Tuesday, August 26, 2014

"Slack" Samuelson

Take two.

Yesterday we looked at Robert J. Samuelson's remarks in the Washington Post: Interest rates and the Fed’s great ‘slack’ debate.

Today, definitions.

What does Samuelson mean by "slack"?

Is it time to consider raising rates to preempt higher inflation? The answer depends heavily on the economy’s slack: its capacity to increase production without triggering price pressures...

“Slack” is economics jargon for spare capacity. It means unemployed workers, idle factories, vacant offices and empty stores.

Got it? Slack is the thing we don't want.

But that's Samuelson's definition of slack, not mine. He's talking about slack in the real economy. I want to see slack in the financial system. Just because we know how to turn a dollar of money into $40 dollars of debt, doesn't mean we should do it. Why not reduce that number to $20 of new debt from each new dollar of money, and have $20 slack? If that's not enough credit, they can print more money. (It won't be inflationary, as long as debt-per-dollar is restrained.)

If $20 debt is still too much, cut it in half again, and double the money again. What do we gain by this? We reduce what it costs to have a money supply. And that's a big deal. It means we reduce the cost-push pressures that have troubled our economy since the 1960s.

We don't need more slack in the real economy. We need more slack in the financial sector, that's where we need it.

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