. The Many Major Uses of Investment Credit Creation: A brief walk through the observed results so far, and the future possibilities made available through Shimomuran Economics | London Progressive Journal
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The Many Major Uses of Investment Credit Creation: A brief walk through the observed results so far, and the future possibilities made available through Shimomuran Economics

Thu 2nd Jan 2014

1 Introduction “Money is the measure of all things”, and personal wealth sets the boundaries of what the individual and his or her family can afford. On the national level, wealth sets the limits of the capital improvements in the national infrastructure and, as defined by politicians, the social affordability of government programmes, the international standing of a country and its military capability.

All goods (with the exception of unprocessed root vegetables, fresh fruit and grains) are “finished goods”, that is they are produced with the assistance of large amounts of plant and equipment. Even simple goods such as grains are usually collected by combine harvesters, and some root vegetables are harvested by machines and there is a wide range of graders, cleaning systems, washing and drying prior to packing, vegetable polishing and automatic box packaging on modern farms. Only the harvesting of soft fruit is still labour-intensive. Intermediate goods - the processing of oil to petrol, and other oil products to plastics, steel and other metal production, and the production of glass, metal and plastic pipes, thousands of minor electrical items and wires and simple and quality items such as basic tools, fuses, light bulbs and florescent light strips etc - require large machinery investments to enable their production. The chemicals and medical drug-producing industries are naturally capital-intensive, especially for the high-end drugs and cell sheet technology required and desired in a modern economy. Clean water and energy production require massive initial investments and constant repair and updating. High technology products – aircraft, motor cars, computers in all their forms – cannot be produced except through the massive investments in the complex machinery which produces their constituent parts. Machine tools – the machinery which produces these machines – are a fundamental part of that process and in the view of many economists have been the key enabler of successive waves of manufacturing development through embodied technological progress, higher labour productivity and higher quality goods output.

Capital investment is central to the process of rapid and sustained economic development. The funding of capital investment in an economy is therefore of the utmost importance in improving labour productivity and providing continually higher living standards.

And Investment credit economics – Shimomuran economics – the marriage of the government’s power to create credit with the capability of private business to invest it wisely and well – is the key to unlocking the investments based upon the continual improvement in production technology arising from continual invention and innovation.

2 Purpose The two purposes of this brief article are first, to set out the previously observed results from a policy of investment credit economics, listing these results as the “proven possibilities” and second, to propose the different future outcomes which may be available, if politicians so choose, and which seem to be inherent in Shomomuran economics. This second group will be listed as “the future possibilities” because although these outcomes may be available through the use of Shimomuran economics, that understanding has not been used to achieve these ends so far.

3 Caveats The effects of Shimomuran economics are so far-reaching and can profoundly affect so many interwoven aspects of the economy that the following listings are often little more than headings with an explanatory paragraph and, where appropriate, a reference which indicates the primary effects rather than providing a more comprehensive listing of most of the consequential effects. Most of the following headings would require at least an article and ideally a book to set out the ramifications of the indicated possibility. In some cases I have written an illustrative article, and where I have produced one, I will refer to it. In other cases, I may indicate an intention to explore the issues raised in subsequent articles. Shimomuran economics is like a vast and largely unexplored territory, with new possibilities inherent in the new understanding at almost every policy turn, and it is not easy to list fully all the potential outcomes which could be made more achievable, so the following is at best a limited listing.

Shimomuran economics is the provision of abundant capital to all the sectors of the economy where the government chooses to supply it. That might be the best way to understand how different national priorities produce such different results.

