Saturday, December 11, 2010

Re-thinking Policy

The only way to fix the economy is to get rid of some debt -- a lot of debt, actually. But remember, it is private-sector debt that holds our economy down. Not public debt. So it is private-sector debt that must be reduced.

When at last we do that, if ever we do, the economy will grow like gangbusters again. With 30 years' of growth incentives in place? There'll be no way to stop the growth!

But when we finally get the economy growing again, we have to do things differently. We have to fight inflation differently. We can no longer expect the Fed to restrict the quantity of money, and curse them when they don't, and curse them when they do.

We must demand from the Fed a quantity of money adequate to support the existing level of economic activity. This will be a much greater quantity than we had, at least greater than we had before the Quantitative Easings.

We must demand from policy that it encourage credit-use for growth, but not for everything. We must expect the Fed to provide sufficient money to support the existing economy, and Congress must understand that credit is only for growth.

And we must invent a policy that uses accelerated repayment of debt to draw money out of circulation when we need to fight inflation, which is always.

The point of these changes is to get monetary stumbling-blocks out of the economy's way, so the economy will perform as we know it can.


charlie said...

First visit and I'm going through the links and I'm at this point. How does the fed get money into the economy. You are not saying they do it through quantative easing are you. I thought it was by Govt. spending into the economy, and that would be Congress not the Fed. Maybe I haven't read far enough.

The Arthurian said...

"How does the fed get money into the economy"?

That's a good question, Charlie.

Here's how it seems to me. When the Federal government spends more money that it takes as taxes, it puts money into the spending stream. But this is not newly created money. It is money that somebody had, that they wanted to tuck away in savings.

What happens by deficit spending, really, is not an increase in the quantity of "money stock" but rather a change in the composition of the money stock. Money that was in savings, or money that was going into savings, instead goes into the spending stream. Deficit spending increases the ratio of circulatings-to-savings.

In a separate operation, the Federal Reserve may decide to "monetize" some of the Federal debt. The Fed prints new money (or pushes a button on a computer, or whatever) and uses the new money to buy Treasury securities that someone in the private sector is willing to sell.

The Federal Reserve adds to the money stock, and at the same time reduces the stock of Treasury securities outstanding.

The Federal Reserve action increases the quantity of money; but the Fed deals with savers. Money set aside in Treasury securities is money saved. When the Fed prints money and uses it to buy those securities, the Fed is paying that money to savers. It's not the same as putting money into circulation.