Trickle down

Trickle-down economics are something you hear about these days only when it’s argued against by socialist-minded people, and even some billionaires seem to get it wrong. So let me explain the concept first, and then I’ll proceed to the related matters.

The concept itself is simple – it’s about whether the rich should be taxed more since they have more. The communist answer is “yes, because they must have stolen it somehow from the poor and everybody should be equal”. The capitalist answer is “no, because wealth is not pre-existent, it is created by people with ideas that worked, and in order to motivate others to explore their ideas, you must create an environment that rewards creativity and success, and punishes mediocrity and risk-aversion”. The trickle-down theory says that if you don’t tax the wealthy disproportionately, they will create jobs and therefore wealth for others. If you tax them, the state will squander the money like it usually does and it will do nobody any good.

The point of contention is that if you don’t tax the wealthy, they will not consume enough products on the market to create demand sufficient to justify the trickle-down theory. A wealthy person will own the best car, they will tell you, but it’s only one car. Also, I heard an even dumber argument, stating that wealthy people will just keep their money somewhere, being wealthy, and that money isn’t doing anything for the economy. It’s obvious why socialists are poor. They don’t know anything about money.

One of the explanations why Germany became so incredibly wealthy is because its people saved money. If they save money, the banks can use deposits to guarantee for loans. This grew the German industry and economy. The opposite theories, that people should spend more in order to stimulate the economy, invariably end badly, in collapse of the credit bubble, and eventually collapse of the monetary system. Paradoxically, when wealthy people save money, the economy thrives, because credit is backed by the deposits, and the alternative is for the state to debt-finance loans, which eventually collapses the state and its economy. In a healthy economy, everybody earns a lot and spends less. Essentially, instead of supporting the credit-financed consumption of the citizenry by foreign debt, the banks support the growth of the economy by internal deposit-financed debt.

Also, let’s see what the wealthy people actually do with their money. First there’s consumption. They put a portion of their wealth into their lavish lifestyle. This stimulates manufacturing and retail. Then there’s the money that is re-invested in their business, because if someone got wealthy by growing a shoe manufacturing business, he will re-invest some of the profits into the business, which means more jobs and bigger industrial output. Then there’s investment in stocks and bonds. If you buy bonds, you help the issuer get capital for his business without relinquishing share in the business. If you buy stock, you help businesses get financing by relinquishing share for capital. Basically, whether you invest in stocks or bonds, you invest into the economy, of course hoping to make a profit in the process, and by doing that, you are performing essentially the same function as the banks: you help economy get liquid capital in order to grow, and you are repaid with a share of the profit. The money you keep in the bank helps the economy through ways I described before, and there’s also the possibility that you keep a portion of your wealth in precious metals, which condenses your wealth to a form that is no longer useful to the economy, but instead performs another function: if the state manages to squander everything, all other forms of wealth will evaporate, but precious metals can be used to restart it from the ruins and get everything going again, and that is probably the most vital function in the entire system. Basically, every unit of money a wealthy person gets to keep functions either as a catalyst, lubricant or power storage for the economy as a whole. So, as you can see, all the criticisms of the trickle-down economics are based on total misunderstanding of money and the economy, which is no wonder, since people are learning economy from the communists. It took me decades to learn these things, and everything I learned in school or from my parents was so incredibly and utterly wrong, it’s a miracle I’m still here, and no miracle I had to go through several disasters to get here. I think even most bankers and heads of central banks have those things completely wrong, which is why today’s monetary system and the economy are in such a precarious state, facing either complete restructuring or a violent disaster.