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Cheap Money Won’t Fix This Economy
Alas, it's the only tool readily available. But even supporters of the strategy don't think it will accomplish much, and might cause some harm. The problem is that cheap money doesn't work very well in an economy such as this one.
The Dow rose 219 points yesterday, since falling interest rates invariably cause a temporary spike in stock prices. But that is hardly a test of effective policy.
The economy is in a self-reinforcing trap. Consumer purchasing power is down due to high unemployment and falling earnings. Businesses are reluctant to invest because they don't see customers. Risk-averse banks won't lend except to the most reliable borrowers. Depressed housing prices and a foreclosure epidemic are a drag both on household net worth and on bank balance sheets.
Still, cheaper money does produce a modest stimulus. Homeowners with good credit can refinance and lower their monthly payments. Consumers considering a new car can finance it for almost nothing. And the government gets to float its own deficit at low carrying costs.
But none of this is potent enough to get the economy out of its vicious circle of depressed consumption, high unemployment, damaged banks, reduced business investment, and slow growth. In the 1930s, when the same syndrome afflicted the economy, critics likened the aggressive use of cheap money to "pushing on a string.'' It was - and is - the wrong tool.
What's the right tool? The cure for the Great Depression was World War II - a massive fiscal and technological stimulus. Annual wartime deficits peaked at about 28 percent of Gross Domestic Product. The government went on a hiring binge, both for war production and via the military draft. The economy blasted out of depression.
Today, however, both parties are wringing their hands over much smaller deficits, projected this year at about 9 percent of GDP. Republicans just took back the House with a campaign against big government.
So there is no political appetite for the civilian equivalent of World War II - a public campaign to rebuild rotting bridges, roads, ports, water and sewer systems, and to invest in 21st century infrastructure such as a smart electric grid and clean energy technology that would make the economy more productive as well as creating millions of jobs.
The Republicans do speak of "fiscal stimulus,'' but they mean tax cuts. However, a recent report by the nonpartisan Congressional Budget Office concludes that tax cuts are a far less efficient use of deficits than direct public investment.
President Obama signaled at his press conference Wednesday that he will likely compromise with the Republicans' demand to extend the expiring Bush tax cuts, not just for 98 percent of Americans as Obama has proposed, but for the most affluent 2 percent as well. These tax cuts will increase the deficit, provide a mild boost to the economy, but not change the underlying dynamics of stagnation.
So we are left with the Fed, as an unlikely champion of cheap money.
And there are some risks. Cheap money has invited a new wave of leveraged corporate buyouts, which enrich middlemen but don't help the broader economy. Low interest rates are driving down the value of the dollar and exporting inflation to other nations, which increases the risk of currency instability.
Financial traders are using low interest rates to speculate in commodities, raising the price of food and other raw materials. Cheap money with few rules is the best friend of speculators looking for some exotic action - exactly the dynamic that crashed the system in the first place.
Long ago, in an era of broad prosperity, former Fed Chairman William McChesney Martin famously said that the Fed's job was to take away the punchbowl just when the party was getting going. Today, however, the Fed is imploring people to have some more punch. But much of the public is too traumatized to drink, and the wrong people could get soused.
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Show AllAnd iyts another tired old "we didn't spend enough" piece. If the government wou;ld just spend enough money the economy would be just "swell" and problem solved.
Don't bother to fix the reasons for this economies fall. Don't bother to replace Glass-Stegall which would have prevented much of the damage, don't bury NAFTA in the grave in which it belongs, don't change tax and trade policies that favor other countries other than ourselves, spend rather than cut spending across the board, military, government, etc...and then raise taxes where we must, don't bother to stop the subsidies we don't need.
Just let government spend our way out of the problem. Lets be Greece or Spain rather than Germany.
The lack of reality based thinking being exposed in the aftermmath of this election is mind boggling.
Not only the refusal to accept responsibility for the staggering defeat, any responsibility for the mistakes made, but a an arrogant insistence to follow the path and methods that have already proved such abject failures.
Double down on failure, that will do it.
