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08 Economic Health

Visualisation

Trade chains and rings are dynamic in that they appear and disappear over time. These trade chains and rings may be subordinated in varying degrees and so flows along them may be diverted as interest for borrowers from loans or as taxes. Again these relations are dynamic in that they also appear and disappear over time. If one could show on the surface of the earth all the trade chains as they appear and disappear I feel sure the result would look almost organic.

When is this living network of flows healthy and when is it not?
  • Is an economy stable or unstable?
  • Are the economic relationships between the bodies happy or unhappy ones?

Economic Health

The risk that any economic body will default on the claims against it, may be said to be a measure of its economic health.

Money is a general outstanding claim on an economy. The risk that an economy will default on that claim may be said to be a measure of the health of the economy.

Default is of course more likely if trade rings are not complete and if subordination relationships are unstable.

Within an economy is the health of the financial bodies that make it up. What is required is the figures for the debt and risk for every such body.

In today's world this information is hard to get hold of primarily because some institutions do a great deal to keep debts off the balance sheets.

How does financial profit effect the economy as a whole? Balance sheet, cash flow and monetary profit and loss.

TODO I would dearly like to find clear information for each government listing the amounts of debt against time who it is owed to and when it is payable. i.e. how much in 30 year bonds, how much in 10 year bonds, how much normal borrowing etc. Is there any clear source of this kind of information.

Economic Bodies

When talking about an economic body another body is only a sub-body if it is possessed by the body. A firm in the UK is not a sub-body of the UK (the wealth of the firm is not owned by the UK) where as a department in the firm is a sub-body of the firm (the wealth of the department is owned by the firm).

This is important because when adding up an account for UK exports it is an aggregate of all exports of all firms. There is no single body (the UK) which is the exporter.

Economic Domains

Any arbitrary set of economic bodies may be considered to be an economic domain, normally an economic domain is something like a geopolitical area such as a nation state or an economy (i.e. an area using a particular currency like the E.U.) An economic domain is not its self an economic body because it does not control wealth, though the bodies within it do. The economic bodies that are in the domain are essentially independent, may trade with each other or other bodies outside the domain. Some economic bodies may have a special relationship with the economic domain i.e. the UK government and the Bank of England have a special relationship with the economic domain called the UK. Governments and central banks may control trade inside their domain and control trade into and out of their domain but this is not the same as having possession of the things being traded.

An economic domain interacts with its economic environment through trade between bodies inside and outside of the domain. To get any insight into the economic health of an economic domain one is necessarily looking at aggregates and statistics.

External Health

For any given economic domain any trade ring that enters its domain must also exit it or it is not a ring and circulation of things and money will not occur. This means there should be a balance in the flows into and out of the domain such that debt will not build up.

An examination of the Monetary Accounts is a good indicator of financial health;
  • the money current account the amount of money.
  • the money credit/debt account the amount of money lent and borrowed.
  • the material current account the monetary value of things held.
  • the material credit/debt account the monetary value of things lent and borrowed.
These balances should be described in the accountants balance sheets, or for a country, in its balance of payments, though definitions of the accounts vary.

The interest payments on credit and debt establishes the subordination relationships of an economic domain, in particular if its ability to produce is being consumed in interest payments then it is subordinated.

Internal Health

Even if the external health of a domain my look good, i.e. there is more income than outgoing and more assets than liabilities, this does not necessarily indicate good economic health internally and therefore does not indicate good economic health over all.

If internally there are sufficient unhealthy economic bodies or unstable subordination relationships this can destabilise the economy as a whole.

One must ask; Are trade chains complete and money circulating or are there significant accumulations of debt and credit in certain bodies. What subordinate relationships are there? Are they good or bad?

The degree of subordination of an economic domain may be gauged by the amount of interest payments in relation to income.

The practical reality of this is that the majority of people work for an enterprise which directs their labour and pays them money which they use to pay, primarily interest, on their mortgage debt. Thus the mortgage lending is not the cause of the profit to pay the interest. An unhealthy burden is placed on enterprise to provide stability so workers can pay interest on loans that have in no way benefited the enterprise! This is unhealthy economics. 

Distributions

For economic bodies one could plot the distributions of the balances of the accounts. Thus for any given monetary value one could see how many bodies were in debt or in credit by that amount.

In a healthy economy (that is self contained i.e. closed) one might expect to see a simple distribution about zero on all account balances.

Class Subordination

If one of these distributions separates into one or more peaks at different values this shows a class divide in the economy, a possible subordination relationship between one group and another. Class divides are not inherently bad in that they may reflect the price (determined by supply and demand) for different capabilities of the bodies however they may also show that certain bodies of the economy are purposefully suppressing the capabilities of certain other bodies. i.e.
  • When poor people cannot rise into positions of power even though they display the capability while rich people have access to power even though they do not have the capability.
  • When rich firms buy up small competing firms to close them down rather than develop their know-how.
The effect is to severely hold back an economy as a whole.

For an economy to function at its best it must promote those with needed capability and demote those with out it. i.e. Not promote our children and demote the children of others. An economy needs class mobility for best use of its capabilities. Subordination should be by capability not by family.

The wealth of any domain in the economy should directly reflect the price determined by, the demand and supply, for the capabilities of that sub-domain. The price for a capability in the market should then encourage or discourage supply of that capability.

If unrelated factors promote or inhibit capabilities reaching the market the price will be influenced giving the wrong economic signals and leading to a poorer economy over all.

The Determination of Subordination Structure

Normally domains subordinate their power to other domains in support of an ideology, for money, or under duress, or a combination of these factors.
  • The call to tax by an authority may bring a fiat currency into existence with which people are paid, but ultimately it is by duress that tax is normally taken.
  • Often we work for money but for an organisation whose ideology is acceptable to us.
So those with the social power to compose economic domains of bodies are the ideologists, the wealthy or the forceful.

An economic domain's survival is determined by "natural selection" in its economic environment, its ability to co-operate and its propensity for conflict.

National Subordination

Imperialism founded on military subordination, of which arms are the instrument, has been largely replaced by imperialism founded on economic subordination of which debt is the instrument. During the cold war there was considerable effort to indebt economies rich in natural resources so as to divert the flow of those resources to what are as a result the more wealthy nations. This includes covert support for what ever form of leadership would support the status quo, involving secret service - coordinated campaigns of propaganda, disinformation and manipulation of currency, if these fail discrediting or assassinating those that stand in the way, and if this fails, war; but this is a political discussion not an economic one. For the political discussion see A Covert Empire

Default

When does an economic body default? At what point does an economic domain reach the point where defaults cascade? Can the cascades be kept within limited domains?

Balance Sheets - Cash Flows - Profit and Losses



ECB: Monetary aggregates


Bank for International Settlements
IMF -- International Monetary Fund Home Page
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BIS - List of Central bank websites

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(C)July 2010 Tom de Havas. The information under this section is my own work it may be reproduced without modification but must include this notice.