2 The Proven Possibilities

2.1 Optimising military investments and creating a preponderant power The United States of America, from 1938-44, during the third and fourth administrations of President Franklin Delano Roosevelt, was the first nation to achieve an economic miracle (defined by me as over 5 years at an average rate exceeding 10% compound economic growth) through the use of investment credit economics. (The average achieved rate of US economic growth from 1938-44 was actually 12.2% pa - see http://londonprogressivejournal.com/article/view/1507/fdrs-american-economic-miracle-or-the-first-economic-bomb-the-usa-from-to-part ). The practice of investment credit creation led to vast increases in the production of all types of military hardware and turned the USA into the “arsenal of the democracies”. The improvement in the production facilities in the docks of the USA and the incredible achievements of previously unheard-of record tonnages of shipping launched, the construction of vast aircraft factories which produced, with some difficulty due to the rapidly advancing technology, the assembly line construction of fighters, bombers and aircraft troop transporters in vast numbers, and the construction and fitting-out of immense new factories to provide all the military equipment and munitions required by the Allies to wage war, are all part of the history of the USA. After the Second World War ended, the USA found itself, with the conversion of many of the wartime facilities to peacetime use, as an economic superpower, as the greatest preponderant military power in the world. As I say in the above-quoted article on the USA:

“The post-war domination of the world by the economic superpower of the USA was caused by the great growth of the American economy during wartime. The first economic explosion due to Investment Credit Creation turned into a permanent fact of political and economic history.”

Alan Milward in his book "War, Economy and Society, 1939-45", (Harmondsworth: Penguin, 1977) has recorded and commented on many of these developments while the 1948 edition of the United Nations Statistical Yearbook records many aspects of the wartime production figures as well as part of the early post-war recovery of the USA.

China is currently using Shimomuran economics to become the world’s preponderant power based, at the moment, largely upon consumer goods production but also on city-construction with all associated facilities and the modernisation of China’s transport and communication systems.

2.2 Stimulating invention and innovation. The wartime experience of FDR’s USA illustrates how major innovations can be brought about by ICC. The investment credit creation funding of the research and development and manufacture of the first atomic bombs was perhaps the most notable illustration of that capability, but the use of government-created credit for synthetic rubber production is another outstanding example of how ICC can fund R&D and production of an essential commodity. See http://en.wikipedia.org/wiki/Synthetic_rubber and the comments from Jesse Jones, the head of the Industrial Finance Corporation 1930-39, and FDR’s Secretary of Commerce from 1940-45, in his memoirs:

http://personal.ashland.edu/~jmoser1/rubber.htm

Part of what Jesse Jones says is almost an ideal summary of the investment credit creation procedure, when he says:

“We handled the rubber situation, both natural and synthetic, in a businesslike way and got results. As a contribution to winning the war, our accomplishments in less than two years in the rubber field will stand comparison with those of any other industry. At the start we did not have the knowledge, but we went out to get it, and did, just as we did in many other fields....”

Many authors have argued for a close correlation or even a connection between war and rapid invention and innovation. That need not be - ICC can act as the moral equivalent of, and alternative to, war, by stimulating peacetime invention and innovation.

2.3 Rapidly recovering from war damage. Post-war Japan is the best illustration of this possibility. See Section 4 (Investment Credit Creation in Post-war Japan) of

http://londonprogressivejournal.com/article/view/1497/shimomuran-economics-the-nodebt-investment-credit-creation-path-to-more-rapid-economic-growth ,

which sets out the extent of investment credit creation in postwar Japan and some of its effects.

2.4 Achieving economic advantages eg in post war Japan Again, Japan is the best illustration of this possibility. See

Ken Bieda, “The Structure and Operation of the Japanese Economy” John Wiley and Sons Australasia Ltd, Sydney, 1970.

2.5 Maximising national income eg In Shinzo Abe’s Japan

Shinzo Abe has set out his programme for involving all the people of Japan in Japan’s economic recovery from the post-asset-bubble doldrums. The text of his speech, involving (among other things) abundant BoJ-created capital, is at

http://www.kantei.go.jp/foreign/96_abe/statement/201304/19speech_e.html

and a comparison of the Shimomuran investment-credit policies of Shinzo Abe with the restrictive poverty-increasing policies of David Cameron is at

http://londonprogressivejournal.com/article/view/1585/a-tale-of-two-prime-ministers

The “Abe” in Abenomics could be the acronym for a “A Better Economics,” which reflects his policy. And the David in David Cameron could be the acronym for “Daft And Vicious Income Destruction,” which certainly reflects his.