Excellent points. However:
"The cure for the Great Depression was World War II - a massive fiscal and technological stimulus. Annual wartime deficits peaked at about 28 percent of Gross Domestic Product. The government went on a hiring binge, both for war production and via the military draft. The economy blasted out of depression."
But the reason we could pay of that debt was that most of the world's manufacturing capacity was in post-war shambles compared to the US. We had the manufacturing and the markets to earn enough to pay off the debt and have prosperity.
These days, I don't think we make much except banking, insurance, services, and weapons. So far, it's in the interest of our creditors to prop up the US economy. Duck and cover when that changes.
We need to quit making cheaper and fancier electronic toys and start finding ways to make transportation, housing, and health care more affordable, even if it means some corporation won't make as much on the status quo. Look at how much of our earnings go to those three.
you mention the problems with our trade deficit which is an excellent point, we dont make much other countries really want. But then you imply that housing and transport and knock electronics, the problem is we dont make electronics and thats exportable, housing and transportation are not exportable, but they are important, they are paid with via the money that can be generated with export. Its important we have a trade surplus again and actually make things other countries will buy. Germany has done it with well known and marketed car brands that have a reputation for quality and that people will pay a lot of money for. Heck, if we just made more of our own stuff we would be doing better and stop with the free trade fundamentalism and instead focused on a trade surplus or a balanced trade, which is not isolationist, its just saying we want to balance our trade relationship so basically our economy is not being gutted.
What stands in the way is corporations and their fox and republican mouthpieces which seems to be happily running the US into the ground so the wealthy elite can make their profits and enrich themselves.
People like Beck, funded by massive corporations, Boehner and their corporate masters are the cause of our economic problems, so its shocking that people would elect these people which is like handing them a gun and saying shoot me, adn to continue the very bush era policies that got us into the mess.
'Consumer purchasing power is down due to high unemployment and falling earnings.'
The problem is not 'consumer purchasing power,' it's that more and more consumers are sick of consuming because they've consumed so much already, the majority are now fat/obese both physically and materialistically.
Plus, like Vicodin after 3 days, the 'thrill of buying crap' drug is no longer effective.
The only card Big Corporate Everything has on the table is the Constant Consumption Economy, which is why their sole focus is to find ways to convince us to consume more in spite of the fact that we're full.
Unless we accept the fact that the Era of Consumption is over and start working on the next Era of ?, total economic collapse is inevitable.
While endless demand creationism used to create consumption ina consumption driven economy incentives consumption just for its own sake, and is causing immense damage to the planet, as well as the lack of any consideration of environmental and resource depletion issues which, seeminly oblivious to most are depleting non renewable resources, all of this is harmful of course, its only part of the cause of our present quandary. Peak oil and resource depletion is playing an increased role in the increase in cost of living and this is drivin a decreased quality of life, especially american levels of resource consumption/waste, actually are driving down american quality of living further than we would with more efficient use of resources. Very little of the long term environmental costs are a part of the costs or considerations of how our economy is operating for consumers or corporations.
Corporate media and Republicans have bred a short sighted mentality, to continue wasteful but familiar ways rather than more efficient ways, even though the the more efficient ways would actually cost us far less, leave more of our wealth for use on improving our quality of life. One example is cars, which if we could replace that with more trians, we would end up consuming less, this would conserve more fuel that could be used to produce cheaper food, with less demand for fuel, the cost and the supply would be better for essential things and uses of it such as for farmers. So the Republican, SUV, oil guzzler ways and their obsession with cars and inability to make investments in rail and rail adn pedestrian based urban design is actually making us poorer.
Secondly a major part of our economy problems has little to do with potential demand. Quite franlly i see little problem with convincing people to buy all of the big screen TVs and all that other stuff. The problem is that we have offshore production of so many of these vary things we arew buying it all from othr countries. But, if we dont make anything ourselves how will we be able to afford tpo purchase thiese things from elsewhere. Truly the ones who benefit most from this are large corporations who have managed to vastly increase the profit margins by making products in low wage countrie s and selling them at a huge markup in the US, What this does is basically pulls money out of the middle class economy and consolidates it int the hands of the elite. ITs sucking the US economy dry. Instead of well paying jobs with money going back into the US middle class, instead, the middle class jobs are being offshored and the wealthy elite sucking what wealth remains out of the middle class through their profit margins. THats how wealthy elites can control our economy, they control markets, thus control jobs, can suppress wages and take the money generated by labor and hoard, it, its workers at the consumer and the production that lose. The workers are both the consumption driver and the production driver of the economy. the production and wage return to workers has been vastly reduced in the US which leaves less for workers for consumption.
