The raison d’être of the Synthetic Economy is to enable both the government and the banks to manage the condition under which the banks had lent trillions of dollars, not only to the Federal government, but states, localities, and even foreign countries, which, as a practical matter, cannot be repaid.
The traditional approach, for a national government, is to ‘monetize the debt’ by printing money to pay it. Of course, new money, with nothing to back it, will simply lead to price inflation. Many times in our history, governments and banking systems have collapsed as a result, as the money was quickly recognized as worthless by the public. In the United States, and modern states with central banks, the process is a little more complicated: the government issues debt, which is bought by the central bank. The bank creates money on the spot to buy the debt, which the government can then spend. But the result is the same: money is effectively created out of nothing, with nothing to back it.
The Synthetic Economy addresses this concern by managing what most of us experience as ‘the economy’ (i.e. the Synthetic Economy) so that what most of us experience as ‘money’ maintains a relatively stable value. This is done by balancing whatever new money is introduced into the Synthetic Economy by money taken out, either through taxes, repayment of ordinary people’s debts, or purchases of imported goods. (Once a dollar goes to China, the Synthetic Economy will likely never see it again!) As a consequence, very little of the new money migrates into the Synthetic Economy, so prices remain stable. In fact, to combat price inflation, the Synthetic Economy is run in a slightly deflationary mode. This further stabilizes prices, but also depresses wages.
For national governments, big banks, and multinational corporations (the players in the ‘Big People’ non-synthetic economy) this means that money is no longer a scarce good. Spend all you want: we’ll make more! But don’t spend it on higher wages for your employees, or new infrastructure or benefits for your citizens. If too much of this money gets into the Synthetic Economy, it will wreck the balance.
For years, politicians have told us that they can ‘fix the economy’ through government spending. Alas, it doesn’t work. One of President Obama’s first efforts was ‘the stimulus:’ a package of some $787 billion in spending meant to get the economy restarted. It accomplished almost precisely nothing.
Actually, that’s not quite true. The dislocations of 2008 primarily hit the Big People economy, but did have an effect on the Synthetic Economy as well. Many ordinary people lost their savings and pensions, or became unemployed. It was a case where too much money had been bled out of the Synthetic Economy, and we had to put some back to maintain the balance. However:
- Much of the stimulus was aid to states and local governments to fund their ongoing operations. This did nothing but spare state and local politicians the necessity of making difficult choices.
- Some of the stimulus went for infrastructure, but then again, the government is constantly spending on infrastructure (although perhaps not enough to overcome the ongoing decay). So at least some of the infrastructure spending in the stimulus was brought over from programs that would have been enacted in its stead.
- The stimulus did nothing to help individuals who had lost out in the 2008 dislocations. The banks and other too-big-to-fail firms had previously received bailouts, but individuals were left out. In fairness, that wasn’t its purpose, and it’s a fair question whether the government should be responsible for making good on individuals’ bad financial decisions.
So the stimulus served to reinforce the status quo, as well as the notion that it’s dangerous for Little People to play in the Big People’s economy. It didn’t change the economy overall, and did not result in the fount of new jobs that its proponents claimed for it.
In fact, because of the need to maintain balance, we haven’t seen, and are unlikely to see:
- Meaningful public or private investment in infrastructure. At best, there will be continuing public spending to keep things from falling down, but little more. On the private-sector side, companies that earn their living through their infrastructure will spend to maintain it, but in the absence of new markets for their products and services, there’s little incentive to build more.
- Private-sector mobilization to create jobs and do more. For a long time, I have believed that the private sector, rather than the government, has the keys to a real recovery. The government can’t force businesses to expand or hire people, but if businesses did it for themselves, they could drive a new, real, recovery. But they won’t, not only because consumers are pretty much spent out, but because introducing new spending into the Synthetic Economy will upset the balance.
- Significant efforts to redistribute income through taxation. Paul Krugman is a big believer in deficit spending to increase demand, but doing so would be inflationary, and the Synthetic Economy is being run in a deflationary mode for price stability.
- Meaningful tax cuts… or tax increases. The rates might be tweaked up or down because of political pressure, but the overall regime, and the role of taxation in keeping the Synthetic Economy in balance, will not change.
Years ago, one of my engineering-school professors remarked that ‘money is shit anyway.’ And now it has come true. It’s certainly true in the Big People economy, where money can be synthesized at will, out of literally nothing.
For now, with the Synthetic Economy, the rest of us have been slow to catch on.