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What is going on with the economy? [Oct. 22nd, 2011|10:36 am]
Aaron Wissner
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The trick to understanding the economy is visualizing how the money flows in the economy. You can divide the people any way you like, but I tend to divide them into about eight groups:

1. the people,
2. the businesses,
3. the banks,
4. the federal government
5. foreign countries
6. the rich
7. the oil owners
8. the states and local governments

If the flow of money towards, or away from, any one of these entities changes, then it will impact the economy.

At the moment, we have several issues.One is that the flow towards the people has slowed. This leads to less sales for the businesses and corporations, and all government entities, and even the foreign countries.

This led to the government lowering lending standards in order to increase the flow towards the people via the banks. This increased the flow from the banks, to the people and businesses, and even the state and local governments; but of course, it also created a great deal of debt, and a future flow TOWARDS the banks, and away from all other sectors of the economy.

Complicating things is that the oil owners, and the global oil market, is subject to peak oil, which really is any change from "normal" in the oil production. Clearly, with Deep Water Horizon, we see that it is very difficult to get oil, and there are not many favorable places left; so there was a switch from increasing oil supply, to a stagnant oil supply. This switch led to higher prices (and the resultant speculative exaggeration) which drew money away from everyone, and towards the oil owners.

Another complication is that the US has created "free trade" agreements to outsource jobs. This decreases the flow to the people (meaning the domestic people) and increased the flow out of the country. Last week, three more of these devil deals were made, which leads to perhaps a short term change in the flow of money, but at a cost of environmental degradation, and the slowing of the flow towards the older, and "advancing" free trade countries.

The federal government response to slowing, after the banks did there bit, is to spend money into the economy directly, or via "mail drops" like tax return checks, such as Bush did twice during his years. This though, increased the public debt, and if it goes towards speculative home and real estate (or other purchases) then nothing is added to the economy.

And, another complication, that top most tax rate, which used to be over 90% for the billionaires, has been whittled down over the years to only 35% or some ridiculously low number. This slows the flow from the rich to the federal government, and puts the rich in a position to speculate with huge impacts, or to spend money out of the economy on foreign goods, or in general, to just put to much control of the flow into the hands of too few.

Back to the banks, when the increase in loan volume began to slow, then the flow from the banks to the rest of the economy decreased, and this led to a slowing of spending, and as we've seen, to an actual reversal of flow. Now money flows to the banks, not from the banks, as more is being paid towards them in debt servicing, then being paid out in expenses and new loans.

Backing out a bit, we see that the entire system is inherently unstable. It has to be monitored with utmost vigilance by those in control, and those in control are the people, of course, but really the mass of the people, the general populace, that is willing to assemble, and force the government to keep the flow of cash in such a way as to ensure full employment, and long term stability.

Of course, our schools do not teach this, and this is perhaps the largest failing of schools.

Now we see the results. As if addressing the oil situation (since the oil is literally the life blood of the global economy) wasn't enough, now we have the issues of income and wealth disparity, a huge trade gap, privatized banks drawing huge quantities of funds out of the economy, an unwillingness of the people to spend directly into the economy as true investment from the federal government, and a pinch on the people, the state and local governments, and businesses leading to insane policy choices that will only serve to exacerbate the situation.

It's complex, but we can understand it, and if we understand it, then we can figure out ways to fix it, or more likely, to replace it.