Avoiding Another Global Depression（Part 3）
Financial Institutions Are Supplying Funds to the World - What Does their Future Look Like?
It’s High Time to Cultivate More Creative Economic Policies
The UN predicts that by the end of this century, the world population is going to reach 10 billion. To allow as many people as possible to lead a prosperous life, we need to drive the economy forward, which means we are going to need big funds. Even today, we need large amounts of capital to trigger a wave of economic growth and dig our way out of this recession. This is a part of the debate on how we can make an abundant world as the world’s population is steadily approaching 10 billion people.
What Can We Do to Increase the Wealth of the World?
There is one principle which all governments, central banks, and private banks that are currently trying to protect their balance sheets have in common: something has to back the value of their money. In other words, if you have no securities, you cannot make debts, and if you have no assets, you cannot print money. However, if using the assets available now as capital, sufficient funds cannot be made available, and money cannot be printed, global wealth will never increase.
What can we do to increase global wealth? Professor Makoto Suzuki from Seigakuin University said, “If you never loan out more cash than is backed by securities, you can never create added value.” Imagine a businessman establishes a business with a 100 million yen loan he has received from the bank without offering any securities. This means that, while this particular businessman has nothing to show, the bank has decided he is worth 100 million yen. If this businessman goes on to establish a business that generates more than 100 million yen, the bank’s 100 million yen will have created new value.
Professor Suzuki continued: “The role of our banks should be to educate people so that they can make money, and to help businesses which are still unknown as to whether or not they are going to produce successful results that will create added value.” Evaluating entrepreneurs’ ideas, funding them according to their value, and creating new value – this is the real job of the banks.
The Need to Establish New Economic Policies: Putting the Focus on Innovation
So far, economics have centered on the finite precept that “we have a fixed amount of funds that require distribution in the best possible way.” However, with this theory, it is impossible to explain the evolution of economic growth and development that has taken place so far. We need a new perspective on economics that puts the central focus on creating value.
In the book “The Age of Discontinuity” Drucker, who is often considered the father of modern management, wrote: “We need economics in a way that focuses on the principle of innovation, which presupposes that the goal of economic policy should be changes in capacity to create wealth, rather than on distributing a fixed amount of resources.
Innovation is the specific instrument of entrepreneurship. This act endows resources with a new capacity to create wealth.”
Austrian economist Schumpeter said innovation itself was the driving force of economic development. According to Schumpeter, economic development starts when banks determine the value of an entrepreneur’s idea and loan him money according to the valuation. This is the money the entrepreneur uses to finance his or her innovation. In short, the way it works is that first banks create value, and then entrepreneurs realize the innovations that correspond with this value.
According to this model, the economy can keep growing as long as we have innovation. An economic slump means that the process of innovation has stagnated and bankers are unable to provide the funds needed to fuel innovation.
If we try to apply this idea on a national level, no matter how much money gets printed, as long as sufficient economic growth takes place, it does not pose a problem. The central bank should pour whatever capacities it has into the market. People may talk about hyperinflation, but as long as there is economic growth, this will not become an issue.
The World Needs Funding
The world’s population is headed towards the 10 billion mark. How can we make sure enough funds are provided for such a large population? Please read the following.
As a way of supplying enough funds to the market, Hayek suggested in “The Denationalization of Money” that rather than only the central banks, all banks should be free to issue money, while the market supplies the framework to determine the value for each currency. If Bank A prints too much money, for example, according to market principles, the value of its money should drop, so the bank will reduce the amount of money it issues. Hayek’s theory was that if money were issued based on market principles, neither inflation nor deflation would occur.
However, we also need to think about supplying funds to developing countries whose economies are just beginning to grow. Professor Suzuki said: “We need to train private financial institutions in developing countries. If, for example, a Japanese mega-bank were to inject funds into a developing country’s bank, then they should teach them banking knowhow in a management exchange. Another option would be to give tax breaks to developed nations’ banks that engage in development aid.”
Current government aid to developing countries tends to be misappropriated. Also, there is the danger of creating a situation in which developing countries become dependent on aid rather than becoming able to work their way out of poverty by themselves. It will take time to educate the local bankers in developing countries, but in the long term it could enable them to be independent and to help create the new value we are hoping for on a global scale.
To ensure further global economic growth, we need to put the creation of value at the center of our focus and ensure that generous funds are made available. According to Professor Suzuki, “The problem is a lack of available funds. If the present situation continues, in which the population is growing, while the funds are not, the future will be characterized by world poverty.”
Showing Real Bankers’ Spirit
Bankers Are Responsible for the Development of Our Civilization
“In terms of natural resources, our nation will become No.1 in the world.” This is what American banker J.P. Morgan predicted at the dawn of the Industrial Revolution. Morgan made major investments in large mining and rail transport ventures, which helped establish the economic power of the U.S., a country that would later become the world’s largest industrial nation.
In Europe, the Rothschilds long dominated the financial world. It was Rothschild III who said: “The banking business is a sector that creates the necessary cash flow to get from Point A, which is the present situation, to Point B, which is the situation one needs to get to.” The Rothschild family financed Great Britain’s acquisition of the Suez Canal, many infrastructure projects, and even the national policies of several different countries. All the more, they shouldered the financial burden of several wars. Managing the financial world, the Rothschild group has long exerted a high level of control over European politics.
The role of bankers is to provide the funds needed to help the development of their country’s and the world’s civilization. Today’s banks, on the other hand, are displaying an attitude of “No securities – no cash!” This is contrary to their actual mission. A real banker actively invests in promising businesses and does his best to plant the seeds of innovation. To encourage such behavior, it is high time for financial authorities to ease regulations.
Making the World Flourish
Morgan and Rothschild have often been criticized for using their money to control the entire economy. However, this criticism indicates the greatness of the banker’s mission.
Eiichi Shibusawa, who erected an empire of as many as 500 businesses in Meiji Japan, laying the foundations of modern Japanese capitalism, said: “If you believe that you need to establish a business, if you believe that you need to make it flourish, start the business. Get involved. Buy stocks in it.”
Having a vision of where to guide the world, and how to make it flourish, and then financing this vision; providing the financial resources to let the global civilization develop – this is the role and the responsibility of bankers today. This is what I call “bankers’ spirit”.
This bankers’ spirit is not only limited to private banks. Central banks, including the Bank of Japan, have the responsibility to pour a generous amount of funds into the market, which should plant the seeds for innovation. For the government, bankers’ spirit means to supply the infrastructure that the private sector cannot provide by themselves, and plant the seeds for innovation through investments in technological development and new industries.
Many technologies that have become a part of people’s daily lives, including Internet and GPS navigation systems, had their origins in the research laboratories of the U.S. military. If Americans had neglected investments in technology, the enormous Internet-related business sector would not exist today, and the general public would not be enjoying the benefits of Internet use on a daily basis.
Bankers’ Spirit Can Save the World
As governments, central banks, financial authorities, and private banks are trying to save their own balance sheets, the flow of money has stagnated, and the world is standing on a cliff, looking down into the abyss of another Great Depression. What we need now is sufficient funding to trigger new economic growth on a global scale. As the world’s population is approaching the 10 billion mark, this is indispensable for our future development as a whole. What do we need to secure the survival of the human race? The answer is: we need to make the world flourish. One by one, we need to embrace the bankers’ spirit.