The development of physical productive forces is not cyclical, but we have a macroeconomic system that follows boom-and-bust cycles. If the development of physical productive power behaves in a boom-and-bust cyclical pattern, we have to tolerate the boom-and-bust cycle of macroeconomic output and the system as a whole. But if the progress of the physical productive power or the potential of the increment of physical productive power is progressive, it is not necessary to tolerate the cyclical behavior of the macroeconomic system. This does not mean that the business cycles of microeconomic system (which correspond to the performance of individual enterprises) should not be tolerated; instead, such cyclical behavior is necessary to ensure business efficiency that is based on consumer preferences. Businesses should be allowed to fail and new businesses should be allowed to emerge based on efficiency and consumer preferences. But macroeconomic system failures are not due to consumer preferences—but to the general illiquidity of consumers arising from a cyclical bad debt crisis as explained by the System Gap Theory. The illiquidity of consumers is not a physical phenomenon but a monetary phenomenon; and money that is not “real” is an abstract quantity, which we can control. That is why I strongly argue that we could have prevented the collapse of macroeconomic systems in the US and Europe in late 2007—and the continuing crisis can be resolved rather quickly if we change the monetary equation. To do it what was—and is—needed is a new macroeconomic policy tool and wisdom beyond the Federal Reserve.

Occupy The Solution not Wall Street

Managing Systemic Bad Debt with System Gap TheoryBy Hema Senanayake

AuthorHouse

Copyright © 2012 Hema Senanayake
All right reserved.
ISBN: 978-1-4772-5698-5

Contents

Acknowledgments..........................................................................................................xiIntroduction.............................................................................................................1Chapter 1: Understanding the Functioning of Macroeconomic System Through the Great Recession of 2008.....................19Chapter 2: Fractional Reserve Banking System and Full Reserve (or 100 Percent Reserve) Banking...........................37Chapter 3: System Gap Theory.............................................................................................51Chapter 4: The Two-Tier Production System................................................................................61Chapter 5: Market Mechanism and Monetary Mechanism.......................................................................71Chapter 6: Achieving Economic Equilibriums or Filling the System Gap.....................................................81Chapter 7: Resolving Some Economic Policy Issues.........................................................................93Chapter 8: The Solution..................................................................................................105Chapter 9: The Question of Pension Planning..............................................................................119Chapter 10: Conclusive Remarks...........................................................................................125Paradigm Shift and Kalama Sutta..........................................................................................129References...............................................................................................................131

Chapter One

Understanding the Functioning of Macroeconomic System through the Great Recession of 2008

The economic system has to be fixed; this notion is now unanimous around the world after the Great Recession of 2008. You can't fix a system if you do not understand it or if you do not understand how it works as a whole.

Sometimes events and occurrences reveal how a system really works. Likewise, the Great Recession of 2008 (which is sometimes referred to as the great crash of 2008) reveals the inner workings of the modern "complex" economic system.

In 2008, the world's wealthiest nation, the United States, suddenly revealed to the world that the US economic system and the society had accumulated enormous debt and other monetary obligations that could not be paid back or honored. The incumbent president, Barack Obama, said "I think it is important to understand that some of that wealth was illusionary in the first place." ("After the Great Recession" interview with President Obama, New York Times Magazine, April 28, 2009)

Without the occurrence of the Great Crash of 2008, such contradiction of wealth and bad debt would not have surfaced. What is important is that such contradictions would continue—and the same occurrences will take place if we do not fix the system. Understanding this systemic contradiction is the first step in fixing the problem.

Therefore, I will use the systemic crash of 2008 to explain the inner workings of the contemporary economic system. Yet, my primary objective in this chapter is not to explain the events of 2008; instead, I want to introduce three economic concepts to the reader that will facilitate understanding how the modern macroeconomic system works. This knowledge will lead to understanding the systemic contradiction that we have to deal with.

Those three economic concepts are (1) Mechanics of Recessions (2) Fractional Reserve Banking System, and (3) System Gap Theory. These three concepts explain the fundamental and integral parts of the macroeconomic system. Without knowing these concepts accurately, no one could understand the economic system as a whole or understand the true reasons behind the crash of 2008. They also couldn't figure out the true solutions rather than increasing the deficit financing of the government on public projects and programs as done in the US or suggesting austerity measures as done in Europe.

The important thing is that you do not need to be an economist to understand these concepts. Any curious reader will understand them without any difficulty in this chapter since I took great care to simplify them. Let me explain them with a small background story through which you may find how I achieved the goal of simplification of theories/concepts.

I was invited to deliver a public lecture on February 10, 2012, on the topic of the "Global Economic Crisis of 2008—Reasons and Solutions." This crisis was something I wrote articles about and I duly claim that I predicted it. The challenge was that I had to do it in thirty minutes. The organizers had allocated thirty minutes for the initial monologue presentation and two hours or more to discuss questions. The logic behind their time allocation was simple. They were of the opinion that the attention of most participants in public lectures is good for the first thirty minutes. If I could arouse their attention and establish my main points in first thirty minutes of my presentation, the rest of the time would be used effectively in answering questions. Their rationale was sensible, and I agreed to do the seminar. I had a fear about the time limit because it was a subject discussed in volumes and volumes of books.

As you may know, the Global Economic Crisis of 2008 became very serious and complex. The European Commission at one point totally rejected the existing macroeconomic theories as incapable of predicting crises and also was incapable of giving any insight to resolve the crises. Many economic scholars have been disappointed by the way things have turned around. Yet many economic scholars, Central Bankers, and policymakers submitted their own theories and views, which did not find consensus as of today. Arguments among Keynesians, monetarists, economists of Chicago School, and economists of Austrian School seem to never end. Apart from that, presidents and prime ministers of troubled countries, IMF, the World Bank, and the International Bank of Settlements (IBS) had their own "pragmatic" explanations. On the other side of the spectrum, there are Marxist scholars who revived Marx's thesis of "falling rate of profit" to explain the crisis, which could not be simply ignored.

But my goal was not to present any existing idea or another controversial view. My goal was to achieve a consensus. Yet in an environment of diverse opinions and views, how a person can explain the crisis of 2008 in thirty minutes with an objective to achieve a consensus of a crisis that is still continuing after nearly four years. However, in this environment, if somebody could achieve a consensus, then he must be presenting a provable truth.

In November 2008, I published a new macro-economic theory called "The Theory of Economic System Gap" in Indispensable Bad Debt to explain the world economic crisis. I knew I had some strong arguments on the subject. Most of those who did read that book never rejected the theory or main arguments presented there. Along with that theory and two other fundamental economic and financial concepts—Mechanics of Recessions and Fractional Reserve Banking—I knew I could present a good case. I was confident that I would achieve my goal but...