2.6 Developing all aspects of the economy - as in China

The advantages of ICC have not been restricted to specific industries or regions but China’s leadership has been addressing the maximisation of all sectors of the economy and in all the provinces of China. See the third paragraph entitled

Chinese ICC development is more complete and on a broader front than Japan’s”

at http://londonprogressivejournal.com/article/view/1622/chinas-allinclusive-economic-miracle-the-third-economic-bomb .

The Chinese moon landing on 15 December is another illustration of the breadth China’s use of ICC in a project which is undoubtedly funded by credit creation at the People’s Bank of China. The unmanned Chinese moon rover will undoubtedly be followed by spacecraft carrying astronauts to the moon, where the Chinese may build a permanent moon-base.

2.7 New city building and slum clearance - also as in China

See the section on the “Chinese Dream” - China’s massive city building programme in

http://londonprogressivejournal.com/article/view/1622/chinas-allinclusive-economic-miracle-the-third-economic-bomb

Cameron thinks many of the unemployed should pick up litter, whatever their skill level, to tidy up the environment and should waste their time applying for jobs which are not there for over 92% of applicants. The Chinese leader thinks the unemployed should be employed in the construction industry at market rates to clear Chinese slums and build amazing new Chinese cities. Which policy, do you think, is more effective at increasing prosperity?

2.8 Funding massive national investments The enormous project of the Three Gorges Dam is the kind of giant investment project which is only made possible by investment credit creation. At a cost of about 180 billion Yuan (or about $22.5bn) and with an output of 22.5GW the dam is by far the largest in the world, about a third larger than the 14GW Itaipu Dam in Brazil/Paraguay. (See http://en.wikipedia.org/wiki/Three_Gorges_Dam .) Very large investments in national projects are made possible through the practise of Shimomuran economics.

3 The Future Possibilities

3.1 Recovering rapidly from the Credit Crunch By providing the essential investment funds to grow the economy through businessmen involvement, Shimomuran Economics (or ICC) can produce a rapid (and now overdue) recovery from the credit crunch. This will probably be one of its major future uses, because austerity is no long-run answer to the need for economic growth which provides for the increasing wealth of the working population.

3.2 Reversing economic decline The relative economic decline of the West has been brought about by the availability of affordable cheap investment credit funds in various Eastern economies (e.g. Japan, China, Taiwan, South Korea) and the lack of such funds in the West. The relative economic decline of manufacturing industries in the major economies of the West can be and should be reversed by the provision of abundant capital everywhere. This will remove the balance of payments problems, level the playing field for businessmen, and restore widespread prosperity in Western nations based upon the equivalent provision of low-cost no-debt investment credit funds. The second book that I co-authored with John Carrington is wholly relevant to this subject:

John C Carrington and George Edwards, “Reversing Economic Decline”, London, Macmillan, 1981.

3.3 Improving social coherence and re-industrialising the Anglo-Saxon nations Many of the social problems of the Western nations have their origin in the destruction of some major sections of manufacturing industry and the creation of a low-employment rust belt (e.g. in Detroit, in both the UK and USA Birminghams, in the industrial complex centred in Glasgow, in Liverpool, in Los Angeles, etc.). A few excellent documentary films, such as “Crips and Bloods: Made in America” make the case for the connection between de-industrialisation and the destruction of job opportunities for the semi-skilled boys and men in America. I will write an article on this issue in due course.

The first book I co-authored with John Carrington is relevant in this area:

John C Carrington and George T Edwards, “Financing Industrial Investment”, London, Macmillan, 1979

3.4 Making Poverty History - in the Indian sub-continent, in most of the nations of Africa, South America, and in South East Asia

Shimomuran ecinomics could deliver the rapid economic development in these nations where development has so far been disappointing or has passed the country by. The example of Japan and China illustrate and demonstrate how that could be done. This is far too extensive a subject to allow any trivial treatment, and I will try to deal with this topic in subsequent articles.

3.5 Making Peace Permanent - Creating the Democratic Hyperstate and avoiding World War 3. This issue is too important and too complex to be briefly discussed here and I will write shortly several articles on this topic early next year.

