Wednesday, July 08, 2015

Economics as a Weapon

Within a modern economy there are two important economic policy tools: the money supply and the level of taxation.

The money supply is the money the central bank makes available to individuals and firms which operate within an economy. There is a market for money, just like for any good, which determines the level of prices. If the money demand is stable and the money supply increases, then we see a rise in the level of prices, known as "inflation"; if the money supply decreases, then we see a fall in the level of prices, known as "deflation".

Deflation has a number of interesting effects on an economy:

1. In order for an economy to adjust to a lower money supply, all prices should decrease, such that the economic activity could continue with a lower amount of money. A shop owner, for example, will see that his clients lack the cash required to buy his goods as before and he has to lower prices. This means that his employees' salaries, prices for his acquired goods, utilities and rent should also decrease. The employees' utilities and rents also should decrease and so on, until all prices adjust. As a result, the economy could function like it did before the money supply decreased, but with lower prices. However, THIS DOES NOT HAPPEN. Some prices are "sticky". The building owner usually is rich enough to keep the rent high, even if this means that the building will stay empty and he will actually lose the rent over a long period of time. The utilities suppliers usually are large enough to function as monopolies and they even continue to rise prices in the middle of the recession. This squeezes the shop owner into bankruptcy. The unemployment increases, the production of goods decreases. We have recession.

2. Potential investors see that their money are more valuable every day. They are no longer motivated to invest the money, unless the business opportunities offer profits above the deflation rate and at a very low risk. Keeping paper money is safer than starting a business, especially during a recession, and now they get a profit by keeping paper money. This decreases investment, and further decreases the money supply, since more money are effectively withdrawn from the economy. As a result, unemployment increases and production decreases further. The circle of disinvestment and recession can continue for a long while.

3. Inflation acts like a tax: an increasing level of prices devalues any cash in the economy, while allowing the government to spend the newly printed money just like any other public money. Unlike a regular tax, inflation taxes undeclared money, money kept in a suitcase under a bed, as well. Deflation has the opposite effect, it rewards black money. In a country with a poor tax collection rate, like Greece, this effect alone can blow up the economy, because the government can no longer tax income as efficiently as before.

4. There is a psychological effect of low money supply. When you see money entering your pocket, and you expect more money to come tomorrow, you plan to spend or invest it. When you see that money supply is tight, you save even more than it would be rational to do. This goes beyond the rational planning in point 2. This strengthens economic booms and recessions, making them worse.

5. A government needs to face unexpected adverse shocks, like bad weather or financial attacks from global speculators. If that government can not print money then its ability to answer to such adversities decreases. When financial global speculators know that a government is unable to answer, the attack becomes certain, because its success is almost certain.

6. When a government prints money in the right amount and at the right time, and spends it the right way (which basically means helping the poor within the society), the economy will grow. As a result, the money demand will increase, and the price level may not even increase at all. This is what happened in the USA, which printed large amounts of dollars, as opposed to EU, which applied tight money supply policies. Today, the dollar grows stronger against the euro.

Taxation also has an optimum level which in Greece has been exceeded by far. In Greece, lower tax rates would increase tax revenues, because the economic activity would increase.

These simple statements are the conclusion of any economics college first grade Macroeconomics textbook.

I remind you that money supply is only paper, printed paper. So why are we having this problem of lower money supply in Greece at all?

Greece is less efficient and more corrupt than Germany. As a result, there is a level of euro money supply which would bankrupt Greece and allow Germany to function. Now ECB knows precisely what that level is. After five years of austerity in Southern Europe the German economy also bordered deflation. ECB reacted on the spot: (risk of deflation in Germany) (reaction).

Sunday, September 08, 2013

Syria Proposition

Western governments should organize a peace conference with Middle East regional powers, because the war in Syria is a regional war and not a civil war. As a motivation, the West should offer a credible recovery plan, that would create business opportunities for most parties involved. If a regional power rejects a correct peace and shows its muscle, then the muscle must be bombed. Also, more aid for the refugees. They know better than us what is going on in Syria and they must be part of the solution.

