Sat Aug 20th, 2011 at 05:19:23 AM EST
When I was young and trying to get my mind around how the world works, I was told that bank loans come from deposits.
- If you want business investment, you have to have savings - typically the savings of ordinary people.
- It doesn't matter how rich someone gets, even if they don't spend their money, it remains in the system because their savings enable loans.
ATinNM has threatened to write about the difference between a million people earning about a billion euros and a single person earning 999 million and the rest earning 1 euro.
Part of the foundation in mainstream economics is the idea that money cannot be removed from the system by this redistribution.
The uncontroversial point in the global age is that money can be removed from the local system. This may result in adjustments of things like wage level/interest rates/exchange rates which should even things out - but we know that all of these things are not free variables in our world.
So the simple part of the inequality problem is that (for example) if the rich person gains wealth in Europe and invests it in China, it's going to be a long time before that money comes back into Europe via trade - which implies a contraction of demand in Europe.
The harder part is that (as discussed quite a bit here recently) bank lending isn't actually tied to deposits.
There's also a question about the effect of fixed asset (for example, land) price inflation... as it's only little people who really use banks in the simple way.
Can this help us further trace the mechanism by which inequality leads to "magneto trouble"?