Saturday, December 27, 2014

Growth Potential, Output and the Fiscal Factor

More growth is needed, to regain the economic environment which existed prior to the Great Recession. While some recent signs are encouraging, they remain skewed towards partial economic access, which in turn affects other vital marketplace formation. Important components of the economy are being held back, in ways not yet fully understood.

Today's economy is - and has been for some time - consumer led. However, governments have invoked too many consumption definitions, through the demands of special interests. Productivity is being lost not just because of arbitrary product categories, but also organizational strategies in regard to resource access. Indeed, income differences are scarcely the point in political debates, when special interests too often prefer to define consumption needs on high income terms.

As a result, primary (basic) consumption exists in many respects as a sticky, non tradable marketplace. This arbitrary marketplace does not reflect wide variance in income, in the same manner as tradable goods. Most important: non tradable goods aggregates require constant monetary flows in order to maintain. However - in spite of this reality - the money which is needed to represent existing marketplace definitions, continues to be questioned as to the purpose it actually serves.

Before any other policy action can be reasonably be considered, the present marketplace needs to remain monetarily fulfilled as it has already been constructed. And yet, as David Beckworth pointed out recently, the recent expansion of the monetary base is only temporary. More time is needed, before anyone can expect trimming present monetary flows to be a safe option. Plus, trimming present flows would only be a safe option after transitioning to less sticky marketplace conditions for consumers and producers.

Wait, what? Who in power is even contemplating the monetary needs of our present production and consumption based reality? Needed innovation for multiple income levels has not even begun to take place. At the very least, governments could provide their citizens with adequate money to fulfill the obligations which have been expected of them all along. Instead, populations are arbitrarily being told by policy makers of multiple stripes that stagnation is inevitable, so as to add confusion to a lack of monetary accommodation and meaningful leadership. This is why the present rush to halt quantitative easing is something of a farce.

Perhaps too many special interests do not recognize the danger in the tight money conditions they prefer. Even as they blithely contribute to the marketplace circumstance which therefore require more meaningful monetary accommodation on their behalf. Governments need to face up to the fact that policy makers remain responsible, for the aggregate demand equilibrium which remains in place.

To make matters worse, policy makers had begun to rely on commodities as primary wealth, even as governments are now forced to cut back on service formation in fiscal terms. Part of the stagnation arguments are also reluctance to acknowledge what a sluggish real estate market actually means, i.e. "it's the lack of building innovation, stupid." It is too easy for policy makers to forget: in order for commodity values to remain stable, time aggregates and access to commodity utilization also need to remain stable.

Governments especially didn't need the recent drop in commodities markets to exacerbate their budget woes. With each passing day, they are in greater need of the wealth potential of their own citizens. A recent post from Marcus Nunes illustrates the degree to which government contributions are falling away from those of the private sector - even as the private sector remains able to expand. There is now a growth paradox of limits in vital markets, for the government has stepped into a conundrum largely of its own making. The private sector is not yet free, to expand areas which governments are gradually becoming less able to support, over time.

Several things concern me about recent growth patterns, as to their actual viability. One problem is a growing need for government budgets to keep inflation low, because of already existing debt loads with their accompanying interest payments - payments which are only increasing in the years ahead. Does the Fed receive implicit messages (re inflation) from government, to "keep it low"? If so, that only decreases growth potential as a whole - just to ease government debt burdens.

The best strategy would be to move more services into a monetary - instead of fiscal - context. Otherwise, limits in services definition can only eat away at commodity wealth formation. Such a strategy might allow governments to eventually turn their attention to infrastructure support, as well. Even though monetizing services is a long term strategy, it could address the long term problem of government debt load - particularly in regard to healthcare. It helps to remember that - at least as far as I'm aware - no other strategies have yet been advanced in this regard. In the future, growth needs to take place through monetary means, so that citizens need not live with a limited marketplace because of policy mistakes.

Services as a monetary function, is not just a moral argument on my part for greater economic clarity and effectiveness. Put more simply: if fiscal capacity were capable of generating full employment and a viable services marketplace, I would back it without hesitation. Oddly, some fiscal proponents remain convinced that government can do this. But when?? If there really were a way to address employment issues through fiscal means, it would have happened by now...not to mention the blessed relief from all the political b.s. that would have occurred. The proof has been a long time coming, and remains yet to be seen.

Too much uncertainty is involved for extensive fiscal action in the present. Hence, production reform needs resource backing such as time arbitrage, which is evident at the point of economic origin. One of the most difficult aspects of fiscal policy is that it has become more difficult to discern the relationship between time use aggregates and total resource capacity. When government defines too many production and consumption requirements, time as an element of price level integrity can be easily lost.

Economic time representation is central to monetary stability. Aggregate time values are primary, if money is to continue serving its function as a tool for entire populations. Only consider what happens when citizens are left behind in the economic pursuits of their nations! I wanted to pull my hair out (and I don't have enough left as it is), when Simon Wren-Lewis recently claimed:
Money is not a hot potato in this world. The potato has gone cold because of the liquidity trap.
As the Fed turns itself inside out to maintain government's expectations (of marketplace conditions), some observe this scenario and expect today's monetary dysfunction to be permanent. Even so, this state of monetary affairs would be impossible to maintain for any protracted period. Societal breakdown would ensue, if populations (as a whole) lost the ability to use money effectively. Money and economies are not just for governments, but also the ends and means of human function. If governments remain hesitant as to serving the needs of their populations, then perhaps free banking should be allowed, where monetary policy refuses to reach.

Resource and commodity wealth aggregates need to be better understood, in relation to the assets, services markets and time use aggregates which ultimately reflect the former set. Most important: time aggregates need ample representation in both aspects of this wealth equilibrium - not just wherever it "feels" convenient to include them. I continue to cross my fingers and hope that governments will begin the task of working with their citizens, to make certain they are economically represented.

Fiscal policy has gone astray, because it built non tradable wealth formations which paid little heed to the existing perimeters of manufacture and commodities formation. Governments were only able to further extend the fiscal horizon, so long as citizens fulfilled the role of economic consumers and little else. It is wrong for central bankers to place the blame on populations for what they can scarcely consume, when production potential is effectively denied. Substantial production rights are needed, in order for populations to regain economic sustainability.

Growth potential is still quite real, but much of it exists on terms which have yet to be acknowledged by the elite. As to the present confidence on the part of the Fed and other observers: there is nothing wrong with confidence, per se. Just the same, confidence needs to be based on reality, and the knowing that problems have been faced squarely for what they actually represent. In other words, not the false confidence of hoping the underlying problems will somehow go away on their own volition. It's simply not going to happen.

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