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Network Propositions
2100 - 2199

Increased government deficit spending, which results mainly in increased consumer expenditure, is likely to cause price inflation, even when the deficit is covered by government borrowing. The reason for this is that government borrowings come from savings which normally flow mainly into capital projects which do not impact directly on consumer prices. Consequently, increased government deficit spending on welfare, unemployment and other social benefits, is likely to increase consumer prices, other things being equal. (Note: Of course, increased consumer prices will not ensue if other more powerful deflationary forces are operating.)

As real incomes rise, the standard of living rises. When real incomes subsequently fall, the standard of living tends to resist downward adjustment ... and people tend to supplement lower incomes by drawing on their savings. This is known as the 'ratchet effect', for standards of living ratchet upwards and tend to stay up.

During an economic downturn, the 'ratchet effect' tends to keep consumer expenditure higher than it would otherwise be, and tends to reduce the percentage of income allocated to savings and investment.

During an economic downturn, the 'ratchet effect' results in capital industries (which rely on savings and investment) suffering a more severe downturn than consumer industries.

When expenditure is reduced, it has both an initial and an ongoing 'multiplier effect'. The retailer orders less from the wholesaler who orders less from the manufacturer who orders less from local and overseas suppliers of raw materials. Also, the order chain moves horizontally to supporting services, such as freight, maintenance, finance, insurance, and so on. Each job lost causes the loss of other jobs. The 'multiplier effect' is analagous to a domino effect. Once a downward trending multiplier is operating, it is difficult to stop.

Automation results in job losses. Every time a process is converted from manual to automatic, jobs are lost. When automation takes place during an economic downturn, it adds downward impetus to the 'multiplier effect'.

Free trade policies permit the importation of foreign cheap-labour products and of differentially-priced 'dumped' manufactured goods. Local consumers tend to buy such cheap imported goods in preference to locally made goods ... and this results in lower local production and job losses. Where the 'free trade' effect operates, it adds downward impetus to the 'multiplier effect' and the 'automation effect'.

A further effect to take into consideration during an economic downturn, is 'operator efficiency'. When the pressure goes on, all members of a production unit work harder and more efficiently in an effort to save their jobs. Per-worker output may be increased by as much as one-third. Staff may be reduced by reason of lower sales and also by reason of increased 'operator efficiency'. If sales go down by 30%, staff numbers may be reduced by perhaps 50%, depending on the magnitude of 'operator efficiency' gains.

When an economy is depressed, the tax-base (sales, incomes and profits) is reduced and the government tax income is less, at a time when its expenditure needs (for unemployment benefits, etc.) are greater. An increase of government deficit ensues.

When an economy is depressed, the government's deficit usually increases and, with it, government borrowings. Increased borrowings, at a time of low saving, push up the rates of interest.

Rising rates of interest, during a recession, further depress the economy.

If, in its efforts to avoid increases of interest rates, the government fails to fully cover its deficit by borrowings, monetary and price inflation ensues.

Once monetary and price inflation is in place, it tends to feed on itself. Any attempt by the government to correct the trend, by reduced government expenditure or increased borrowings, will increase rates of interest and depress demand.

In democracies, political pressure militates against reduction of government expenditure and the government is left with the alternatives of increased borrowing (with higher rates of interest) or inflationary deficit spending, that is, deficits which are not covered by borrowings.

When a Reserve Bank buys government securities, it increases the volume of money and credit: This has an inflationary effect.

When a Reserve Bank sells government securities, it decreases the volume of money and credit: This has a deflationary effect.

When the Government borrows overseas, it reduces pressure on the local interest rate: When it borrows locally, it increases pressure on the local interest rate.

A net increase of overseas borrowing increases demand for the local currency (as the net borrowings in foreign currency are converted to local currency). A net decrease of overseas borrowing has the opposite effect.

An increase of exports has the effect of bidding up the exchange value of the local currency, as exporters sell their foreign earnings and buy local currency.

