Think back a couple hundred years ago - before industrialization when economic life was much simpler. Let's assume that when a good or service was purchased, that the person who received the money spent it all - no savings. Therefore, money was circulated just like water can be circulated in a closed pipe. If the pipe makes a circle, then all that is needed to keep water flowing through the pipe is a pump. Similarly, when the blacksmith received $10. for shoeing a horse, we can assume that he took that money and spent it at the grocery. The grocer then took that same $10. and spent it with the farmer. The farmer took the money and spent it at the haberdasher's and so on. So the same $10. gets passed around from person to person until it lands back up at the blacksmith's again and the process repeats itself over and over. As long as all the yeoman in any given village have a good or service they can sell and as long as the money flows through the hands of each person in the village, that same $10. is used over and over; it is circulated round and round just like the water in the pipe. As long as the money flows fast enough, everyone can purchase what they need and business is good. GDP is a measure of how many transactions occur in any given year. The faster the money flows through the system, the greater is GDP.
Now what happens when one of the participants saves some of the money instead of spending it all? Then there is less money to flow through the system and economic activity and hence GDP will be lower. The more money that is saved, the more economic activity will decrease until the money supply is inadequate to meet people's needs. It is a well known fact that, when consumers spend more and save less, economic activity and GDP increase. That's why George W Bush sent everybody a check and told them to go out and spend it. When economic activity decreases enough, a recession or a depression occurs. In the US consumer spending accounts for 70% of GDP so, if consumer spending decreases, economic activity decreases. This would happen in the simple economy described above if, instead of the blacksmith spending his money at the grocer's, he saved it instead. So saving decreases economic activity and GDP. There is one caveat to that and that is, if instead of the blacksmith saving the money, he invested it by expanding his business and created a couple of additional jobs. Then those additional workers would also go out and spend their paycheck adding to economic activity.
When the economy goes into recession two things happen. Government revenues from taxes decline and consumers spend less because they have less money to spend. Keynsianism is a philosophy that says that the government should borrow money in a recession and spend it into the economy thus creating jobs and increasing economic activity or at least preventing starvation and dire need. The other way that economic activity can be expanded is for the central bank to loan money to banks which then loan it to businesses who want to expand their businesses thus creating jobs. So money is injected into the economy either by the government borrowing money or by the central bank printing money in the form of a loan. In either case debt is created and the economy becomes a debt based economy.
If we think of money circulating similar to water circulating in a network of pipes, if a business or an individual saves a portion of the money instead of spending it, there is a continual need for money creation to keep up the same level of economic activity. That's why capitalism has to be a growth based economy. When there was one blacksmith for every village, saving money was not a problem since the income from blacksmithing over the economy as a whole was dispersed to many blacksmiths who all spent most of it keeping it in circulation. If one blacksmith captured most of the business - let's say he called his business Blacksmiths Are Us - and franchised it throughout the whole economy, then all the profits would flow to one person - more or less - and money would be continually taken out of circulation necessitating growth and debt based money creation by the government or private businesses just to provide enough jobs to keep money circulating to all people with economic needs. Money saved and not spent is similar to water in a system of pipes entering a cul de sac or black hole from which it never emerges or to being siphoned off never to return to mainstream circulation.
In today's economy money is continually siphoned off by the major corporations who have not only nationalized but who have internationalized. It's as if Blacksmiths Are Us has gone global. That money which is taken out of the real economy goes into the financial economy which is a black hole from which money never emerges again into the real world economy. So there is a continual need for either the central bank to print money (increase the money supply) or for the government to prime the pump with debt based stimulus money (the fiscal method).
In a western capitalist economy there is a continual need for money to be created either by government borrowing and the provision of fiscal stimulus or by means of the central bank loaning money into the banking system. The only problem is that today, when the Federal Reserve (the central bank) loans money to other banks, the money goes not into the real economy where jobs are created but into the financial or casino economy. In other words it goes to rich people like Jamey Dimon of JP Morgan Chase or Lloyd Blankfein of Goldman Sachs who don't spend it in the real economy but who gamble it in the casino economy so it doesn't do too much good for the creation of jobs which provides for the distribution of money to all who need it. A job is seen as the only legitimate means for an economic unit to acquire the money it needs to meet its needs. Of couse, just giving the money to all who need it would increase economic activity and GDP, but that isn't seen as legitimate. Similarly, when the government borrows and spends, the money also does not circulate much since it is soon siphoned off by the Wal-Marts, the Exxon Mobils - the modern day versions of Blacksmiths Are Us - where it ends up in the financial economy. There is no very good way to keep the money circulating in the real economy since large corporations are siphoning it off at every turn which means that either the central bank has to keep printing money or the government has to keep borrowing and spending money, the Keynesian approach.
