11.1 Methods of capital redistribution – inevitability of state debt
As employees and businessmen have strong tendency towards profits hoarding ( capital accumulation) without certain mechanisms ( as defence against human greed) that allow for its return to circulation
( capital redistribution) the economy would soon go bust.
So there is a rule: if you want to be millionaires and billionaires , OK. We will let it happen.
You can withdraw from circulation certain amount of money, which you can call „yours“ but:
1. It is expected that if you are not able to spend or reinvest these profits you will return them to circulation in the form of buying of state debt.
This is the first line of defence against unlimited accumulation of capital – its voluntary return in the form of government financing.
So missing buying power in the amount of profit is supplemented by dotation from various government programs, exactly matching the profit withdrawn from circulation. The result is macroeconomic equilibrium where it is possible to achieve planned sales, because buying power of citizens is increased by government dotations.
2. In case businessmen are not willing to finance state debt ( for various reasons, whether economical or political) and keep their money in their bank accounts, there follows second line of defence:
Banks alone will provide this capital to the government if they are not able to use it otherwise.
So businessman who earned millions and is not able to put them to further use or lend them to the state will do so even without knowing it and nobody asks him..
From the picture it is visible that financing of buying power through buying of state debt indirectly – through banking system is not possible in such volume as directly by companies and individuals. The reason are mandatory minimal reserves, which every bank has to keep ranging at 8-10% and these are lowering its ability of engagement. Even if the bank would be willing to invest into state debt, it cannot. Of course it does not mean that banks are investing all free capital into state debt.
It is a great and incorrect myth that savings are automatically converted into investments.People somehow implicitly assume that ALL savings are converted into investments but this couldn´t be further from truth.
Banks apart from keeping mandatory reserves are also creating voluntary reserves based on expected losses and also because there is lack of business opportunities or simply they lack the will to lend
( either because of fear of nonrepayment or from political reasons – for example if certain state needs to finance its deficit so they will not provide the money because their owners have political agenda).
If the banks decide not to lend – and that is happening right now, there comes the last defence against human greed :
3. The central bank will lend the money to the government as a lender of last resort.
With this last option how to keep economy afloat central bank is providing money to the government and creates new money to buy state debt and so supplements missing buying power.
The problem with this method is in the fact that this newly created money fall through the cogs of economic machine quite impotently, landing at the accounts of the same people who refused to lend to the government.
So noncooperation pays off. If central bank does not want to let the economy tank it must add new money into the system which at the end arrive at the accounts of the same people that forced such policy.
The worse aspect of such policy is its international impact:
If new money just pile up in the accounts of receivers, so be it.
But what if their receivers decide to invest abroad ?
Whether we are speaking minerals ( oil, coal, gas, iron ore....) or invetsment units, their business partners ( it they are not total fools) must have serious doubts about value of such funds: they are coming directly from printing press and their value is zero.
If they would accept them without objections, noncooperating subjects could continue in their position towards inner economy and as central bank would be saving the situation by supplementig new resources they would be able to buy the whole world – for nothing.
Therefore it is an inevitable consequence that after longer term quantitative easing such currency depreciates or is being rejected at all in international trade.