An increase of imports has the effect of bidding down the exchange value of the local currency, as importers sell local currency in order to buy foreign currencies.

When economic conditions are buoyant, liquidity preference is low ... that is, credit conditions are more relaxed, inter-business credit is higher and the rate of circulation of currency and credit is greater: These conditions are inflationary.

When economic conditions are depressed, liquidity preference is high ... that is, credit is tight, inter-business credit is lower and the rate of circulation of currency and credit is reduced: These conditions are deflationary.

An increase of duties on imported manufactures, encourages local manufacture and increases local employment, while also increasing government revenue and reducing pressure on the balance of payments.

Any measures which result in adding local value to exports encourage local manufacture, increase local employment, and advantage government revenue and the balance of payments.

When demand for local labour is high, relative to supply, labour tends to use collective bargaining in order to gain higher real labour rates of remuneration.

When real local labour rates reach internationally uncompetitive levels, local consumers may agitate against high local consumer prices, and may exert political pressure for increased importation of cheaper goods from overseas.

When cheaper goods are allowed in from overseas, both local labour and local manufacturers are adversely affected by reduced demand for locally made goods.

It is desirable for local industries to be locally owned, as foreign owners tend to add value by processing goods wholly or partly overseas, where labour is cheapest.

When a local economy is depressed, its government often seeks to lower interest rates, in order to stimulate demand.

When local interest rates are held below average international rates, foreign investment flows out of the country. This outflow continues until local interest rates are raised to, or above, average international rates.

When, by reason of below-average local interest rates, foreign investment flows out of the country, the local currency drops in value on the currency exchanges ... and it continues to drop until local interest rates become sufficiently attractive to reverse the flow of foreign investment.

When a country is heavily in debt to foreign lenders and has a weak current balance of payments performance, it is forced to keep its interest rates at a level which is attractive to foreign lenders.

There is always a better method: There is always a more efficient and less costly way of carrying out any activity or process.

Business enterprises, which have the ability to move, from opportunity to opportunity throughout the world, have an advantage over businesses which are restricted to particular markets.

Laissez-faire entrepreneurial business is, by nature, hierarchical and authoritarian and undemocratic. The more laissez-faire a society is, the less democratic it becomes. Democracy consists not only in a free vote for each person but also in the right to live free of authoritarian dictatorship, whether political or economic or social.

It is easier to make high profits in monopoly and quasi-monopoly conditions than in conditions of unrestricted competition. Monopoly or quasi-monopoly conditions may be created (inter alia) by:

Each country finds it desirable to have and control its own currency. If it uses a foreign currency, as its own currency, it is affected by changes in the value and availability of that currency. Such changes may act as wild variables, making economic management more difficult. If a country has its own currency, it can increase or decrease the volume of that currency, as it pleases ... and, by the use of central banking techniques, it is better able to control bank credit within its domain.

It is desirable for a government to encourage foreign investors to align their local plans with approved government policies ... and to aim towards a mutually profitable partnership.

It is advantageous for a country to encourage direct, participative, foreign investment in local industries, particularly where it results in:

Governments should make it their business to keep closely in touch with enterprises and organisations in all sectors of the economy ... and they should ensure that they are well informed on their plans, progress, profitability and staffing. The aim of such liaison is not 'big brother' authoritarianism but to ensure that government policies and actions are in line with the private sector, thus optimising the economic performance of the country as a whole.

Highly automated industries tend to operate with a small highly-skilled and highly-paid staff.

Highly automated industries tend to produce at low unit costs and low sale prices.

Where products are labour intensive, they tend to be produced where cheap labour is available.

The technologies associated with automation are developing rapidly and obsolescence becomes an increasingly important factor in any capital investment involving automation. Consequently, pay-back periods tend to become shorter and a larger proportion of the product sale price is set aside to cover the increased cost of obsolescence.

