A World in Crisis a Blueprint for Hope

The purpose of this article is somewhat technical in nature, and is designed to provide a mathematical and theoretical understanding of world economics. While some concepts may be difficult to understand and somewhat technical in nature, I ask that the reader persevere as these concepts are now shaping and will continue to shape the course of human history. I am also introducing a mathematical spreadsheet program that shows the effects of these theories on economies in a way that is very different on conventional analysis. While I am still developing this spreadsheet program, I believe that the understanding that it brings to understanding economics is such that I do not wish to delay its presentation. In this regard, I welcome any debate and improvements on the program.

This analysis is about Gross Domestic Product (GDP), the forces affecting GDP, and the effects that our present financial system has on GDP. We tend to only look at GDP only, that is total demand, and not the forces interplaying in the economy that create this demand. Thus, we fail to understand how financial imbalances are created, and how economies can grow for several years only to plunge into severe depressions, wiping out the economic well being of billions of people and concentrating wealth in smaller and smaller hands.

In view of the financial collapse of South East Asia, Russia, now Brazil, the economic death spiral that Japan is in, and the severe economic imbalances in the United States, this analysis is more critical than at any time in world's history.

Getting behind the numbers, we first must understand that demand is driven, not by income alone, but by credit expansion and income. Governments borrow to fund expenditures in excess of tax income. People borrow to fund expenditures in excess of income, and the same with business. In the short term, (which can last decades), this credit induced demand adds substantially to GDP, in fact, adds substantially to the incomes of people, business, and governments. When money is spent for example on new residential construction, this causes a rise in personal income, business revenue and profits, and then tax revenue. It does not matter whether this residential construction is financed from income or credit expansion.

However, under our present financial system, this credit expansion also leads to a massive increase in both money and debt. The problem is that debt is owed by some economic units, the money by others, and that this debt soon grows far beyond the capacity of the debtors to repay. Compounding this problem, is that most loans are not made based on the borrower's ability to repay. Loans to governments clearly fall into this area. Claims that governments can simply raise taxes to repay debt are meaningless unless we analyze the capacity of people and business to pay higher taxes, and the effect that higher taxes will have on the incomes of people, business, and governments. Many business loans are not made on the financial viability of the business, but are based on connections or some government guarantee. Loans to business in Japan, Asia, or China are clear examples. Personal credit growth is no exception as evidenced by unsolicited credit cards, or the lack of analyzing personal income in mortgage applications.

The other problem is that credit induced demand increases the incomes of people, business, and governments. That is income is inflated when debt is created. As credit expansion ceases or contracts, this will lead to a downward spiral in income, and loans that appeared to be repayable from income when loans were being created will no longer be payable from income. The economy appears to function as long as there is an expansion in credit, which in theory can continue forever, as long as banks are willing to expand credit without regard for its repayment. However, once credit expansion stops, we immediately have a contraction in demand. This is clearly self evident since credit growth is a source of demand, the removal of credit growth will cause a decrease in demand. If an economic unit obtains a loan in year 1, he is able to increase his demand by the amount of the loan in year 1. However, in year 2, demand, when compared to year 1, must decrease by the amount of the loan in year 1 plus any payments due on the loan. This decrease in demand now feeds back on the economy, causing the incomes of business, governments, and people to fall. This decrease in income again feeds back on the economy, causing a further decrease in demand, and so brings the economy into a downward spiral. Should loans actually decrease, this will only serve to accelerate the downward spiral. As incomes fall, the inability of borrowers to repay loans only increases, which will eventually topple the banks. It must be stressed that this economic contraction will happen, regardless of the ability of the borrower to repay its debts, an insolvent borrower will only increase the rate at which this happens. We must recognize the false teachings regarding the creation of growth through debt. Growth will occur as long as debt increases, but will decrease as debt is repaid, and as debt is repaid with interest, the fall in demand due the repayment of loans is always greater than the increase in demand in the giving of these loans. Some may argue that these loans never need to be repaid, and thus we will see no decrease in demand, which is the same as saying that the money created by these loans will never be spent. Money in our present financial system only has value if the loans backing this money can be repaid. If loans can not be repaid, then banks do not have the resources to repay depositors. The concept of never repaying loans and not spending the money, is the equivalent of eliminating both the debt and the money created by this debt. Both allow demand to be maintained, confer no value to the holders of the money, and all benefits to the debtors. Under our present financial system, the only way to maintain demand is to eliminate all debts and the money created by these debts.

In the past, inflation has served as a safety valve in maintaining demand. Inflation destroys the value of money and debt, and thus by destroying debt, eliminates the negative effects that debt has on the economy. The move by central banks to "fight inflation" could be thus viewed as being counterproductive.

