Money and the real economy.

We work and produce things. In today's language working and producing is what is
called the real economy. It is the only real economy.

Not everyone who has a job and goes to work is part of the real economy. Lawyers, real
estate agents, football players and others are not part of the real economy. They do not
actually produce things, and in the case of lawyers and real estate agents their presence
can be a negative because they distort the real economy.

But we need to exchange what we have produced for the things we need. The most
primitive form of exchanging what we have produced for what we want is the barter
system.

In a barter economy trade would have to be face to face with a person who wants what is
have produced, and has something to offer in exchange. This would make the
opportunities for trade limited. It would have to take place within a very limited area. It
would take place within the same village or a nearby village.

With the money system the goods can be exchanged for a token of nominated value that
has an acceptance to someone who has the goods we want.

With money a token of a nominal value is received from someone who does not have
what the 'seller' wants. The seller can then take the token to someone else and exchange it
for what is wanted. Money has no intrinsic value. It only eases the workings of the real
economy by using a concept of value, not a real value. Real value only exists in the goods
produced in the real economy.

There was another feature added to the money system. If someone had some spare money
they could invest that money in companies that needed to raise money to aid production.
That way excess value in the real economy can be re-directed to a place where there is s
lack. This was done by way of share in companies purchased at the stock market.
But the overriding principle is that the money system has no value other than helping the
real economy work.

Discussions about a directed economy (Communism) or a market economy (Capitalism)

only refer to the philosophical way in which goods are distributed in the real economy.
Will all good and services be shared equally or do those who works harder get more?
This could become 'do the sneaky and unscrupulous get everything.' The money market
in both cases would be the same to achieve maximum results, although in practice the
ideology spills over.

The money system that has operated for the last few decades is the neo-liberalism system.
This is a real system, not just name calling, even though Malcolm Turnbull tried to use it
as such when Kevin Rudd used the expression.
Basically neo-liberalism is 'let the market decide.' It is everyone for them selves. Neo-
conservatism replaced Keynesian Theory. Keynesian Theory is basically free market, but
with governmental controls and intervention to smooth out the rough bits.

It is one of those ironies that now that neo-conservatism has completely messed up the
markets are calling for Keynesian style interventions from governments to fix things.
What has happened has happened over and over the controllers of the money side of the
equation lose site of the fact that they were only there to facilitate trade. No more and no
less. Instead the money side started driving the real economy.

In the mistaken believe in its own existence the money markets act in ways that expand
the money markets without the slightest concept of what it is doing to the real economy.
The real economy has a certain capacity to produce. The sustainable level of the real
economy doe not change radically in the short/medium term. It has certain level that it
cannot exceed at any time. The real economy can grow, but only with increased
infrastructure and or/greater efficiencies/new technology.

But pure greed takes over and the money side increasingly pushes the real economy to
produce more, until the demands of the money markets exceeded the ability of the real
economy to produce. The problem with greed is that it losses sight of what money is and
why it is there.

The visible sign of the greed of the money people pushing the real economy past
reasonable expectations is the sub-prime market. This is not the sole problem, but it is the
visible problem.

How could any one giving out Ninja loans (No Income, No Job, no Assets) expect that
increases in the real economy would cover the dept? Somehow the real economy was
expected to increase very quickly to cover trillions of dollars of new debt. It was never
going to.

In 2001 I described the US economy as a .com economy. Sell twice as much this week (at
a loss) to cover last weeks losses, and twice as much again next week. This produces
rapidly increasing debt with no increase in the real asset base to cover the new debt.
Many others predicted the collapse of the US economy because it was never going to
work long term.

There is only one legitimate way in the real economy for people to get something they
cannot afford. That is to grow the real economy (overall or personally) to a stage where
they can afford to buy. That does not mean everything must be paid for in cash. It means
loans must be within the reasonable expectations of what can be repaid.