3.6 Funding the next enlightenment The Royal Society of Edinburgh was created in 1783 by Royal Charter for “the advancement of learning and useful knowledge”. There may be no better illustration of present-day useful knowledge than Shimomuran economics. The new Strategic Framework of the RSE, “Towards a New Enlightenment” calls upon the Scots to deliver another enlightenment, another series of insights and understandings which can form the basis of another leap forward in mankind’s economic and social progress. That call is highly significant because, as the RSE Website (at http://www.royalsoced.org.uk/292_Policy.html ) records

“For more than two hundred years the Royal Society of Edinburgh (RSE) has played a major role in Scotland’s development as an enlightened, innovative and competitive nation.”

Shimomuran economics permits the possibility of that new enlightenment by creating the no-debt route to the additional national wealth which lies at the root of social and economic progress. I hope that can happen in my native Scotland, and I offer my understanding of Shimomuran economics to the Scots in the hope that I can become part of that in my own country.

4 Conclusions

4.1 Shimomuran Economics places governments in the driving seat Shimomuran economics (or Investment Credit Creation (ICC)) relocates the development power of the economy back where it should be, with governments. ICC places the government of any country, which is still in control of its currency, in the commanding position of being able to run the economy for the benefit of all its people. No previous economic understanding has enabled that outcome.

4.2 Credit Creation can be misused Just because governments could run the economy for the benefit of all its people does not mean that they will all do so. ICC was used by FDR’s USA to help win the Second World War, to fund great innovations (such as the atomic bomb and the mass production of synthetic rubber), and to establish the USA as the preponderant power during the last half of the 20th century. However, ICC was not used in post-war America to maintain the impetus of US peacetime growth and development in the interests of all its people.

There are several dark downsides to ICC.

First, an understanding of ICC could enable and encourage secession from economic and political unions. The EU has used trillions of Euros as ECB consumption credit creation to support the revenue overspending of various EU governments without creating the local flows of investment finding available to the SMEs of Germany, which would be a much better solution. Even the Germans - so competent in understanding, and so experienced in providing long-term loans to SMEs from local German Savings Banks - do not yet understand how no-debt investment credit creation could revitalise the economies of southern Europe and the newer EU entrants. This is a tragedy not only in the making but one that has arrived. The cohesion of the EU is threatened by the absence of an appropriate economic understanding in high places. If Merkel and the EU do not understand and use ICC soon for the benefit of all the EU peoples, then ICC could be used by any future EU secessionist states to build a better future for their people. There is no need for that to happen - Shimomuran economics can act as a force for economic integration rather than secession - but if it is not used to unify, it may be used successfully to secede, and to fund growth after a seccession.

An independent Scotland using ICC could create a much better future for the people of Scotland than the Coalition Government, with its sterile emphasis on fiscal balance and deep cuts in living standards, could ever achieve now or in the future.

Second, ICC could enable devastating wars, because militarised economies (using ICC for munitions production) could wage better equipped wars with devastating effects on all the populations involved, and possibly bystanding populations and neutrals.

Third, ICC can be used for lesser purposes. The UK has used the financial variant of ICC - financial credit creation, or FCC - to shore up the liquidity of its obsolete banking system. This has been great for bankers but not effective in restoring UK prosperity, which now seems to be detached from UK economic growth because Coalition Government policy is focused upon improving the incomes of the already rich who are their funders and supporters, and on the deliberate decline of UK living standards for the majority of British people. The Coalition Government is so wrong-headed that Osborne glorifies in a belated economic recovery which is not connected to people’s average living standards, which continue to deteriorate. Investment credit creation could be monstrously misused, with difficulty, to accelerate that tendency. There could be higher economic growth which would only be a benefit to the already rich and to the state, in a more extreme version of the callous Conservatism which is the distinguishing characteristic of the current Coalition Government.

4.3 The importance of Shimomuran insights Shimomuran economics is sooner or later going to be recognised as certainly one of the greatest leaps forward (and perhaps even the greatest leap forward) in economic understanding because it encourages invention and enables innovation and the implementation of the rapid advances in technology from now on, and consequently produces the continual rapid economic development and the accompanying social benefits which national wealth permits, for the benefit of all.

When political and economic understanding permits!

© George Tait Edwards 2013

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