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The Network Propositions / 2100-2199
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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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
INDEX to the Network Propositions
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