It is no longer possible to ascertain what does and does not constitute 'dumping'. The distinction is blurred by concepts of differential costing/pricing and short-payback costing/pricing. Also, whatever the initial assumptions may have been, once a plant is built, the investment becomes a sunk cost, and its owners proceed to sell its products at what the markets will bear. The concepts of fair costs and fair prices, on an industry basis, are too abstract and theoretical to provide a workable criterion for the application of 'dumping' duties.

The unit product costs/prices of highly automated plants are so competitive that the supplying countries (such as Japan) will continue to gain overseas markets, to the detriment of buying countries. Countries of lower automation status will continue to lose market shares and to lose exports to countries of higher automation status. Countries of lower automation status have no option but to raise import duty/quota barriers in self defence.

Banking, finance and stock-exchange expertise take quite a long time to develop, if the expertise is to develop in a stable manner. Too rapid development (such as has occurred in Japan, Taiwan and Korea) is likely to result in dealings and transactions of low integrity, with consequent collapse of credit worthiness. This 'hot house' development, of financial infrastructure, is likely to prove a major weakness in a number of Asian economies.

Interest may be analysed as follows:

The three main elements of interest are the pure, risk and inflation elements. Government intervention can affect rates in the short-term but not in the long-term.

The pure interest element is rising and is now approximately 5% p.a. Increasing physical and social entropy is causing the risk element to rise and also likely to cause the inflation element to rise also. As a temporary countervailing element, government intervention may tend to reduce actual rates of interest. However, the underlying determining elements of interest are all tending to increase.

The general indications favour borrowing long and lending short ... with lenders lending short and seeking to avoid long commitments.

Industrialised countries have suffered from automation, via its job-alienation effects ... and non-industrialised countries have suffered via the reduced demand for their exports. Automation has a negative effect on employment and on consumer purchasing-power, worldwide.

The curve of aggregate asset-value coincides with the curve of universal cohesion (note: Refer to proposition 403) ... that is, as cohesion decreases exponentially, aggregate asset-value also decreases exponentially. Each day will see assets reducing in value, as their total future benefit-flows decrease.

From now on, all Balance Sheet fixed assets will need to be reduced in value at each accounting date, making it difficult for high-fixed-capital businesses to make real profits.

From now on, the real rate of depreciation on fixed assets will tend to exceed rates used in accounting practice and rates allowed by the income tax authorities.

As the general public continue to over-estimate race remainder-time, they over-estimate future asset benefit-flows and, accordingly, they over-estimate the value of fixed assets.

Businesses will tend to overvalue their assets and, thus, overstate their earnings.

As businesses will tend to overstate their earnings, they will tend to overpay dividends and to run down their reserves.

Investment in the shares of companies with a high fixed-assets profile will be ill-advised.

The following conditions militate against the success of formal businesses:

Difficulties facing formal businesses will increase and more and more successful businesses will be in the informal and semi-formal categories.

Stock exchange share dealings will decrease, in number and value, from now on.

As effective government and effective controls decrease, informal business will increase. Business enterprise will find a new freedom and a new renaissance.

The significant number and value of informal transactions results in official statistics of sales, earnings and Gross National Product (GNP) being understated. As the level of informal transactions grows, such official statistics will become less and less meaningful.

Banking has traditionally made its profits by borrowing at wholesale rates and lending at higher retail rates. Although house-mortgages are a continuing avenue for banking loans, bank lending to low-risk businesses is decreasing, as these businesses become ever scarcer. Banks have fewer and fewer opportunities for profit-making, and competition will force some of them out of business.

The first stage of industrialisation is that of increasing job opportunities and a happy partnership between semi-automation and growing numbers of increasingly well-paid employees. The second stage, of high automation, is one of staff redundancies and increasing unemployment.

China and many other countries are enjoying the good economic growth which goes with the first stage, but most western countries are experiencing the rising unemployment of the second stage. It is noteworthy that Japan is in the second stage but has so far avoided unemployment by foisting it on to the importers of its export products.

