Sunday, 23 September 2012

Social Credit is Salvation Through Deflation

By: Socred - B.A., SCMP

One of the primary criticisms of Social Credit is that it is inflationary. Gary North has written a critique of Social Credit entitled “Salvation Through Inflation”. The purpose of this essay is to demonstrate the claims that Social Credit policies are inflationary are fallacious, and to demonstrate that its policies are in fact the only way to reduce prices given that labour is being replaced by capital in production. Economists define inflation as too much money chasing too few goods. They argue that an increase in the money supply with a relatively fixed amount of goods and services for sale tends to increase the price of those goods and services. This assumption is based upon the quantity theory of money, which is critiqued in another article on this blog.

Douglas said there were two forces that governed prices: 1) the upper limit of price is governed by supply and demand, or what the good or service will fetch on the open market, and 2) the lower limit of price is governed by the cost of production and the rules of cost accountancy. Economists focus solely on the forces of supply and demand and their effect on prices, but they tend to ignore the rules of accrual accounting and its effect on prices. As such, economists always see rising prices as a result of too much effective demand, which they believe is the result of too much money being created. Their only policy recommendation to eliminate, or reduce, inflation is to reduce the quantity of money being created. The quantity theory of money ignores how money is created by banks as a debt. It also ignores the fact that the creation of money for capital production is prior to said capital being able to produce any consumer goods.

When physical capital (machines, raw materials, factories etc…) is created it is generally financed through loans from banks. This increases the money supply at the time the capital is being constructed, and this money makes its way to consumers as effective demand through wages, salaries and dividends. Since the capital is being constructed, it is not capable of creating any new consumer goods, so the income disbursed in its creation makes its way to consumer goods and services already on the market. This has a tendency to inflate the price of those goods and services, and this is what economists would call “too much money chasing too few goods”. But is it too much money? The money disbursed via the construction of capital has to be given to consumers, because eventually said income will be part of the cost of that capital. If that money was not disbursed, consumers would not have enough income to pay for the capital as it was expensed at a later point in time. In other words, rising prices at the time capital is being created is not caused by “too much money”: it’s caused by income making its way to consumers prior to the capital being built being able to produce any consumer goods and services. This income is necessary to defray the cost of the capital being created, but it is not used to purchase the consumer goods said capital produces, because consumers have to use it to purchase goods and services at the time the capital is constructed in order to meet the needs of living.

Once the capital is constructed its costs are generally capitalized and expensed over a period of time using the rules of accrual accounting. Douglas’s A+B theorem divides costs into two categories: 1) A = income = wages, salaries and dividends, and 2) B = payments to other organizations. Over any given time an organization will distribute A in income and charge A+B in prices. This is true for all organizations. Consequently if we sum all of the income disbursed in an economy over a period of time it will always be less than the total prices generated over the same period of time. If this is true, how has the economy not collapsed? It has not collapsed because income in the creation of capital is distributed prior to the capital’s costs entering the market and being charged to the consumer. So long as capital is being created, and debt/money is increasing in order to finance its creation, the economy functions fairly well. As soon as the capital’s costs enter the costs of consumer goods, income is insufficient to defray those costs, unless more capital is being contructed, because the income disbursed to create the capital was used to purchase consumer goods at the time the capital was created.

As labour is displaced in production by capital, B costs increase relative to A costs. How does this influence prices? Price = A+B, and if B is increasing relative to A, then any attempt to stabilize or increase A (income) has to be met with rising prices. Conversely, any attempt to stabilize prices (A+B) has to be met by falling incomes (A). In other words, even if there’s not “too much money chasing too few goods”, prices will rise so long as the government tries to stabilize or increase incomes. Inflation is systemic given the rules of cost accountancy coupled with the fact that labour is being replaced by capital in production and a policy of full employment is being pursued. This is why the government accepts “limited” inflation: they are afraid of the effects of reducing prices will have on people’s incomes and economic activity.

Fortunately, there is a solution, and it’s the only mathematically viable solution. The solution is reduce prices at the point of retail with monies with no cost attached to them. If money passes through the productive system, it has to have a cost attached to it, but if the money is given directly to the consumer it does not. Prices can be reduced to the consumer via a price rebate distributed with debt/cost free money given to the consumer. For instance, if the price of the good or service is $100 and the rebate to the consumer is $25, then the price of the good/service has been reduced by $25 to $75. The retailer receives $100 and the consumer pays $75 – the difference is made up via the creation of new debt free money.

In summary, prices are governed by two limits – supply and demand and the cost of production. The quantity theory of money, and the belief that inflation is only caused by too much money chasing too few goods, focuses solely on supply and demand and assumes that prices are only governed by these factors. However, prices are also governed by costs and the rules of accrual accounting. The fact that labour is being displaced in production, combined with a policy of full employment, increases the costs of production and consquently prices, even though consumers have inadequate incomes to purchase all of production. The only way to eliminate this type of inflation is to give consumers a price rebate at the point of retail. Therefore, not only is Social Credit not inflationary, but its policies are the only viable way to eliminate the real cause of most inflation today which is the displacement of labour in production coupled with full employment policies.

