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Sunday, May 26, 2024

Prof. Valentinčič: The velocity of money – the government should align salaries and pensions with overall inflation

By: Prof. Dr. Tine Valentinčič, retired professor of neurobiology, amateur stock market researcher

Inflation of European and other world currencies causes problems for all residents, especially those with low incomes, both pensioners and workers living from salary to salary. The number of minimum wage workers is a shame for Slovenia.

The biggest mistake any government can make is to further reduce the amount of money in circulation during inflation. This has already happened twice in Slovenia. The first time was when we recapitalised NLB bank with taxpayers’ money, and the second time was when Prime Minister Golob gave guarantees and aid to electricity distribution companies. Why? If there is a shortage of money in the system, the worst thing we can do is to further reduce the amount of money in circulation. If money flows out of circulation to the bank to cover the bank hole, there is less of it in circulation – and 5 billion is an awful lot of money in a small country like Slovenia, but also one billion and seven hundred million is extremely large. What happens when there is not enough money in the system, wages and pensions cannot increase, prices rise during inflation and the sale of goods stops. Because people do not have money, they soon buy almost nothing anymore, sales of products in stores decrease, farmers and artisans sell less, and investments also start to stop. Such a state of the economy is called depression, not recession, but depression. In a recession, the economy shrinks, but part of production and consumption still work, while in a depression, due to a negative feedback loop, a larger part of the economy stagnates, companies close, farmers start to give up farming, investments, if the banks do not act, are simply gone.

What can the government do to prevent such a situation. The most successful intervention is accelerating the velocity of money and increasing investments. How to accelerate the speed of money, the most successful method is to increase the income of everyone who has a small income. What happens with the increase in small incomes. People can pay fixed costs and have some money left over for shops, agricultural produces find a buyer, whoever has at least a little more income can buy consumer goods, and also the creditworthiness of middle-income people increases and with it, investments. If average consumers can buy at least some goods, a positive chain is established, traders and farmers and producers can also acquire new products and reproduction materials, their wages increase, and they too can buy and invest. The speed at which money flows through the system – the velocity of money – increases. The same total amount of money can be turned over several times in one month. If we reduce the amount of money in circulation, the money turns over once a month at most, and if people do not have money for money bills, never. Therefore, increasing taxes, holding back the growth of wages and pensions, holding back or administratively controlling investments are the worst things a government can do. There is no man who has the godlike ability to control the flow of money better than humans can do it themselves. Anyone who does not believe this should look at the fate of the Soviet Union. Their economists reasoned that they could best control the flow of money. And what happened in the long term, when the chains of acquaintances and party officials reached all extreme points in society, the country went bankrupt and fell apart. Today, the consequence of Putin’s madness to restore an ineffective system is the war in Ukraine.

Why was Slovenia and Slovenes better off under socialism. We lived on the extreme border of communist systems, on the border with capitalism, freedom of economic activity existed here at least partially. Economically inefficient firms failed, just as in Western capitalism, while economically efficient firms prospered. If the communist economy was successful, capitalism would fail, and communism would prosper. But the opposite happened, capitalism prospered and is still prospering, China is currently operating according to capitalist principles, even though the Central Committee and the Communist government are at the helm.

Therefore, I call on Golob’s government to align pensions and wages with the growth of inflation, not a part of inflation, but the whole inflation. This was 9% last year, and much higher for food products. Not only as a partial measure to increase pensions and wages for the poorest, with this you will create a poor society. In such a society, there will be no investments and the bills will remain at least partially unpaid. Pensions and salaries should be increased for all those who create added value. If the government does not have the money, take it where you wrongly gave it, to the power companies. Electricity distribution companies, state and private, must get money (loans) from banks, but if the banks do not want to lend money, they must go bankrupt, and the state should establish new electricity distribution companies and find capable managements that will not repeat the mistakes of the past. Moreover, the price of nuclear fuel is low not because enriched uranium is cheap to produce, but because of SALT 2 (The Strategic Arms Limitation Treaty, 1979), which limited the number of nuclear bombs each country could possess to about 6,000 for each of the most powerful nuclear countries (https://ourworldindata.org/nuclear-weapons). Although the parliaments of both countries did not ratify the agreement, both the United States and the Soviet Union adhered to it until the collapse of the Soviet Union. At the peak of nuclear bombs, the Soviet Union had 36,000 and the United States had 32,000. The fuel for the uranium bombs has already been paid for, paid for by American and Soviet taxpayers many decades ago. This fuel needs to be diluted about 20x in order to obtain fuel for nuclear power plants. And speak of the devil, the German government was so foolish as to shut down its nuclear power plants. Fortunately, at least this detail is different here. We can build another nuclear power plant, but no one can guarantee us that nuclear fuel will always be cheap. The world is once again plunged into the madness of preparing for nuclear war.

I can conclude that in conditions of high inflation, the only option for the government, which wants to maintain relatively favourable economic indicators, is to divert funds from state investments to increase the incomes of the poorest (pensioners and those with minimum wages) as well as the average worker. Only in this way will the velocity of money remain high, people will be able to pay bills and buy in stores. THE VELOCITY OF MONEY WILL REMAIN HIGH, the same funds will turn over several times a month. By maintaining the wages of the middle class, investments with the help of banks will also accelerate the circulation of money, the economy will not stop. Of course, for this it will be necessary to stop the unbridled growth of non-economic activities, the number and size of ministries and all forms of non-productive activities.

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