Therefore, neither the method of giving money to rich people through zero interest loans nor fiscal stimulus requiring more government debt will work in today's economy. Paul Krugman, who advocates fiscal stimulus and more government borrowing, is wrong and the Republican supply siders who advocate giving more money to the rich are also wrong. Obviously, the central bank cannot go on indefinitely printing money because of the devaluation of the currency and subsequent inflation and the government can not go on indefinitely borrowing money because interest on the debt eventually consumes all expenditures so what is the solution? Giving more tax breaks to the rich only compounds the problem of money being siphoned off from the real economy, taken out of circulation and placed in the financial or casino economy where it circulates only among the financial elite. The Republican solution is to speed up the process of redistributing money from the poor and middle class to the rich even more.
The only viable solution is to redistribute the money from rich to poor. The money that has been siphoned off and taken out of circulation by the Wal-Marts and Exxon Mobils of the world needs to be siphoned back into the real economy where it can continue to circulate. Too much money is ending up in the cul de sacs where it never reenters the real economy but instead circulates endlessly in the casino economy among very rich people. 300 years ago when the economy was much simpler and consisted of a yeomenry who provided a good or service and spent all the money they took in, money circulated endlessly in the real economy. Today, Wal-Mart and Exxon Mobil take most of the money out of the real economy in the form of profits. That money leaves the real economy and enters the financial economy which is a big black hole as far as the real economy is concerned. In order not to increase the money supply endlessly or to require the proliferation of new products and services, which provide a temporary increase in economic activity, new jobs and circulation of money to a wider distribution of individuals and families, money has to be recirculated and redistributed into the local real economy. And in order for the Federal Government not to have to borrow money endlessly, it needs to siphon money from the rich who won't spend it and redistribute it to the poor and middle class who will. In this manner the economy needs not to be based so much on debt based growth but can become more of a steady state, balanced economy. Money siphoned off by Blacksmiths Are Us is siphoned back again and redistributed to the local blacksmiths where it can circulate in the real economy again.
Another way the economy can grow without creating debt or increasing the money supply endlessly, which means just fueling the casino economy, is to take Ellen Brown's suggestios from her book Web of Debt, and that is for the central bank to not loan money into the economy with zero interest loans to the big banks, but instead to spend the money into the economy for infrastructure projects and the like. Thus the money supply is increased as needed without the creation of debt. This is the method Abraham Lincoln used to fight the Civil War and to build the transcontinental railroad. It is estimated he saved the nation $4 billion in interest by spending the money into the economy with greenbacks instead of loaning it into the economy at interest.
Taxing the rich amounts to siphoning back money which has been siphoned off from the real economy in the first place and putting it back into circulation amongst a wider distribution of people. The Blacksmith Are Us franchisees supply a uniform blacksmithing experience for weary travelers regardless of which village they happen to be in. As such they take business from the Mom and Pop blacksmiths and concentrate wealth at the central headquarters of Blacksmiths Are Us. We imagine that no matter which village George Washington or Thomas Jefferson was in, they could count on the fact that their blacksmithing needs were met with satisfaction when they shopped at Blacksmiths Are Us. However, this would diminish the amount of money in the real local economy due to the fact that the business of the local blacksmith would diminish since the profits would be shipped elsewhere.
A final note: with all the economic turmoil in Europoe over the eventual default by Greece on its loans and the fact that this could create economic chaos, instead it could be seen as an opportunity for Greece to set up its economy as non-debt based by having its central bank spend fiat money into the economy thus creating jobs and distributing income until the economy picks up steam of its own accord. Thus Greece could drop out of the eurozone with it's western debt based economic methods and align itself more with the non-western world to create a non-debt based society instead of one drowining in debt as it is presently constituted.
