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Monday, April 13, 2020

The lockdown reveals the weakness of capitalism and its underlying structures

Looking forward to the future of business

Rizal Philippines
April 13, 2020

Govt eyes 15-day lockdown extension

As a non business course undergraduate, I struggled as I was starting business to understand more about business, to study economics, money banking credit and finance, entrepreneurship.  These were some of the things:

1.  That banks have been most influential in expansion of business, especially the fractional reserve system, where little actual money can be made to multiply based on inverse of reserve requirements ie where the reserve requirement for banks is 20%, the money can be multiplied five times and so on.  Much of the economy is based on debt.  That if you have an economy say P5million, the liquidity that circulates maybe only 1/5

2.  That business that progress needs its own money to finance its growth:   be it a stock offering, a debenture, or credit cards to finance consumer financing.    A business that does not do that, can grow organically, like a tree slowly;   Like the SM group business when it used GC to increase purchase by its customers, eventually starting a bank that offers CC

3.  That a bank rather than a collector of savings, create money by creating credits.  US for instance, has
grown from about $20 trillion in debt, created by Federal Reserve banks, investment  banks and credit card companies.  Debts and more debts create progress in Western Countries.

4.  A central bank, due to fiat currency system creates money out of thin air.

     1. When issuing money:  

         Dr.       Coins and currency                        xxxx

                                Coins and currency in circulation             xxxx

        the issuance of which is limited by ability of the Central Banks ability to print money

   2.  When lending to banks (as in buying bonds and debt instruments)

        Dr      xxx              Loans

                        Due to  Banks                                 xxxx

      expands money supply without corresponding increase in  real assets as gold in  the vault of the
      Central bank

     The Central Bank of China has been more adroit by investing the money in gold and strategic
      commodities and oil rather than just Loans.  Also invests in strategic oil companies.  China has most
      gold, and even TN...

5.  A business is an important component of the capitalist system:  it creates jobs and employment
     and keeps the money, the cash flow circulating.  Say for instance as a common example, you pay a
     jeepney driver P10.00 for the fare, this P10.00 goes around to benefit:

     1. Him and his family
     2.  The spare parts vendor and employees
     3.  The spare parts factory and employees
     4.  The gasoline station and its employees
     5. The carinderia where the jeepney driver eats
     6.  The repair shops;
     7. The ME oil producers, refineries, oil tankers - owners and seafarers
     8.  The banks and investors financing #7
     9.  The govt collecting the vat, the excise tax from numerous transactions going around the country -
          from thousands of gasoline stations located nationwide

   The govt does not dole out anything to keep the system going and to provide jobs to the millions in the country

6.  The whole industry is interdependent and is a system.  The supply chain is a delicate system.  A defect in one disrupts and  stops the capitalist system (just like a war)

Here comes the lockdown:  which prescribes the closure of non esssential  business, transportation so that people can stop moving and prevent the spread of virus.  Life or business decision.

Here are the effect:

1.  Business stops;
2.  People lose their jobs
3. Jobless seeks money from govt;
4. Govt finds out  it has the budget but no liquidity because it has stopped business - no one pays the taxes
    including the one due on April 15 2020

This is the weakness. We are not prepared for this.   Its worse than a bank run.  Its a nationwide depletion and stoppage of economy and cash flow.   A bitter pill to swallow. Now we see/forecast up to 80% reduction in business,  expansion mode is on hold while others see closure /bankruptcy at their door, sapping the strength of the banking sector..

5.  Many people dependent on other jobs:   like jeepney drivers, vendors are impoverished and may soon go hungry and riot

With the lockdown, the whole capitalist system, the banking system collapses.    With the extension of payment of rents and other credits, the cash flow so necessary for the banking system stops. Even the govt, pathetically sees that there is no money at the barrel... It has to borrow from abroad.

The lockdown effectively crushed the capitalist system dead on its tracks.  The system built up very hard by business has ground to a standstill.   It may take years to bring back the business to its former status just 30 days ago.  And it will entail huge amounts of money.  Business may decline 1% of GDP   (about mere $3B) as estimated by experts.  I would say 40% to 50%

When the system hums on its own, the govt does not have headache nor logistical problems.  The crisis breeds a lot of problem