Why the cost of finance must be reduced

I think maybe I had too many graphs in Wednesday's post. Today, I repeat the thoughts I couldn't put into words until those graphs were done.

First, allow me to remind you that the cost of finance is driven by two factors: the rate of interest, and the size of debt on which interest is paid.

 
The growing cost of finance was the prime mover, the initial cause that set in motion not only the wage-price spiral of the 1960s and '70s, but also our subsequent decline.

 

The cost of finance can create cost pressure and cost-push inflation as surely as OPEC can. People still today talk about OPEC as a source of inflation, and wages as a source of inflation. But nobody ever points the finger at finance and says here is the cost that drives cost-push. But it is. Finance is the root of the problem. Excessive finance.

It is all well and good to say business has to raise prices because wages have gone up, and to say labor needs an increase because prices have gone up. But the question that must be asked is "Which came first?" We have accepted the story of the wage-price spiral for half a century and more, without ever insisting that there must have been a first cause.

There must have been a first cause. But it cannot be wage hikes and it cannot be price hikes, because in the accepted story each of these is caused by the other. There must be some other cause, some initial cost increase that set the price spiral in motion.

That initial cost was the cost of finance.

The rising cost of finance in the years after the second World War contributed to the "creeping" inflation of 1955-57, the inflation that troubled Samuelson and Solow (1960). The cost of finance continued to increase, creating the cost pressure that led to rising wage demands in the latter half of the 1960s.

Finance is our primary growth industry. The growing cost of finance is endless. But the growing cost of finance is a source of cost-push pressure. It drives prices up and economic growth down.

Inflation is not the worst part of this problem. The cost pressure is the worst part. The cost push. Cost-push slows economic growth. The big problem is not cost-push inflation, but cost-push decline. And since the growing cost of finance is endless, the result is long-term economic decline. 

Long-term economic decline is indistinguishable from the decline of civilization.