Wednesday, September 04, 2013


  1. We need to use the new IT technologies to monitor, control, and influence our gov't's decisions in real time. (Toffler)
  2. We need to support our interests against the interests of large centers of power, like governments and corporations. (Robert Putnam)

Syria: My dear 50% non interventionist Western citizens

Syria is not a problem of the Muslim world. There is only one world, and the Middle East lies on its most important fault line. Moreover, the Middle East society is vertically integrated. This is bad enough, but there is more. The conflict is hugely amplified by your dependence on oil. Western interventions in the Middle East have been intense and uninterrupted for a long time now. This created tensions which are big and concentrated, largely against you. In Syria, for example, both sides would like you better dead, and they don't make a secret out of it: Khomeini and Al Qaeda. ONLY THE SYRIAN CIVILIANS, caught in the middle, would like to live decent lives in a Western style democracy. Your decision to default on your (rather impressive) responsibility for those people's lives may well be the last straw before your payday. It is imperative for you to care and support peace negotiations among regional powers in the Middle East, even if that means for you to give up some of your interests and support financially, politically and civically the establishment of decent societies in the Middle East. About the racist and Christian fundamentalist components of your position, I better keep my comments to myself.

Sunday, May 05, 2013

All Together Now

An open society is not stable. (In an open society public decisions are made through rational discussions between members of that society.) People always try something new, and if they are on their own, they will change their society. Electronics and Genetics are only the last important change, turning our global society upside down, in a long string of changes promoted by open societies in a short period of time, starting with the ancient Greeks. And it only gets worse, the speed of change increases every decade.

Open societies are usually horizontally integrated (see Open Society) and they can cope with change much better than their poor counterparts, the closed societies, which are usually vertically integrated (VIS). (In a closed society change is arrested by dogma, terror, dictatorship, and it takes place in convulsions, at large time intervals.) You can't imagine how disruptive have been these new technologies to the Russian and to the Chinese societies, for example.

After the fall of communism globalization resulted. This allowed the rich Western elites to extend their area of interest to the whole planet. Horizontally integrated societies (HIS) find it now much more difficult to control their governments, because their governments colluded with multinational corporations and became stronger than the horizontally integrated societies which enabled them to conquer the planet in the first place. Also, communism is no longer a danger, such that the poor can be taxed to subsidize the rich during the economic depression.

Technological change places direct pressure on HIS's, too. According to Toffler, political institutions should change to adapt to the new technologies. When large businesses and government officials use the Internet to move their billions around the globe at the speed of light, they can not be controlled through a vote on paper every four years. Example: at the New York Stock Exchange, powerful computers intercept online buying orders and use their speed to buy those shares before the online order is completed. As a result of the increased demand, the online user buys the shares at a price a little bit bigger then when he placed the order and the difference goes to the one who owns the fast computers. Such problems can't be regulated through a four years vote on paper. And it is not about money only, it is about power, because the very way we protect property is in question. Digital private information, satellites, drones, we can't control them when we vote on three issues every four years. The problem of citizens' control over their governments in HIS's is serios enough to make the control of the Internet by large corporations and governments the main political issue of our time (for copyright protection, of course).

Lack of global government is also a major problem. Because of technological advances we do now have a global society and economy, but no global government. By global government I don't mean a centralized government, I personally support a distributed government, as I will soon explain, but we certainly need some government. For example it becomes clear that we need some population control policy. It would suffice to tax everybody's income with some percentage and distribute the money to mothers with one child. This should be enough to cover the cost of raising one child. With such a policy in place, very few women would choose to bear more than one child. But we can't do this. The pressure on our ecosystem is increasing to a point where people will support our traditional population control strategy: yet another war.

The solution is to voluntarily cooperate to solve our common problems, to govern ourselves a little bit more. Just as the French analphabet, superstitious and violent peasants had to learn basic mechanics and how to read the paper in the morning before they go to vote, we need to learn some more basic sociology, economics, political science and we need to begin to control our governments in real time, imposing limits on the mistakes they make on daily basis. I thought that it should be easier now, when we accept reason and science as the basis of our decisions, than it was in 1780's, but it is not. People continue to support well documented policies that destroy our economy and society. Why? Because the global society is vertically integrated. Every little individual is motivated to be stupid, to support austerity, to shut up when he sees injustice, to be irrational in the way he thinks, and so on. As I said here, there is no rational discussion in a VIS, only declarations of loyalty.

