Out-of-balance raw materials prices causes national debt creation

by Fred Lundgren
Co-author
The Nature Of Wealth

The Nature of Wealth talks about raw materials and how their prices influence the overall economy.

Our study of raw materials spans the 20th century and is confined to the U.S. economy and the first point of sale value of raw materials. We calculate this value as a percentage of annual total "National Income." The National Income is a macro economic series of numbers used by government and economists to calculate  the income created by production during a single year. National Income differs from "Gross Domestic Product" (GDP) -- the more popular and inflated series that reflects the retail value of all goods and services.

In a nutshell, NORM looks at total annual  raw materials income as a percentage of all income, and uses proven formulas to predict how changes in raw materials prices change the economic condition of the country.

This method of calculation differs from the input/output calculations of a factory. The raw materials you speak of are partially processed. Labor costs have been added to them after the first point of sale. To be considered a pure raw material, their value must be calculated at the quarry gate or, at the time they are harvested as plants and sold.

Economists get confused and often lose credibility when they calculate "fair" first point of sale values for raw materials. Their calculations appear mysterious and elusive. They usually end up making excuses for businesses who increase their profits by exploiting raw materials producers.

NORM removes the mystery and subjectivity from the process. NORM establishes the intrinsic value of raw materials based upon the the technology (labor efficiency) of the current era. From this we conclude that the annual value of raw materials at the first point of sale should average about 1/7th of the annual "National Income." This income becomes the primary input of new value in the economic pipeline each year. It is important to economic growth.

Today, the US has a National Income of about 6 trillion dollars. This number is about 1-1/2 trillion dollars too low for current technology and population. A little over $1 trillion of this $7- 1/2 trillion should be paid to producers of raw materials at the first point of sale. This $1 trillion should pay for all the agriculture, petroleum, timber, quarry materials, fish, recyclables etc., as they pass into the pipeline each year. Instead, less than 1/2 of this amount is paid for annual production at the first point of sale and the income shortage must be offset by debt expansion so the economy can consume its production. By maintaining the correct raw materials income level, the economy creates a sufficient flow of dollars to purchase its production without adding unnecessary debt to the economic system.

Sadly, Americans have allowed public policies to squeeze National Income while driving raw materials prices far below 1/7 of national income. Today the number is about 1/20th of our national income, and that is far too low. As a result, the U.S. must create private capital debt to purchase its annual production of goods and services in an effort to compensate for the underpayment. Every profit-driven society, (every society based on private enterprise), does
this to some extent.

In America today, the correct, or "PARITY" ratio of raw materials income to national income should be 1 to 7.38.   In other words, the value of raw materials at the first point of sale should comprise a little under 1/7th of the economy. These numbers evolve over time as technology addsto the efficiency of labor which causes a re-division of labor among thevarious segments of the economy.

In the year 1900, the parity ratio of raw materials income to national income  was 1 to 2.  In simple terms it means that one person was engaged in raw materials production, (on average) for every two persons employed elsewhere.  As technology improved, this ratio grew. People leaving the farms by the millions changed the ratio most of all. A similar reduction was seen in the labor force of other raw materials industries.

This ratio can be referred to as the "trade turn" or the roll-over of dollars as they flow from the raw materials stage of production, through the economic pipeline, and finally to the consumer. In 1900, this roll-over was 1 to 2.  By World War Two it was 1 to 5. Again, technology has increased it to just over 1 to 7 today.

With all of the above information in tow, here is a bench mark answer to the question how much should raw materials producers earn?

The producers of  raw materials in the U.S. should earn an annual gross profit of 42% over their cost before federal taxes are assessed. If the taxing system is fair, they should earn a combination of equity and cash at a ratio of 3/4 equity and 1/4 cash. These two amounts should yield the same ratio of net income to gross income as parity annual (national) raw materials income ratio to national income. That is, raw materials producers should have a net
income after taxes, (a combined net income of cash and equity increases,) that total about 1/7th of their gross income. The balance of their gross income must flow to others.