Sunday, 1 January 2012

Debt and Living beyond Our Means

By: Socred, B.A., SCMP

It is often said by supposed financial experts that the reason there is so much debt, both public and private, is that we are “living beyond our means”. Their argument is that if we all just “tightened our belts” and consumed a little less, then we would not be in this financial mess. On the surface, this argument seems to make sense. We all know that we have a certain household income and if we spend more than our household income, then we must go into debt in order to do so. If we continue to spend more than we earn, eventually the debt will become too large to pay off and we will have to default on our debts.

Does this argument hold true for the economy as a whole? If all agents in the economy balanced their budgets, would we be in a better situation? Let’s explore what it really means to “live beyond our means”, and the possibility of balancing all budgets in an economy.

First we must eliminate money from our analysis, because money is just (or should be) a symbolic representation of the ability to consume and produce. The purpose of any economy is consumption, and this is only limited by our ability to produce. Finance should merely be a mathematical representation of these activities.
Production not meant for consumption is waste. In other words, the purpose of production is not to provide work, but to provide goods and services to consumers with the least amount of effort. This may seem to be common sense, but when we add money back into our analysis, common sense seems to leave most people, including supposed financial experts.

Now, without a doubt, it is possible for any individual agent to “live beyond their means”. What this means in real terms is that someone consumes more than they produce. However, if one individual consumes more than they produce, another must consume less than they produce (you cannot consume what has not been produced). The second agent is engaging in “savings” in real terms. Of course, the second agent would only consume less than he produced if there were some incentive to do so, and this is why the first must pay back the amount of goods and services “borrowed” from the second with “interest”. However, consumer goods only have a limited shelf life. They depreciate over time. Therefore, savings in this form does not exist in the macro-economy because goods and services cannot be “saved” for any length of time in order to be consumed at a later date.

The ability to "live beyond our means" seems to make sense from a micro-economic point of view involving individual economic agents, but from a macro-economic point of view it is completely absurd. Is it possible for an entire economy to “live beyond its means”? Momentarily excluding foreign trade - any economy produces a certain amount of goods and services, let’s call that quantity X. Is it possible for all of the agents in that economy to consume X plus a certain amount more (A)? If the economy produces X, is it possible to consume X+A? Clearly this is impossible! You cannot consume something that does not exist. A has not been produced, so you cannot consume it. For the economy as a whole, it is impossible to “live beyond our means”. Consequently, the “financial experts” advice, which applies to individual economic agents, does not apply to the economy as a whole. If we all consumed less, this would mean that more and more production would be waste, because consumer goods have a limited shelf life, and cannot be saved in order to be consumed at a later date.

Hold on, some will argue, you have exluded foreign trade from your analysis. With foreign trade, it is possible for one country “to live beyond its means” by importing more than it exports in goods and services. So it is possible for individual nations to “live beyond their means”. This is true. However, all countries are attempting to pursue a favorable balance of trade simultaneously. A favorable balance of trade means that a country wants to export more than they import. In real terms, this means that all countries are trying to give more goods and services away to other countries than they receive from those countries in return. From a macro-economic perspective, the country that exports more than it imports engages in “savings”, and the country that imports more than it exports is “living beyond its means”. Nations are individual economic agents in this analysis, and the macro-economy is the world economy. As we discussed previously, this type of savings is not real, because consumer goods have a very limited shelf life. Further, it is impossible for all countries in the world to consume less than they produce without a huge amount of waste. Thus, we need to understand why all countries pursue a favorable balance of trade.

The main reason why a favorable balance of trade is pursued by all countries is that it leads to economic growth in terms of GDP accounting. China is a prime example of how this policy leads to this type of growth. China had a balance of trade surplus of 14.5 billion dollars in November of 2011, and its economic growth was 9.1% in terms of year over year increases in GDP. Exports represent almost 40% of their GDP, yet the Chinese people themselves have a GDP per capita of less than $6,000 per annum in U.S. dollars. Their balance of trade surplus represents approximately 3% of their GDP. (source: trading economics). In other words, the Chinese live in relative poverty in order to give away 3% of the goods and services they produce so that they can pursue a policy of a favorable balance of trade in order to have economic growth. What causes this seeming paradox? Why would the Chinese give away 3% of their GDP to other nations while their citizens live in poverty?

