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Re: Fatal Flaw in Logic of the Crash Course?

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  • Sat, Feb 21, 2009 - 06:50pm

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    Re: Fatal Flaw in Logic of the Crash Course?

Let us make this simple (but not too simple), and say that the economy is composed of three sectors: households (H), finance (F) and business (B). There are three relationships we need to consider: households/finance, finance/business and business/households.

1. Households/finance

There are two streams of money across this interface. There is the stream from households to finance (HF), mainly composed of fees and interest on loans. Then there is the stream from finance to households (FH), mainly composed of salaries and interest on deposits. HF is of course larger than FH, since the interest rate on loans is smaller than the interest rate on deposits.

2. Finance/business

The finance sector has a net stream from households, HF – FH. In addition to this, there is the stream of money from business, BF, mainly composed of interest on loans. If we for a moment assume that the system is in balance, this means that there has to be a stream of money FB that is larger than BF. There is of course interest on deposits and payment for goods and services, but this cannot be larger than BF, or finance would not be very profitable. The last part of this stream would be the owners of the financial sector spending their profit on a luxurious life style. (In this model, owners are included in the sector they own, not in the household sector.)

3. Business/households

The stream BH is salaries payed to households. Since there is a net stream of money from households to finance (HF – FH), the stream HB is smaller than BH, meaning that households spend only a part of their salaries on goods and services. This is not a problem for business, since it is balanced by a net stream from finance thanks to the owners luxurious life style. This does seemingly not make any room for a profit in business, but there is. Since business owners are counted as part of the business sector, the profit payed to owners is canceled by the owners spending on their luxurious life style.

This model is in perfect balance. There is a net stream HF – FH which equals FB – BF which equals BH – HB. There is nothing in the financial system that prohibits such a balance. The size of the money flow between sectors is given by the amount of debt. The larger the debt, the larger the stream of money to the financial sector, and the more money the bank owners have to spend.This is not reality though, in real life neither bank owners nor business owners spend all their profits.

If bank and business owners (capitalists) were to save money, this would reduce the money flow to households. Households can now decrease their spendings, which will force business to decrease their expenses to households, and we have a certain economic breakdown. The other possibility is that households loan the savings from finance and business in order to keep the economy going, but this will then increase the flow of interest from households to finance, allowing the finance sector to save even more money that the households eventually have to loan. Then we have the other type of economic breakdown due to an exponentially growing debt. This is what we see today.

This bubble is not driven by the need to loan more money in order to pay interest, like the Crash Course claims, the culprit is the capitalists’ hoarding. Since it is utopian to believe that we can convince capitalist not to hoard, the only way to avoid recurring economic crises is to abolish capitalism, i.e. transfer ownership to the people. We can no longer afford to provide for the capitalist class.