If you want to run the economy, you should first learn how it works

Let’s Take Carly Fiorina’s Advice:

First, understand how the economy works

In a recent speech, Carly Fiorina said of her other contenders for the Presidency: “They want to run the economy, but it would help if they actually knew how it works.” Although her statement was true , I am beginning to fear the she is also among them, as well as the entire United States Congress, and all politicians everywhere. In fact it may be true of the entire country save only for a few members of the Federal Reserve, the 7,000 corporate bank CEOs, and their accountants. Plus me and my students.

What do we know that others do not? It can be summed up in this simple identity: M1 X V1 = GDP. That expression states that money in circulation times its turnover rate is equal to our best measure of the economy. It is as fundamental to the economy as E = MC^2 is to the universe, but it’s a lot easier to understand.

It means we must get money into circulation so that it can be spent if we want to grow the economy. And that is because 90 percent of GDP consists of spending, either by you and me, or by the government. And in order to do that we need to understand where money comes from, and how it gets into circulation. I assume that even the dullest among us knows how to spend the stuff.

Here is another way to look at the economy: C + G + I + NX = GDP. This tells us about the four major components of GDP: C (consumers), G (government), I (business investment), and NX (net exports, or exports minus imports). And here are the numbers behind each of those components. Consumer spending = 70 percent; government spending = 23 percent, business investment = 15 percent; and net exports = minus 8 percent.

Before we go further, it should be crystal clear that spending is far and away the biggest chunk of GDP. That means you and me and the government comprise some 93 percent of GDP by our spending. That is critical to our understanding because the rest of the universe believes that spending is the problem, especially government spending. That is simply not true . GDP accounts for all employment (jobs), all incomes, and all tax revenues. So if we want to increase GDP, and job growth, and incomes, and tax revenues we must increase spending.

Here is an example: Let’s put one trillion new dollars into circulation. We know that each dollar will be spent (i.e. turns over) 6 times in the next year; GDP will increase by $6 trillion; incomes will increase by $5.1 trillion; jobs will increase by about 4.7 million; total tax revenues (local, state, and national) will increase by $2.4 trillion.

Let’s stop and assess the preceding paragraph. By increasing the amount of money in circulation by $1 trillion, we can create 4.7 million new jobs and reduce the unemployment total to almost zero, increase personal incomes by $5.1 trillion, increase tax revenues by $2.4 trillion. By almost any standard of measurement, we have just solved the economic problem in America. Even our budget deficit will fall by about $900 billion, and that would give us a budget surplus of about $500 billion.

Holy bananas! Am I a genius, or what?

Actually, no. I am just a mere mortal who understands how the economy works. And so do most of my students. I only wish that Carly and all her contenders understood as much.

The bigger problem is this: Year in and year out, one of the two major political parties keeps hammering home the idea that “we can’t spend our way to prosperity. The way to do that is to give huge tax cuts to the wealthy. They are the job creators.”

That is all false. The wealthy do not spend their tax cuts. They save it by putting it into stocks, bonds, or real estate. That is called the savings portion of M2, not M1. And savings do not circulate, so it does nothing for GDP, or incomes, or jobs, or tax revenues. It merely makes the wealthy—wealthier.

“OK, so why can’t we get more money into circulation?” you should be asking. That is where those 7,000 corporate banking CEOs and the Fed come into the picture. The Fed orders the Treasury to print say, $1 trillion new dollars. The Treasury prints it and sends it to the Fed. The Fed in turn ships all those new dollars to each of their 12 regional Federal Reserve Banks. Those banks sock it away into their vaults, and make it available to all its member banks, those that belong to the Federal Reserve System. They are controlled by those 7,000 corporate banking CEOs. These bankers can now borrow that money from the Fed at the princely interest rate of 0.25 percent, the discount rate set by the Fed. That rate is nearly free money to the banks.

Those 7,000 bankers borrow as much of it as the law allows. But they want a good return on their new (and essentially free) money. They can lend it to you and me (all of the spenders) at 3 or 4 percent, or they can put it into their own investment accounts at the market return rate (of 10 or 20 or 30 percent). Put another way, will they help themselves, or or will they help the country? I will not call them greedy because that is too polite a term for them. They are thieves.

The Fed then orders more money, and the bankers take it. It’s a fun game. Those bankers are getting so rich they are going nuts. And so the Fed orders more, and the bankers take it and divert it to their own accounts and lend some to their best customers, the other 63,000 corporate CEOs who fatten up their own stock holdings with the swelling stock market.

Meanwhile, those M1 dollars remain flat, and no new spending takes place, no jobs are created, incomes and tax revenues remain flat. But those M2 dollars rise and rise and push stock prices higher and higher.

Meanwhile, 99.9 percent of humanity doesn’t have a clue about what is going on. And that works perfectly for those bankers and their friends who are making profits hand over fist. And, instead of lending that money to small businesses and to individuals so that it can get into circulation, they call for tax cuts!

But look at those two math identities listed back at the beginning. There is nothing in them that suggests tax cuts help the economy. Oh, they have a tiny effect only because the typical tax payer also gets a few dollars from them and we spend it. But the overwhelming chunk of tax cuts goes to the very wealthy. So tax cuts amount to a double dose of good times for the rich, while the rich blame all that government entitlement spending for the reason why the economy is not growing, and our deficits and debt keep rising.

By now you should be asking “How can we stop this madness?”

Unfortunately, we cannot change that which we do not acknowledge. As Carly Fiorina correctly noted “It helps if they [and we] first understand how the economy works.” The rest is up to us.

This cozy arrangement between the Fed, those 7,000 corporate bankers, and their 63,000 CEOs friends must stop. When new money must get into circulation, stop making it available to corporate bankers. Make it available to smaller community banks and to credit unions. They are the channels that direct money into circulation, that help small businesses (who create 70 percent of all jobs), and consumers (who comprise 70 percent of GDP).

What can you do? Launch a petition demanding that the above action starts now. Launch a thousand petitions, and collect 100 million signatures. Inundate Congress and the White House with those petitions. Let the Fed and corporate bankers know that we are onto their play pen activities with our money. Get creative, get organized, and fight grand larceny with facts and determination.

I regret that I am too old for much activism. My task is to turn Carly Fiorina’s advice around and let everyone know how the economy is supposed to work, how it actually is failing us, and how you and I are being cheated more and more with each passing day.