Tuesday, May 01, 2012


This is the first time that I read such a long piece of writing on the computer screen. Really. The action does not fade after the first few pages. By the contrary, it only gets better.

Wednesday, November 30, 2011

The Third Wave

Alvin Toffler published his book The Third Wave in 1980. He classifies societies by the way they produce wealth:
  • societies based on agriculture  
    • main asset is land  
    • most goods produced locally  

  • industrial societies  
    • main assets: raw materials, energy sources (coal and oil), markets  
    • mass production, standardization, synchronization, centralization (pyramidal integration)  

  • third wave societies  
    • main asset: information  
    • modularization, flexibility, small scale production becomes feasible, the speed of the economy increases  

Toffler analyzes societies by dividing them into a number of spheres: political, military, religious, educational, cultural. He states that it is important to have such spheres harmonized within one type of society. While our economy enters the Third Wave, our political sphere is lagging behind and it fails to fulfill its function. As an example of the inadequacy of our political sphere he cites the “Pueblo incident,” which is a result of overwhelming information pressing on our political system. It seems that one high rank civil servant found a 1000 pages report on his desk one morning and he was forced to use it to assess the risk of the mission by noon. Our current political system is modeled following an industrial era mechanism: regular check through standardized mass voting, upward filtering of representatives into parliament, committees and government, concentration of power. The solution is to share the public decision process among people. Toffler proposes the use of Third Wave technologies to set up temporary flexible teams, real time discussions, voting and polling.

Tuesday, May 03, 2011

Open Society (continued)

I have no words to describe the evilness of a vertically integrated society (VIS). The worst kind always wins. Not only that equals sabotage each other as well as possible, but the person in power does not feel safe unless it is able to prove his power again and again. This proof takes all negative shapes one can imagine: it is the power to destroy, to impose absurd public decisions, to arrest change, all to make the powerful person feel a bit more secure in his position of power. Even if the powerful person was well educated before he took the power, he will be forced to change if he wants to survive. There are no rational arguments in a VIS, only declarations of loyalty. A rational argument requires a civic society able to listen and judge that argument. This phenomena takes place at each and every level of a VIS, starting with groups of two people and ending with the whole society. This situation describes a stable social equilibrium. Besides the reason and the experience which soon teaches every person the right strategy to survive, this attitude is also sown into every individual since birth. I watched a three year old being taught not to acknowledge the presence of neighbors.

Vertically integrated societies have a tendency to change unexpectedly, when one single person, usually deprived of any free intellectual challenge, suddenly decides to change policy, or when rather regular but always unexpected popular uprisings erupt. These uprisings always fail in the long run, as people do not cooperate with their equals on a regular basis, but simply choose new leaders to solve their problems, and preserve the social structure. A VIS is unable to enforce contracts beyond the discretionary and always unexpected will of the great leader. This renders the economy hopeless, but also it gives to every international treaty involving a VIS the value of the paper on which it is written – and nothing more.

Horizontally integrated societies (HIS) show a few defects themselves, as follows:

- Racism: as problems can be solved within the community, where people know and control each other well, and the community is defined by small but overwhelmingly important details like the accent, body positions and eyes color, efficient HIS's are usually hermetically closed. Larger scale problems require larger scale cooperation, but such problems are delegated to remote high rank politicians and many of them fail to be solved.

- Inertia: a problem needs to sink in before people tear off from their valuable private time to solve it. In a HIS, a problem is postponed until it becomes stringent, and then it is dealt with it very intensively over a short period of time. The solution, generated by the very middle class people who are affected by the problem, is usually good and feasible, such that people can ignore such problems over a long period of time, after which the problem resurfaces in a new form.

- Flattening: it seems that societies which are well integrated horizontally have a tendency to censor people who are well above or well below the average from the point of view of competence and performance.