The $20 Trillion – Where is it now? Part 2

The $20 Trillion – Where is it now?             By Steven Phillips    Part 2

Last time we began by taking a look at how we accumulated a $20 Trillion National Debt and started to follow the money trail to find out where that money is now – because, it’s not gone… it has simply transferred to someone else. Now we are going to follow that money trail further up the line.

But before we go further, give me one minute to set some parameters for the rest of our discussion. I am going to assume that there are certain levels of protection for our citizens that most of us agree are needed within a modern society. For instance, I don’t believe there are many people who would like to see a return to the Middle Ages. I don’t think many of us want to see children starving, sick people going without basic medical care and dying in the streets, or old people being put out into the cold. The number of studies that support that this assumption is necessary for a modern society to prosper are numerous. Any society that allows their people to live without those basic safeguards, eventually winds up paying larger costs anyway. For example, it’s quite convenient to say, “Let them eat cake.” when the masses have no bread. But we already know how that sort of response ends up – especially if there is a scenario like today where the rich are becoming abundantly richer and the middle class and poor are becoming increasingly poorer. (And, keep in mind, that is the scenario we find ourselves in today, in America, and also remember that no society since the beginning of human history has long endured with the level of income disparity that we have here at home today).

According to Paul Samuelson, who was one of the most famous economist of the last century, when a government spends money, that expenditure should have a multiplication effect within the economy in which it is spent – we call that the stimulus effect. Samuelson said that that “stimulus effect on the economy should amount to a multiplication factor of 6-7 TIMES (!) the amount of money spent. There is, according to Samuelson, a simple way to illustrate that point.

So, let’s pretend there is someone that we will call, “Mrs. Average” who is a retired widow, 88 years old, and who has very little in savings after her husband died some years back. She gets a Social Security check, and she uses it to pay her rent, to pay her heating bill, and to buy a pound of butter along with her other groceries, etc. But those dollars that she spends within the local economy are then used to pay the wages of the people who mow the grass at her apartment house, and clean the hallways. Some of it pays the driver who delivers the heating fuel. A part of it helps to pay wages to the people who work at the dairy where the butter is made, and to pay the delivery truck drivers who transport the groceries to the stores. Of course some of it represents the expected profits paid to the farmers who produce the groceries or the building owners who built her apartment house. But it goes far beyond that.

Let’s take the person who delivers the heating oil. He uses a part of his wages to buy new shoes for his children before school starts this year. The shoe store owner, who is doing better than expected this year, uses some of his profits to buy a new car, the car dealer, in turn, who is having a better than expected year of car sales, gives his employees a much needed raise, which they then use to buy the normal things that people buy… and on and on it goes. The money isn’t gone – it’s transferred to someone else. As it transfers, it is supposed to stimulate the entire economy – especially when it is large amounts of funds invested into the national economy at the Federal level – because it is unexpected growth stimulus money which means it directly affects everyone’s pocket book through increased purchasing power.

As long as that money keeps moving in this manner, from one person to another, it has the undeniable effect of stimulating the economy, and if the economy is doing well, then people have more income upon which they are taxed. Those new taxes are supposed to come back into the government to make it possible for it to do all the things we, as a people, want to do.

But wait a minute! What happens if that money stops moving somewhere along the line? What if someone just decides to hold on to it, instead? Or suppose someone decided to take that money out of the “local” economies and invest it overseas instead – because they found they could produce their goods cheaper than they can in America. They decide that they can hire workers for far less. Or, let’s say they simply have far more money than they need – so they put it in off shore money accounts. (Because you have to see that will also have a negative effect on the local economy, as well since those offshore funds are no longer able to be loaned to people in the local economy to buy things like houses, cars, education, etc.) The money isn’t gone. But it no longer transfers to someone within the local economy, and so it prevents the stimulus effect within the national economy at home. Left unchanged, what those types of people have done with the funds they have received from our so called stimulus money… which we borrowed, either from investors or by raiding other national programs to insert into our economy… will, inevitably, begin to make the entire national economy to slow down, or in some cases stop – like it did in the Great Depression.

But who would do such a thing? It can’t be poor, old “Mrs. Average” because she lives on a very tight budget. Every dime she gets she has to spend, usually within the same month that she receives it, to stay in her apartment, keep the place warm in winter, and to buy the groceries she needs. That same principle also applies all the way up the line through virtually all of those “average employees” who do the work to supply the goods and services that we all depend upon. Most of them can’t save large portions of the money they receive in wages because they, like old  “Mrs. Average” live on somewhat tight budgets, also. To cut to the chase, the only people who can just decide to stop transferring money are those people who are wealthy enough to do so. They make far more than they need for regular daily living expenses and have money to spare.

In point of fact, funds that go into the economy for so called “entitlement programs” – which includes any funds that are transferred to people of lower incomes are virtually assured to go almost immediately back into the local economy. Or how many of us actually know welfare recipient who have an overseas “slush fund” or who are actually building a new factory overseas? No! These people spend the money they receive from their monthly benefits, very  quickly, and almost exclusively within their local economy. That money is, therefore, back in the economic stream, and having Samuelson’s “multiplication effect” of stimulating the whole economy.

The problem comes whenever those funds stop moving to the next person within the economic cycle. Or let me say it another way… if money we inject into the economy keeps moving within  the economy, it will help to grow the economy, so long as those expenditures are kept within a close range to the Gross National Product – the GNP (or the total that we all produce within the economy). If the expenditures go much over 100% of the GNP, we will eventually create what amounts to a national ponsi scheme – essentially, “milking the cow to feed the cow.” What will surprise most people is the fact that our annual expenditures over and above the GNP can be tolerated within the economy, so long as three things remain in balance. 1.) So long as we continue to export more goods than we import so we have profits coming from outside our economy, 2.) So long as the job market we have at home remains healthy, and 3.) So long as taxes are paid by everyone who in proportion to the amount of spendable income that they have left after their living needs are met. In fact, if you take any one of those fundamentals out of the equation, the economy becomes the proverbial collapsing “House of Cards.”

By this point, many of you reading this article should be having a big “AH-HA” moment!

Why? Well, if Samuelson’s right, we should have seen a 6-7 TIMES MULTIPLICATION OF THAT $20 TRILLION INVESTMENT IN OUT ECONOMY AS IT CYCLED BACK UP THE ECONOMIC CHAIN!!!

Do the math, and you start to see that there is something terribly wrong. We should have seen the biggest economic increase in the history of the world. No country every invested that much into the economy before. So, when I ask the question, “Where is that money now? I’m remind of something the famous, old Senator from Illinois, Everett Dirksen once said when I was a child (I actually met him, by the way. My Dad took me to see him.)  Dirksen said,

“You know, A billion here and a billion there… pretty soon if adds up to some real money.” (- smile -)

Well, I’m sorry, we are not talking about just billions here… we are TALKING ABOUT TRILLIONS!!!  SOMEONE HAS THOSE TRILLIONS!  THEY DIDN’T VAPORIZE… WHEN YOU SPEND SOME MONEY, IT MEANS MONEY LEAVES ONE HAND AND GOES INTO ANOTHER!  WHOSE HAND???  WHY DIDN’T IT HAVE THE STIMULUS EFFECT THAT IT SHOULD HAVE HAD??? To answer that question, we wlll need to move on to my next post.

Coming Soon: $20 Trillion – Part 3