This paradox is the result of confusion in regards to the purpose of the economy. The real purpose of the economy should be to provide goods and services to consumers. It does not exist to provide employment. It is true that a certain amount of employment is necessary to provide goods and services, but the less amount of employment required to provide goods and services, the better off we are. This is the whole purpose of science and technology. Advances in technology reduce the amount of labour necessary to produce goods and services. If we adhere to the belief that the economy exists to provide employment, then we will account for a favourable balance of trade as an increase in prosperity because it provides employment to those who are producing the goods and services. This is exactly how GDP accounting accounts for a favourable balance of trade. In other words, the purpose of an economy, according to the way we account for economic prosperity currently (GDP accounting), is to provide employment .

There is nothing wrong with foreign trade so long as the purpose of that trade is to give one country something in return for something else. However, there is a problem with foreign trade when the objective is to give away more than you receive back. This policy of a favourable balance of trade inevitably leads to a trade war between nations, which often results in a real war. War is the ultimate favorable balance of trade in that a country “dumps” bombs and bullets on another country at no cost to the other country with the intended purpose of not receiving any bombs or bullets in return. In fact, if war was accounted as an “export”, which it truly is, the United States would not be running as large of trade deficits in times of war. This is why the US economy is so dependent on war for its proper functioning. A large amount of propaganda in the United States is aimed at creating enemies so that the country can dump large amounts of exports on the enemy. This activity leads to employment and allows for economic growth.

These policies are insane in the truest sense of the word because they are all linked to confusion in regards to the true purpose of an economy. This policy has at its basis a philosophy which is non-congruent with reality. All policy derives from philosophy. Work is a by-product of an economic system, not an ends in and of itself. Because money is created as a debt and prices increase faster than incomes, the result is ever increasing debt. This increase in debt does not mean that we are “living beyond our means”, which in macro-economic terms is a complete fallacy. It is due to a misguided philosophy that is wreaking havoc on our world’s economies. There is a statement in the bible that “if any will not work, neither should he eat” (Thessalonians 3:10). This was certainly true at the time and place it was written, but that does not mean that this is a universal truth that holds for all time and all places. Just as Jesus said, “go sell what thou hast, and give it to the poor” (Matthew 19:21), he did not mean that everyone has to sell all they have and give it to the poor. This statement was true for the intended recipient, who valued his material possessions above all else. It was not meant as a universal truth to applicable to everyone.

Technology is replacing labour in the production. As such, employment is becoming an ever decreasing factor of production. This fact is responsible for an accounting flaw, which in turn makes it impossible to balance all budgets within an economy simultaneously. In a letter to the Social Credit Premier of Alberta, Douglas wrote:

"This seems to be a suitable occasion on which to emphasise the proposition that a Balanced Budget is quite inconsistent with the use of Social Credit (i.e., Real Credit – the ability to deliver goods and services 'as, when and where required') in the modern world, and is simply a statement in accounting figures that the progress of the country is stationary, i.e., that it consumes exactly what it produces, including capital assets. The result of the acceptance of this proposition is that all capital appreciation becomes quite automatically the property of those who create and issue of money [i.e., the banking system] and the necessary unbalancing of the Budget is covered by Debts."

In other words, a policy of attempting to balance all budgets in an economy simultaneously implicitly assumes that technological progress is non-existent. It assumes that the economy consumes exactly what it produces, including its capital assets (factories, machinery, etc..). However, we know that capital assets can last for years, so they are not consumed at the same rate as consumer goods. As a result, all capital appreciation (increases in capital minus depreciation of capital) becomes the property of those who issue money (the banking system) due to the fact that they are the only ones who can monetize the use of that capital. Since the banking system only issues money as a debt, capital appreciation and the monetization of its use results in ever increasing debt. This means that as we advance technologically, we are forced into ever increasing debt. It is technological advances and the displacement of labour in production which causes increasing debt loads, not "living beyond our means".

How do we solve this dilemma?

Douglas demonstrated in his A+B theorem that prices increase faster than incomes as a result of technological progress and the replacement of labour by capital in production. If we give people the necessary purchasing power to buy back all of production through a compensated price mechanism and a national dividend given to all, then debts will not increase over time. Further, the ability for consumers to obtain purchasing power without employment will end the pursuit of a policy of full employment. This will stop the insane practices of war and a favourable balance of trade in order to make the economy function properly. Increasing debt is not a result of “living beyond our means”, but the result of technological progress and the inability to balance all budgets in an economy simultaneously with this parametric shift. The Anti-Christian philosophy of Salvation through work perceives technology as something that enables us to do more work (and as consequence, producing ever increasing goods and services, and falling further and further into debt). The Christian philosophy of Grace enables technology to become a positive factor for progress because as physical labour is replaced by machines, people's purchasing power can be increased without having to do more work or go into every increasing debt. Only by increasing our purchasing power in accordance with capital appreciation, can technological progress become evidence of God’s grace. God’s grace is imperative to our salvation.

"The most dangerous man at the present time, said Major Douglas in answer to another question, was the man who wanted to get everyone back to work, for he perverts means into ends. This is leading straight to the next war - which will provide plenty of work for everyone."(Tragedy of Human Effort)