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Future Economics

by on 05/09/2018
The major problem of understanding the economy is that while people are good in perceiving situations, they are not so good understanding processes. Process is flow of events following each other, chained to each other by causal relationship sequence. Process is happening in time, while situation is an immediate state. How much this causality relationship is hard to comprehend can be seen in all those popular theories throughout the human history, taking form of mythologies, religions, conspiracy theories, that are all about, as if revealing these causal relationships between sequencing events. Yet since throughout the history people created all those mythologies, obviously the need for causal explanation is a necessity for human perception.
Science is all about causal explanation between sequencing events, while economics as a science, is also trying to expose these causal relations in economic processes. Economic processes have to be analyzed in their timeline. The timeline can be short term, medium term and long term.
-The short term timeline is defined as an economic event from the beginning to the end. Such event in the private sector can be in between financial reports of a company, or a process of planning-production-commercialization of a product. In the public sector it can be an annual budget, or a term between elections.
-The medium term economic processes is defined as several economic events, connected to outside events, like market development, change of taste, fashions, but also political cycles like change of government, structure, etc.
-The long run processes analysis timeline is within human life span, and sometimes even exceeds it. Such a planning needs to be related comprehensible to the whole global economic system, including all its elements. For example retirement planning is such an economic activity, even if not taken as such, this is why there are so many defaults in it. For example the pension systems have difficulty to cope with increasing human lifespan, since no one can predict its development. Other such a problem is global environment monitoring and planning.
The classical economics, starting with the emerging capitalistic economy in end of 18 century, was all about reciprocal flow of money and goods and services (production) out of which emerges the value of every element of commercialized production. In the process of commercialization emerges the price of the product, using money as an universal scale. Price is result of continuous process of tender in form of invisible offers and bids, in each case when a process of sell&buy happens. If a consumer picks up a product in supermarket and puts it in his basket, this tender process happens, even if many times unconsciously. More conscious act of offers and bids is when the consumer chooses between two or more similar products standing each one next to each other but with different prices. The price is the most important among many attributes the consumer is considering before the act of purchase.Out of the agreed price emerges the currency value itself, representing the universal value of all the products, but also every separate product, that can be commercialized. Even more than that, the currency value relatively to other currencies is also strongly influenced from the product prices in the local currency.
Smooth flow of the economic processes requires trust in money value of every participant of this act of commercialization. The trust is secured by government enforcing acceptance of its legally tendered promissory note, (Money), as representing the price value of production by every resident of the territory, the government is sovereign in.
The major tool to enforce the money value on the commercial activities is tax collection in form of money, issued once by the same government. Why does the government need to collect taxes, when it can easily just issue the same money? Because it needs from one side to enable this whole carousel circle of commercial activities, from production processes to commercialization of the products, and on the other side between issuing the money by the treasury of the government and taking it back to the same treasury.
This economic process worked pretty well in the last 250 years, spreading this system of money circulation all over the world, going through evolution and increasing sophistication, as the professional economists analyzed and comprehended the whole economic process, improving their understanding from one economic crisis to an another. Every economic crisis can be seen as result of intellectual misconception of economic profession, until new discovery makes a paradigm change in understanding the economic process and with it comes the economic system change.
Several such economic concept changes happened in the late nineteenth and twentieth century, when gold-silver coins money monetary system was changed to paper many, at first based on golden standard, meaning exchangeable to gold one to one. Even in this time mainly after WWI, several major currencies, like the dollar and the British pound were used partly as reserve currency that had backing of gold reserves. This connection between the dollar and gold was disconnected in early seventies of twenties century and fiat money became the leading form of money in the world.
Economic crisis of 1929, escalated to catastrophic dimensions because of misconceptions of economic leaders of the time. One of the major reasons of this crisis was insistence of the economic leaders of the time to stick to gold basis of the money. This caused monetary squeeze at the time, when monetary enlargement was needed. The crisis of 2008 didn’t come to same dimensions, exactly because the economic leaders in Federal Reserve and the US Treasury, possessed better knowledge about economic system, and reacted according to upgraded economic concepts. It doesn’t mean there is no opposition to this policy, and the problems of deep economic crisis is solved. In contrary. The policy of Quantitative Easing implemented by Federal Reserve bank brought the world to unknown enchanted territories.
To this short term developments in macroeconomics on the global scale, that is fueled by increasing debt of either private or public sector or both, are accompanied several other medium and long term developments. If to follow the most significant macroeconomic processes in the developed economies, we can find the following phenomena:
A.One distinct long term development is relative decrease in employees wages as percentage of the GDP.
Wage.png
B. Since employees are the majority of the population, their share in GDP is still about 40%, it means this development has a major impact on all aspects of the economy. Naturally the propensity of the employees to savings is lower than of other sectors of the society. This seems to have major influence on the economic cycle. In the next chart can be observed the declining trend of the velocity of money. This two parameters of the economy seem to be closely connected.
Velocity.png
  1. Continues recycling of the money and the production, economy needs consumers demand of the wide population, including the employees. The solution to decreasing wages of the existing economic system is consumers credits, in form of mortgages for real estate ownership, mostly not of newly built houses, but newly evaluated ones, leasing contracts against private cars or other tangible consumers products, or just credit cards debts. Unrestrained consumers credit adds uncertainty to the economy, since the private households, as one hord, may anytime panic and try to repay or reduce their debts. If it becomes a major event, it brings collapse of the economy, and the government has to intervene, by buying up the debts of the private households from the private commercial banks.
  2. The public debt is growing to unsustainable level due to government budget deficits and due to nationalisation of the private debt created by the banks, whenever these debts are endangering the existing economic monetary system. To save the financial system that created these debts, from collapse, the government initiates government treasury securities purchase or mortgage backed securities, by exchanging these securities to cash money Quantitative Easing (Q.E).
  3. Due to the Q.E. policy the commercial banks are overflowed by cash money available for immediate use, yet with no operational capacity to increase the entrepreneurs loans for new business ventures, that judging their business plan needs expertees they don’t have. On the other hand the banks act more cautiously with consumers credit due to learning curve of the banks and due to new regulations that restrain their risk taking policy. The result is increase in their reserves in the central banks vault, above the level demanded according to the minimum reserve rate requirements of the central banks. This cancels the need for interbank loans between commercial banks and last resort loans from the central banks to commercial banks.
  4. The excess liquidity of cash money in the system reduces the treasury security interest rates to zero.
  5. The central banks, in purpose to create a new instrument to regulate the interest rate started to pay interest on overnight reserve deposits of the commercial banks. This interest competes with government treasury securities, its interest rate must be higher than the reserve deposits interest rate, because of rate, because of higher risk. This results, that the interest rates are administratively fixed by the central banks, and are officially accepted as the bottom interest. It means interest is not anymore, result of open market operation of the central bank with government treasury securities, but fixed directly by the central bank.
  6. The disconnection of interest rate fixation from any marketplace operation eliminates the connection to business moods, emerging from the private sector of entrepreneurs and households.
  7. The central bank’s policy is to secure full employment and price stability. If the banks rise their risk taking policy, and increase the credit to more risky projects or increase the consumers credit, the central banks will have to increase the demands on banks on minimum equity requirement, even above the Basel III accord, or minimum reserve rate requirement and these tools may become in the future the prime monetary instruments to regulate the interest rate.
  • But all these processes described above are valid for the classical capitalistic market economies. If to do prediction about the economy of the future we have to try to uncover the major trends and their dynamics at present, that will create the new economic circumstances in next decades. The most dynamic and most substantial issues are all result of technology development and social-political reaction to them. There are many fields that as result of previous scientific discoveries are developing new profound technologies. More than that these technologies start to get interconnected, as new peradigma changing technologies. Let me mention few of them.