What the greed of the money markets has done is give loans that could not be repaid and
expected the real economy to expand beyond its capacity so they could be repaid. It did
not happen. It could not happen, and can never happen. The real economy has finite
limits.

When that finite limit was reach the real economy defaulted. It simply broke down under
the pressure of the money markets. The money stopped flowing, and the whole system
stopped working. You can stretch rubber band so far before it breaks, but when it breaks
it stays broken. Greed can only stretch thing so far before something breaks.

Making a stand against greed by way of government controls is not a slide towards
communism as some will say. Do we want money to be used as it was intended? As a
way to facilitate trade?

If people are going to trade, either with goods or labour, they must have the ability to
trade. If the housing market wants to sell houses people must be able to buy houses.
Trade depends on people with the ability to trade, and that means in a healthy economy
the wealth must be spread around sufficiently to promote the highest possible level of
activity.

Poor people don't trade, they survive. Balancing the economy so that poor people are
lifted out of poverty is one of the things that is needed. This is not a social nicety or
philosophical position. A healthy sustainable real economy cannot afford poor people. A
healthy real economy needs all its participants to be productive and solvent.

That does not mean that the hard working or business sector are not rewarded their
efforts. It means that there must be a minimum level of general wealth within an
economic system if that system is going to operate to maximum sustainable capacity.
Please do not confuse my use of the word 'sustainable' with global warming issues or
power issues. I and using it in the sense of healthy and long lived.

The thing that must not happen in a healthy economy is that the money side becomes the
driver, not the facilitator. There has to be sufficient control and government intervention
policies to ensure that the money side stays subordinate to the real economy.

There has to be balance between allowing the real economy room to manoeuvre without
being overly restricted by money supply, and the need to keep greed out of the markets.
How can greed be legislated against? With great difficulty, but it has to be done if
another sub-prime fiasco is to be avoided.

The world economy is essentially smashed. Do we re-build the same system only to have
it self destruct again some time in the future, or build new greed resistant economic
systems?
The 'allow the market to find its own level' miss the point that the money market does not
need to find its own level. What the money market need to do is to respond sensitively to
the demands of the real economy. The idea that regulation of the money market is
somehow an interference with free trade or restricts trade in any way is incorrect.
Regulation of the money market that keeps it in line with the real market promotes free
trade. It allows the real market to run at equilibrium levels.

What are the conditions that allow the maximum flexibility with sustainable certainty in
the real market? These conditions may require heavy regulation of the money markets.
This might appear as interference but it would not be. The would be the rules of the
game.

Would anyone watching a game of football complain that the rules of the game interfere
with the free market principle of the right of the players to do whatever they want?
Without rule the game of football would be a shambles. It is the same with the money
markets in relation to the real economy. Defining how the money market must work in
order to perform the task was intended too is no different.

Making rules someone who wants a house loan must have 10% deposit and reasonably
proof that they can repay the loan is not interfering with the market because the only real
market is the real economy. The real economy must have the capacity to support the loan.
If the person cannot repay then the real economy does not have the capacity to support
the loan.

If finance is need in the real economy the person taking the loan needs some sort of
stability and certainty on which to make rational decisions. This is impossible when
limited regulations allow cowboys (and girls) to play poker on the stock market.

The stock market was a good idea but quickly became a non stop game of poker using
other people's money. Stopping short selling, getting stock brokers under control and not
allowing re-sale of stock for 30days is not interfering with the market because there is
only one real market and the stock market is not it. Getting rid of the gamblers and the
spruikers to allow the real market to operate efficiently is not control anymore that banker
robbers can claim they are oppressed by the police.

If we want a free real economy it means that the money market has to be designed to fit
the needs of the real economy. It is impossible to have a healthy free and responsive real
economy and an uncontrolled money market.

Maynard Keynes seems to have worked along these lines. His supply and demand
theories with Governments adjusting money supply recognise the only real economy is
the economy that produces things, and money is only there to oil the machine.