Economic System of the United States of America

by Larry McCart

 

Buying Power in an economic system primarily means checking account deposits, savings account deposits, gold, and money held by individuals.  Secondary Buying Power in an economic system includes other assets than can be turned into checking account deposits within 30 days -- such as stocks, bonds, short-term certificates of deposit etc.  In order for a supply-and-demand free economy to perform well, Buying Power in the economic system needs to be steady or slightly increasing from one year to the next. Due to gross negligence on the part of bankers in the United States and Europe, the amount of bank loans for the purpose of stock market speculation increased to dangerously high levels in the 1920's.  The private banking system had created checking account deposits to loan to speculators who used that Buying Power to bid up stock prices.  The amount of secondary Buying Power in the form of stocks rose to a very high level.  The collateral for these loans was the current value of the stocks as determined by the stock market.  When stock prices went down enough, more collateral was required in order to maintain the loans.  By 1930 stock prices were way down, and many loans were declared losses by the banks, and much of the Buying Power created by banks in the form of checking account deposits and over-priced stocks disappeared, resulting in a drastic Buying Power drop in the U.S. economic system. After the drastic drop in Buying Power in the economic system, customers of businesses did not have enough Buying Power to pay all their bills, businesses did not have enough Buying Power to pay all their suppliers, and suppliers did not have enough Buying Power to keep all employees.  Factories had to lay off large parts of their work forces because there was not enough Buying Power in the possession of factories to keep all their work forces. How did the so-called "best and the brightest" who were running the U.S. government during the 1930's react to this basic economic problem -- not enough Buying Power.  Did they raise the margin requirement on non-wealth-creating loans such as loans for stock market speculation?  Yes, but not nearly enough.  The margin requirement for these loans had been 10 percent, and should have been raised to 80 percent or more.  With a 40% margin requirement, too much stock market speculation continued.   What did the fools do about the industrial sector of our economy, where wealth is created, where goods are created, the goods that cause money to have value, such as food market goods that can be purchased with checking account deposits or dollar bills?  Checking account deposits are needed to pay employees so that the industrial sector can produce goods.  If customers do not pay their bills and banks will not loan enough in checking account deposits, an industrial company will not have enough checking account deposits to pay employees, and there will be mass layoffs of productive people who want to work. What was needed at this point was a big reduction in margin requirements banks are required to have on checking account deposits, and what was needed at this point was low interest rates and lower margin requirements for bank loans for responsible wealth-creating industrial companies.  Such loans would have made it possible for customers to pay their bills and for industrial companies to pay their employees.  With such loans the mass layoffs could have been avoided, and the Great Depression would not have occurred. What did the federal government fools do at this point?  Instead of lowering margin requirements for checking account deposits in the banking system, the stupid fools drastically raised margin requirements for checking account deposits in the banking system so that the amount of Buying Power in the form of checking account deposits in the banking system available for loans would be much less.  The higher the margin requirement on checking account deposits in a private banking system, the less checking account deposits that can be created by the private banking system for making loans to wealth-creating industrial companies, and the less Buying Power that can be created by the private banking system for the economic system in general. What else did the fools do to foul up the economy?  In addition to drastically raising margin requirements on checking account deposits, they drastically raised the margin requirements on loans to wealth-creating industrial companies.  A business now needed much more collateral for getting a loan, and could not borrow as much as before.  The fools then proceeded to drive up interest rates so that it would be even more difficult for wealth-creating industrial companies to borrow enough checking account deposits to maintain normal employment levels.  Instead of the Buying Power crisis getting better, it got worse.  The federal government had done it again.  What had been a thriving industrial economy with jobs for any person who wanted to work in the 1920's, had become a severely depressed economy with huge numbers of unemployed people. During the 1970's Larry was an economic research specialist and investment advisor registered with the United States Securities and Exchange Commission.  In 1974 Larry proposed that the Dow Jones Industrial Average be used as a gage for measuring Buying Power in the U.S. economic system, and that the banking system in the United States should use the Dow as a speedometer for determining when to increase or decrease Buying Power in the U.S. economic system.  In cooperation with research technicians at the United States Federal Reserve System, Larry has promoted this method for managing the U.S. economy since the 1970's.  Jimmy Carter would not listen, and the economic policies he adopted were not good.  Ronald Reagan did not seem to be aware of Larry's economic policy proposals.  Finally with the Bush Administration the federal government has maintained a steady and slightly increasing Dow Jones Industrial Average, and the economy is strong and becoming stronger without excessive price inflation (as of 2004). (September 2008)  Because of bad management on the part of the US Congress, the Federal Reserve Board, and US federal government regulators since 2004, the prices of homes were pushed up to dangerously high levels similar to the dangerously high levels of common stock prices during the years preceding the Depression of the 1930's.  As home prices fall back to realistic levels, a huge amount of secondary buying power has been wiped out in the US economic system.  Already a bad recession exists in some areas of the US economy, and economic conditions will get worse if the decline in home prices is only about 50% (as of September 2008) of what the full decline in home prices is expected to be.