How Central Banks Should Be Creating Growth for Everyone

Systems were made for men, and not men for systems, and the interest of man which is self-development, is above all systems, whether theological, political or economic.

We are living under a system of accountancy which renders the delivery of the nation's goods and services to itself a technical impossibility. The only way we can ensure that median wages rise is to “over-print money”

I'll call attention to the excess of production capacity over consumer purchasing power, an observation that was also made by John Maynard Keynes in his book, The General Theory of Employment, Interest, and Money.

But there is a way to create the high liquidity needed in the economy without the inflation.

A central bank which partly funds local banks and creates vast flows of no-cost project credit and is not independent of the government. Central banks do not assist local development unless they are under the direct control of the government. When central banks are independent, they create asset bubbles and consequent credit crunches. Central banks are badly informed because they lack the local information about company prospects which local banks can possess and use when advancing long term loans.

Loans made to SMEs at about the rate of inflation, thus stabilising the system by making money a counterpart of real resources. The loans made to Chinese SMEs have been at a low rate which has been equal to or slightly above the estimated rate of inflation of factory gate goods outputs. That policy stabilises the financial system by making the value of loans approximately equal to a counterpart of real resources because the real value of the initial loan is preserved and maintained with changes in inflation.

An inflation-limiting salary and wages system which involves the payment of annual income rises in two parts — about half weekly or monthly and the other half in lump sums payable in November. The major factor in many economies is the control of inflation. Wage and salary costs are always a major component of consumer demand and the factor most likely to increase the rate of inflation. Splitting the wage and salary awards into two sections — one part awarded as an increase in weekly or monthly incomes and the second part paid as a November bonus — reduces the level of consumer demand and increases savings and household stability because lump sum payments are more likely to be saved.

Many local banks committed to the success of local SMEs, with Central Bank support of that lending within a legislative structure all of the economic miracle economies have had local banks, often set up by their governments, committed to the success of the local industry, and receiving support funds from the Central Bank. There are seven main examples of this: for instance, in every one of the following countries local banks funded local SMEs to produce a successful industrial and commercial flourishing: German public bank - Wikipedia

The definition includes high liquidity as the key prerequisite for successful capital projects and which also includes WIP and raw materials as part of project costs. When the local banks extended credit to local companies in post-war Japan, they did not only provide the loan funds for new buildings and equipment but also they provided the monies for work in progress and finished goods and the high liquidity which is essential to ensure that high business confidence which lies at the root of rapid economic growth. The systems in use by Western banks (and for example, the UK Treasury ‘’Green Book’’ which sets out the Net Present Value (NPV) method of assessment of capital projects) focus upon the rate of return on capital investment and do not take into account the total costs of a capital project. The results of that narrower focus have been demonstrated in the example of the attempted UK Government rescue of British Leyland where billions of capital were provided for machinery but no adequate allowance was made for raw materials, work in progress, finished goods or company liquidity. If money is provided in the form of bank loans only for equipment then this is setting up the company for the over-trading route to bankruptcy because new equipment consumes raw materials and intermediate goods at a high rate and rapidly produces finished goods which must be sold in due course. The valley of company death which exists between more effective new production machinery and final sales can more easily destroy a company if no funding is available for the essential higher levels of raw materials, work in progress, and finished goods and the more restrictive definition of project costs as simply capital investment is unsuccessful at ensuring good outcomes. The created credit which funds higher liquidity in investment economies is a key component to their industrial success. Managements know that they will survive the higher associated work in progress costs of modern machinery in a way that is not available in Western economies.