The Disaster of the Value Added Tax

On top of all this, the European common market decided to introduce the Value Added Tax. The Netherlands began with a 16% Value Added Tax range. Germany began with 11%. All other members of the community began with even larger percentages. Nobody saw, that this decision would immediately create another immense shortage of capital in the market.

No one in the European Common Market foresaw that this tax would cause extreme unemployment figures plus the nearly liquidation of the Middle Class, because their money system, just like the money system of the United States is to primitive to cope with that kind of economic developments.

Both cases, the change from weekly to monthly wages and the introduction of Value Added Tax drew extremely high amounts of Working Capital out of the Production Environment. The consequences were inevitable, the existing money and banking system is not equipped with modern economic facilities that can regulate the capital supply for such changes in economic behavior.

The reason for this shortcoming is easy to understand. We have never thought about it. We have an extreme shortage of knowledge about the working of the economy in relation with the existing money and banking system. We never investigated the real qualities of the existing reserve banking systems.

The unobserved withdrawal of capital out of the production environment caused in the first instance a decrease in production, while the demand in the market stayed the same.

The prices had to rise slightly. The decrease in demand followed later when the unemployment began to reduce the total purchasing power of the population. The Central Bank Presidents recognized immediately an inflation that did not exist. They never became aware that a lack of capital and an enormous increase in the costs of capital, had caused the problems.

Because of the oppressive impact of the shortage of capital, the Central Banks had to make more capital available after that the damage to the economy was done. This inevitable necessary constant increase in the lending operations of banks led also automatically to an enormous increase in the quantity of capital in the form of bank loans. The costs of all that capital would, of course, also lead to severe cost increases and consequently price increases.

In the seventies the lack of capital became so large that organizations like Philips International, the Dutch electronic giant, became forced to borrow enormous amounts of capital to cope with the developing situation. In 1973 Philips International became forced to request a loan for about ninety million Dutch guilders to save its skin. The Dutch press mentioned that this loan was unique in the company's history.

The lack of capital forced every enterprise to reduce the involvement of capital in areas where reduction was possible. This led in the seventies to the elimination of the existing form of dealing with Stock in Trade. It forced enterprises to introduce more advanced computer systems to cope with control of the development of Stock in Trade. This led to another extremity: The extensive reduction of the production during the time that they began to reduce the available stock in trade. Of course, the reduction of Stock in Trade led to a decrease in the production during the liquidation time of the Stock in Trade.

However, all those developments anticipated the development of unemployment and the temporary downturn of purchasing power. It became also inevitable that the business world began to look at the elimination of labor for no other reason then to decrease the need for more Working Capital. The elimination of labor would automatically free Working-Capital. everywhere. The least that happened was the elimination of economic growth.

Again, because of an enormous lack of knowledge about the working of the economy, the business world believes that a gradual increase in prices solves their problem.
It didn't and it doesn't.

Those annual price increases, developing from fear for lack of capital, gave every year the wrong signals to the Central Banks who declare every year a red alert for inflation. They did exactly the opposite of what was needed. They continued to reduce the supply of capital where the problems had developed from a shortage of capital.

I have not investigated the statistical figures of other countries in the same way as I have done with the figures that I found in the Netherlands. However, I have become reasonably certain that only the unique structure and facilities available in the Netherlands have allowed me to discover what went wrong with the world's economy.

Something else happened. The wrong interpretation of the price increases blinded the Central Banks and leading economists for the simple and easily to prove reality that practically every economy in the Western World is suffering from DEFLATION. This neglect to recognize deflation is related to the same simple fact that we got the wrong education. Yes, I know, it becomes a tiring repetitive statement.

However, it is useful to see how a Dutch journalist stumbled over this DEFLATION fact and nevertheless did not see it because his economic education, just like mine and your education, and the education of millions of others, did not allow to see the facts in the right context. (We will see that in one the next page.)

I was lucky. At the end of March 1981 I became annoyed by the fact that a Nobel Laureate Professor Herbert A. Simon made it clear to the world that we had a lack in our knowledge. It confronted me with the fact that all the work that I was doing, was not based in any realistically proven scientific law.

I was again lucky when my partners and I decided that I should go back to that country at the mouth of the Rhine, at the border of the North Sea, to see for myself why the Dutch had invented the word "Stagflation." Without spending those thousands of dollars of my own money on a research that would also lead to isolation and scornful laughter about my discoveries, I would never have been able to write this electronic course in economics.

Let us give some attention to that Article of a Young Dutch Journalist