There is no doubt that a direct relationship exists between
investment in the economy and the growth it will experience after the lapse of
a period of time. And when we say investment, we mean that instead of consuming
all of this year's production, we set aside a portion of it to use as seed with
which to increase next year's production thus achieve growth. The farmers
understand how this works because they deal with physical objects such as the
amount of grain they choose to sell or plant, the chicken they choose to send
to the market or raise to lay eggs, and the cows they choose to slaughter or
milk.
Modern life being more complicated than simple farming, we
do not make a direct link between having to save a production machine to make
other production machines, or saving a power plant to make other power plants.
We think instead in terms of saving some of the money we receive from selling
the products made by the machine, or saving some of the money we receive from
selling the electricity produced by the power plant – and using that money to
buy other production machines or buy other power generators. This is how we
plan for and achieve growth in a modern industrial economy.
Here is the rub. The complicated way of doing things has
consequences because money is fungible which is why we call it liquidity. The
reality is that wheat seeds can only produce wheat, chicken can only produce
eggs or chicken, and cows can only produce milk or meat. But when it comes to the
industries that produce goods, or those that produce services, you cannot
produced more of the product by using the product itself without employing
money as a medium of exchange to facilitate the intervening transactions that
will be called for.
This means that the surplus money created by the power plant
can be used to grow the power generation capacity of the plant but also used to
purchase other production machines. But look what will happen in the latter
case. These machines will require power to work; power that will not be there
because the money was not invested in the power generation facility to make
more of it. And this eventuality has the potential to create two problems which
are common to a modern economy. They are the industrial bottleneck and the
financial bubble. The first problem usually happens to single industries at a
time such as power generation that is lacking the necessary funds to grow. The
second can happen to the economy as a whole or to a single industry that is in
vogue and also in short supply.
The people who make decisions as to how the investment money
should be allocated are called entrepreneurs, business people, financiers,
money managers or what have you. But whatever the name, they are of two types.
There is the type that makes products such as the goods or services that the
public or business community will buy. And there is the type that will invest
in those businesses for the purpose of making a return. The first are true
entrepreneurs who love the craft in which they have immersed themselves, and
think of the money they make while exercising it the icing on the cake. Because
they are in the business, they sense the increased demand for their product
when this happens, thus allocate resources to expand the business. This is how
growth is achieved in their industry; growth that also contributes to that of
the economy as a whole.
As to the second type, they are the people who work with
their own money or work with other people's money. Most of the time, they worry
about the health of the economy only in the way that it might affect their
bottom line; which is euphemism to mean the profit they will make at the end of
the year or end of the quarter. And this means they will adhere to the saying:
the trend is your friend. That is, they will invest the money under their
control where they see growth happening without worrying that a bubble may be
forming in this sector or in the economy as a whole – and this will add air to
the formation of the bubble. Meanwhile, these people will concentrate their
attention on timing; which is to say they will try to figure out the best
moment at which to sell their holdings, thus convert their bubbled up assets
into cash.
They will do this then sit back and wait for the market to
crash so that they may get into it again, buy what they sold and more at a
cheaper price. This is how they achieve growth in their portfolio, growth that
will happen at the expense of someone else in this zero-sum game. It will also
add growth to the money supply but not to the real economy because there will
be no increase in the goods or services produced.
Worse than that are the people who short-sell products they
do not have at high prices at the height of the bubble thus cause it to burst
and cause the prices to come crashing. When this happens, they buy the products
at a cheaper price and give them to those who bought from them at a high price.
They pocket the difference between the price at which they sold the product
they did not have, and the price they paid to have it. This is how they achieve
growth in their portfolio and the money supply but not the real economy. All
sorts of problems for society follow this occurrence.
To avoid such occurrences in the future, we must reject the
notion that the marketplace is a good allocator of resources. It may be the
best of a bad bunch but not good enough to run a modern industrial economy. And
it is easy to see why; most of the funds which are invested today end up in the
hands of people who care only about the bottom line. What motivate them are
fear and greed; and that's no way to run an economy on which millions of people
depend to raise their families. So then, what can we do?
To make it simple, the process by which money is lent to
entrepreneurs should be streamlined, and the interest on the money lent to them
must be kept as low as possible even when the collateral is minimal or
non-existent. At the same time, money that is lent to the financial
institutions must be strictly regulated, foremost among these being the
brokerage houses that also double as banks.
Naked short-selling must be criminalized under any
circumstance. Also, a stock that a broker lends someone to short-sell must
remain the responsibility of the broker. That is, if a broker lends me a stock
to short sell, and the stock goes down, I pocket the profit. But if the stock
goes up, it will be tough luck to the broker who will have to cover the
difference if I don't.
This may not be all that is needed to fix the system but it
will be the beginning of a shift in the culture, pointing to a better way by
which resources should be allocated for the maintenance of a sustainable
growth.