It should be noted that the economy would be destabilized if only one sector of the economy, that is people, business, or governments, is allowed a destabilizing credit expansion. As noted, some economic units end up with the money, some with the debt. When debtors are called to repay the debt, they must decrease demand, which starts the economic contraction spiral of falling demand causing falling incomes, which again feeds back on itself causing demand to fall still further. When large debt imbalances are created, this can lead to a sharp fall in demand leading to a substantial economic contraction. As the economic units holding the money realize that the banks are unable to repay these deposits, the ensuing rush to demand deposits will topple the banking system. Those that would advocate a continual credit expansion must realize that this can happen only as long as depositors are willing to leave their money within the banking system. Thus we have in the world a financial system that is very unstable. Repayment of debts leads to economic contractions, which will only spiral downwards, continually gathering momentum. Continuous credit expansions lead to severe distortions between those holding the money and those owning the debt, and will continue only as long as the depositors are willing to leave their funds within the financial system. Once depositors choose to convert these "money assets" into other "assets", the whole financial system collapses.

These factors are constantly at play in our economic world. Credit expansions leading to booming bubble economies, and credit contractions leading to severe economic depressions. These factors are not understood in relying on traditional GDP analysis. In fact, the solutions proposed by traditional economists to deal with falling demand prove to be totally counterproductive. Most advocate a credit expansion to deal with falling demand, failing to realize that it is credit that is the real problem and that adding to credit will only make matters worse. To stop a decrease in demand, loans must be eliminated. This can happen in two ways. Inside the banking system, loans and deposits can both be defaulted on. Alternatively, governments can take over the creation of money, print sufficient money to repay every bank loan, and pay off all debt. This will leave banks with "notes" to cover all depositors money, with all loans repaid. Both these actions will eliminate the power of the banks to control and manipulate economy's, and thus contrary to the desires of the powerful political and economic forces behind the banks.

While these ideas may appear to be radical, they are really quite simple once we move away from economic theories and into financial analysis. Modern economics does not focus with the money flows in an economy, most theories are impossible to prove, and their value is highly suspect. Financial analysis deals with the dollar flows actually affecting the economy, and can show the effects of every transaction on the economy. In this regard, financial spreadsheets can be developed that clearly show how present and future financial flows will affect the economy. Various assumptions can be made about what will happen in the economy, but once these are known, we can show what the economy will look like. At present, various economic theories are proposed, with no way of knowing how they will affect the economy. A good financial spreadsheet will show these effects.

In the interests of fostering economic debate, and providing an insight into what is happening economically, I am providing two spreadsheets that I am developing. The first is a model of a closed economy. I would note that while I have made some assumptions in this model, all assumptions can be changed to reflect different ideas, the primary purpose of the model being to show how different actions will affect the economy.

The second model deals with the financial analysis of an individual company, and is useful for showing the future economic position of any business. Not only is future profitability considered, but also such balance sheet items as future accounts receivables, inventory levels, and bank loans, etc. These financial programs are provided to allow a greater understanding of financial dynamics. I would ask that any commercial use of these ideas first obtain my written authorization.

The above analysis is basically a numerical one. As I have explained in previous articles, as money has no absolute value, any measurement with money must be aware of any transient value. For example, does the creation of money out of nothing lead to increased real demand, or simply to higher inflation with more money chasing the same number of goods. If our view of the economy is that it can not physically produce any more, than the creation of new money must lead to higher prices. If we view the economy as underutilizing human and natural resources, then the creation of new money can lead to higher real production.

In light of the economic realities now facing our world, the above analysis is meant to provide theoretical and mathematical understanding to the forces controlling world economies. We must understand that our present financial system is not some natural development, and is not designed to foster the wellbeing of mankind. It has been designed by the bankers, central bankers, and organizations such as the IMF, and is maintained by political forces that are subservient to these interests. In various areas of the world, these forces are now acting to bring about severe economic depressions, and if left unchecked, will soon engulf all mankind in their diabolical plan. In order to prevent total economic collapse, the power of these world bankers must be destroyed now. All debt must be eliminated before it is allowed to contract demand, thus destroying economies. A new financial system then must be developed that bases the value of money on an absolute value, a physical commodity such as gold, and does not allow a small group to create and control the money of the world. Failure to do this will soon result in the largest financial collapse in world history.

These forces that maintain the political and economic power in the world may be the most powerful in world history. In fact, their power may go far beyond politics and economics. Still it is power that is based on a lie, an illusion, a lie that is clearly shown by sound theory and sound mathematics. We must all be painfully aware of the consequences of believing a lie and forsaking the truth.

The following two files are in Microsoft Excel format.

Economic Analysist.xls
Business Analysist.xls