Saturday, August 2, 2014

The clock is ticking...

From mine of 6 July 2009:
The question is simply, what is the best way out of this mess?

The quickest way out is just to print money and use it to pay off debt. But it's like touching a snake, isn't it? You can't stand the thought of it.

David Beckworth, 13 June 2013:
... I will endorse ... a helicopter drop, a government program that gives money directly to households.

Mine of 18 June 2009:
Here's the plan: We print money and use it to pay off debt in a big "debt-forgiveness" operation. When money pays off debt, the two cancel each other out. The debt ceases to exist and the newly printed money ceases to exist. It's almost no-strings-attached.

Nick Rowe, 26 July 2014:
... maybe you need to increase the inflation target ...

Mine of 18 April 2009:
Square One: While the economy grows, our reliance on credit increases. When you borrow a dollar and spend it, you take a dollar and put it into circulation. You take money that is not in circulation, and put it into circulation. That credit-money then stays in circulation until you repay what you borrowed. In a very real sense, you have the same power to control the money supply that the Federal Reserve has. Except the Fed can handle bigger quantities of money than you or I can handle.

Once you spend that new dollar of credit, it's gone. It's gone into circulation. No one can any longer see that it is a dollar of credit. It looks like a dollar. And you have increased the quantity of money in circulation.

Now the Federal Reserve monitors the economy. And they notice the quantity of money going up. So they take some of their holdings of Treasury Bills and sell them. The money from this sale is put away somewhere, out of circulation. That's how the Fed fights inflation.

So you and I borrow, and the quantity of money increases. (This is how we make the economy grow.) And then the Fed sells securities and takes money out of circulation. (That is how they fight inflation.) We are left with more debt than before, but no extra money in circulation. The extra money we created, that we might have used to pay off debt, is gone. Do you see how out-of-balance this process is?

After the process is repeated over and over for most of a century, by more and more people, for an increasing variety of purchases, we end up with a lot of debt in the economy, and not a lot of money we can use to pay off that debt. This is the underlying process that eventually creates a credit crisis.

There is a better way. Suppose I borrow some money and spend it, which increases the quantity of money in circulation. But say the Fed doesn't take that money out of circulation. Instead, I pay back the money I borrowed. That's it: That's the plan. I pay back the money I borrowed, which takes dollars out of circulation. The extra money comes out of circulation, and my debt is reduced at the same time. Do you see how beautifully balanced this process is?

But what makes me pay off my debt? Well, I'd pay it off anyway, sooner or later. And the Federal Reserve doesn't take the money away, so funds are more readily available. But the key concept is that new tax incentives are set up, incentives that encourage us to accelerate repayment of our debt. Tax credits that give you a break on your taxes when you make extra payments on your existing debts, or a tax rate that varies up and down somehow with your particular level of indebtedness.

Tick,  tock.


geerussell said...

I follow all that except for the part about the Fed taking money out of circulation. When they sell treasury bills they're just swapping one kind of money for another.

It's a bit of an adjustment to move away from the "standard" definitions we're accustomed to but when conventional aggregates used as a proxy for "money" are inadequate, comfort must be sacrificed for accuracy. this paper makes a good case for why and how securities are money.

The Arthurian said...

71 pages?