Most companies, which need to raise large capital sums on the open market, will find it increasingly difficult to do so, as the public is losing confidence in the dividend potential of most companies.

On a national basis, the difficulty of floating new share issues will slow down capital investment and GNP growth.

Due to their inability to float new share issues, many companies will fail to meet their loan repayment obligations, and will be forced into bargain-selling of assets and even into liquidation.

In future, due to poor liquidity, many companies will be forced to reduce cash dividends ... and this will reduce the market value of their shares.

Increasing entropy is changing the geometry of value. Long-term future benefit-flows become ever more highly discounted, as entropy increases. The curve of future benefit flows is now falling exponentially.

As, with increasing entropy, future asset benefit flows decrease, lenders become more reluctant to lend long-term ... for, not only does repayment of principal become more problematical, but what the repayment sum will buy on maturity becomes also problematical. Accordingly, lenders will charge ever-higher interest rates, as the contractual term-length increases.

As time passes, the business of lending will become ever more risky ... and it will become ever more risky to lend to lenders. Now, it is preferable to hold cash than to lend at longer than a three-month term. The burden of risk outweighs the interest factor, beyond the three month horizon.

As entropy increases, liquidity preference increases and the amount of investment decreases ... and the gap between short and long term interest rates widens.

As entropy increases, the profitability of long-term capital investments decreases.

As the profitability of long-term capital investments decreases, company share investments decrease in total amount and in unit share prices ... and stock-exchange activities decline.

As job-tenure weakens, generally, demand for first-owner house mortgages will decrease ... and, as economic prospects become more uncertain, demand for house mortgages will decrease more generally.

As opportunities for profitable, private-enterprise investments decrease, and as demand for house-mortgages decreases, and as government-deficit borrowing increases, a greater proportion of public savings will be invested (directly or indirectly) in government stocks and bonds.

Large cash-starved companies will be forced to issue notes and debentures offering high rates of interest. For the most part, these will constitute a risky and ill-advised investment.

The people have less power (over events) and have less power to delegate. Accordingly, the leaders to whom power is delegated, have less real power to go with their nominal authority ... and their real power decreases day by day.

Power to control events needs cohesion, as a pre-requisite of control. Where chaos prevails and grows, there is very little cohesion, if any.

Without cohesion, there is no control and no power to control. Power is nothing if it cannot control.

Power is controlled energy.

When power is immersed in the midst of chaos, power itself becomes chaos.

Leaders increasingly find their follower-groups of adherents become less coherent, less cohesive, more vague and looser and less enduring.

Confusion reigns in chaos and nothing else challenges its supremacy.

As group cohesion dissipates, individualism remains, in naked self-reliance. Those, who are strong in self-reliance, are those who will best survive in chaos.

Citizens, generally, will participate less and less in voting for and supporting 'leaders', because they are realising more and more that the whole exercise of representative government is one of sham and self-delusion.

Power is being sublimated or transmuted from the physical to the mental-spiritual.

If you can't direct and control energy, you have no real power.

Energy derives its value from its uses and, to achieve those uses, one needs to control and direct energy.

As cohesion/control abates, the uses of energy abate and the value of energy abates.

As the value of energy abates, all physical asset-values abate.

Assets are cohered/controlled energy.

As we lose our ability to control energy, we lose our ability to make and maintain assets.

Assets will obsolesce and depreciate ever more rapidly and fewer new capital-assets will be made and those which are made will have shorter value-life ... that is, they may endure physically but they will become valueless after a relatively short time.

Trades, professions, and all relatively inflexible skill groupings, will become less effective. The capable, versatile, dynamic, flexible, adaptable, intelligent, creative individual will be the success feature of the future.

More and more, the emphasis will move from the physical to the mental, and from long-term inflexibilities to short-term flexibilities.

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