    1. Computer power, the quantum computer is to be launched and operational within few years, and many very complex computing problems will be solved.
    2. In energy, within 15-20 years from now, most probably the first fusion electricity reactors will be launched, and within a decade they will become the major source of energy.
    3. The 2 means unlimited energy for almost zero marginal price, after the initial investment costs. One of the major technological problem of fusion reactor is in creating efficient superconducting materials. Research in this field will probably get strong push with the new computing power capacity of quantum computers.
    4. New materials, the new nano technologies of manipulating molecules on most elementary level enable to create new materials with unprecedented, and many times unexpected attributes. Nanotechnology will probably get strong push with the new computing power capacity of quantum computers.
    5. New biological forms created by genetic engineering. The already existing crispr gene editing technology opens the possibility to create new living tissues, with new attributes. This will change completely the agricultural production, if political and cultural limits will be removed. This technology will probably get strong push with the new computing power capacity of quantum computers.
    6. Artificial Intelligence, is getting to a stage, when more and more human activities are done better and cheaper by machines, and computers than by humans. Not to mention the new computing power capacity of quantum computers will have major impact on AI.
    7. They are many other technologies, like robotics, swarm technologies, virtual reality worlds, that are all result of all the above mentioned technologies.

    Any economic system, that will not include these expected developments in its curriculum, will fail. So what effect will have those expected developments on the economy? General price decrease of products, due to new marketing models, distribution forms and production efficiency, that we can see already evolving today, demand to consider new economic model. Price decrease, even if increases the utility value of production through more products sold for the same cost, does not increase the commercialized monetized value of the GDP. This trend is in opposite to the trend that ruled quite recently, that more and more products were monetized. For example food and clothes production were allocated to shops and restaurants from housewife kitchens and salons. All these activities, if before excluded, became part of the GDP or National Income, out of which were paid taxes, wages, capital gains, etc. But when the prices decrease, or many times product is transferred free of charge, as in case of many items distributed on the internet, the classical economy stagnates, and so the GDP. But all the economic financial system is based on assumption of increasing GDP, and if not, the capital can’t get its expected yield and the government can’t collect taxes. High production and distribution efficiency, mechanised and computerised will also create large scale unemployment.

    Major questionnaire hangs above the function of money and the whole monetary system. In the classical economy money fulfilled two functions, intermediary agent between buyer and seller, and value holding asset. The technological development didn’t jump over the monetary system. The money became more and more virtual, financial transactions became or immediate or overnight. Also new financial instruments appeared on the system, as platforms for direct investments, like Kickstarter and above all the cryptocurrencies. Even if price reduction of consumers product diminished the inflation pressures, it didn’t happen to value holding assets. The souring value of cryptocurrencies, stock prices, and above all worldwide real estate increase, are all different form of inflation, not measured in average consumer basket, and not influencing directly the population, unless the individual has no accumulated assets tries to jump the bar, and tries to become an asset holder.

    From → ECONOMICS, MENUE

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