforce.

At the same time those companies that are able to attract capital are, because of the prevalent unemployment paying their workforce less and less.

This situation is for the present moment increasing the income/wealth gap which decrease the marginal return on investment and the necessary level of long-term yields in order to maintain the prevalent weak growth of the economy. (the richer have a high marginal propensity to save, while the poorer have a high marginal propensity to consume. Profit being a function of consumption that return is going down.)

Investments don't trickle down enough to create the necessary level of consumption.

No matter how gigantic the QE might be it is running after lower and lower marginal rate of return.

Bernanke Says U.S. Economic Growth Too Slow Even With Fed Bond Purchases
http://www.bloomberg.com/news/2010-09-24/bernanke-says-ec...

If the yields on saving is always positive it is not impossible that we could get to a negative marginal return on investment to sustain this weak economy.

Quantitative Easing has Worked:

That is true during the last year Quantitative Easing has succeeded in providing the capital in order to keep investments alive. That is because before the Great Recession the marginal return on investments were sufficiently high so when the crisis did occur QE was able to restore some sort of investments. But now the marginal return on investments have decreased substantialy and will continue to do so.

Note: the marginal return on investments is much lower than the average return on investments and it is these marginal return on investments that depends the growth or lack of of the economy.

Supply Side Economics:

The idea of Supply Side Economics is that supply creates its own demand. That is true when interest rates are above 0% and we can adjust the marginal return on investments till they meet the demand. This is obviously not the case today.

State of the Economy:

We are confronted with a dual economy in which the bigger corporation make higher and higher profits and the smaller businesses are confronted with an offer of capital that have to take into account a high risk of default when at the same time their return on investments are going down. The gap between the offer of capital and the demand is wide and can't be cleared.

At the same time the richer with low propensity to consume get richer and the poorer with a high propensity to consume get poorer.

For the present moment this dual economy seems to function for the richer but at some time the demand for their products will be so low that they will also be confronted with the same economic woes as the weakest both in term of investment5 and consumption.

Conclusion:

At the present moment increased investments have low social value when increased consumption has a high economic value.

In order to alleviate those economic woes wee need to create, as fast as possible, a new credit free currency that will solve the credit crunch and bring immediatly incremental jobs, consumption and later investments to the present system.
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Credit Free Economy
More Jobs, No Debt, No Fear.
Prosperous, Fair and Stable.
http://post-crash.com/
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http://www.youtube.com/watch?v=dlPjxz4LGak



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As we will have exhausted all our other options, I will, on "Market Crash: be Prepared" display a series of videos presenting my alternative to the Deep Depression:

An ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to -- to exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is, yes, I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact. A flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak. That's precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

History teaches us that men and nations behave wisely
once they have exhausted all other alternatives