Is More Liquidity Better?
If more liquidity continues to be injected to relieve bankruptcies or require more caution in financial investments, the real causes of the loss incurred will never be removed. Increased liquidity interrupts a route connecting a useful fund with another useful purpose.
Lemma 1.1. ‘More liquidity ’ means that the financial market does not have its own internal solution.
To escape the crisis, it is necessary not only to clear debts, but also to invent new financial commodities. However, no more loans could be created because of the low expectations of the loan market. These new commodities could therefore only be actualized if suitable funding was injected from outside the market. Investment banks therefore needed to persuade savings banks or building societies holding high amounts of deposits to deliver their funding into trust for the investment banks. In extreme cases, investment banks have urged governments of countries where there are relatively high levels of savings to reform the institutional settings to promote financial investment. As a result, a national economy targeted by the market is artificially depressed by losing options to invest. This is the situation now seen in Japan.
Lemma 1.2. The market always needs external resources. This doctrine has existed unchanged since the industrial revolution.
Funding the relief measures for bankrupted corporations can exhaust even the tax take of a national economy. The relief of AIG after the Lehman shock, for instance, cost over US $150 billion.[14] In Japan in the 1990s, record sums were spent to bail out banks after excessive loaning during the 1980s bubble period.
This resulted in a chronic and serious record of negative national savings, which must be a danger sign that a national economy may be at risk of collapse. Other European countries may also fall into this situation if the financial crisis expands further.
These treatments correspond to opportunity losses in a traditional economic sense. That is to say, we can criticize this critical situation from a traditional economic standpoint. The chosen remedies may invalidate alternative chances for improvement, but the idea of opportunity costs has never been taken into account.
A supplementary countermeasure was proposed by Silvio Gesell (1862-1930) in Gesell (1916), whose ideas were favored by Keynes and Hayek. His idea was negative interest, called ‘stamp money’. The idea is more usually applied to local or regional money. When stamp money is used, it incurs commission fees (stamps). Stamp money therefore loses one of the main characters of money, and cannot then be used for any financial purpose.
Chiemgauer[15] studied money in Germany, and found that about a half of regional GDP was achieved purely from regional money, without any resort to national funding Gelleri (2013). This remarkable result shows that national or universal money is not always necessary. This kind of intermediary, rather than financial commodities, might therefore stabilize a local economy to prevent financial invasion or default.
1.8.2