Part of the solution, really the core solution is balanced trade, worker rights to form and join democratic unions that they run, a return to the US manufacturing more products, instead of traitorous and corrupt corporations we need to see our a productive base as something that shall serve this countries people adn economy and is essential to our health and well being, and as well, that they must be accountable to the people and under regulation by democratic government of the people. To do this we need to get corporate money out of politics and make certian that people are once again elected not because they are funded and the campaigns are loaded in their favour by corporations and run as fake populism, but real pro-worker, pro-environment, pro-union progressives are popular with common americans and who realise the progressive agenda is in their interests and the Republican agenda opposed. For this, it all comes down to the fact that the media currently is controlled by the Corporations and I believe the fact we have a media that is basically not independant, we have no independant media except one that is a mouthpiece of the corporations and which is used to control peoples minds by controlling their information.
I too believe that collapse is inevitable.In fact it may already be here.
Consumers --which is most of us--- have been told to consume way
beyond our means so that the wealthy can increase their wealth. The
wealthy can "afford" it. The rest of us cannot. Recovery for the rich means
fixing up their corporations for their big executive prices, borrowing vast sums
at no cost for their corporations, opposing Medicare for All, opposing unions
and participation in running their corporations (eg Germany). Everyone wants
and we want it--for nothing. This is not only similar in some respects to
the desperation in the Weimar Republic prior to WW II but as well for
the US prior to the Great Depression. Why expect more "consumption". There
is nothing with which to purchase.(No $$$$) Recovery means firing workers and
so-called "re-structuring" for the corporation and its profits. Like many
others, I live month to month on social security (without "COLA") cutting out
everything, cutting on every dollar spent. I take myself out for dinner once a year for my birthday.That's it!! I have no TV (of any kind), no high-tech gadgets. Don't ask me to consume for others' profit. And yet...I am lucky. I am not sleeping on a bench outside. Not yet.
The cure for the great depression did NOT have to be WWII, a great fiscal and technological stimulus. The continuing massive development of infrastructure is ALSO a massive fiscal and technological stimulus (FDR would have continued on with this agenda if wallstreet's "deficit hawks" back then didn't force a cutback in same. THEY were the ones behind the "WWII project" instead).
Today's massive fiscal and technological stimulus can also be achieved by massive infrastructure, and science & technology driver projects, such as NAWAPA, maglev trainlines, the alaska-siberian maglev & powerline tunnel, infrastructure upgrades, similar development & terra-forming projects around the world (where 5 million square miles of deserts become grasslands & forests, affording MORE plant, animal, and human life to develop).
This would have to await a "glass-steagall" bankruptcy reorganization to bring down the global bankster cartel , followed by a "Lincolnesque" government issuance of "Greenback" credit for these projects. Also, a grand alliance of US, Russia, China, India would have to be formed for a global strategy of bankruptcy reorganization/public credit issuance/co-ordinated infrastructure projects world-wide.
This would be even MORE fiscally and technologically stimulating than ANY wild-eyed conception of a "WWIII" project (which is where the global bankster cartel will go, if allowed to continue to exist).
Good grief you sound like Lyndon LaRouche.
Massive hubristic technological impositions on the planet - yeah, that's what we need so much more of! Sure i trust the industrial technologists to bring more life to the deserts!
You sound pretty "wild-eyed" yourself...
Oh look, i Googled all your techno-industrial buzzwords together, and Lyndon LaRouche comes up...
Well golly I guess you got me there. I've heard of the man since the 70's. Always struck me as eccentric, sort of a crackpot. Ive paid closer attention to him the last 5 or 6 years now, since all the strangeness that has gone down, politically & economically. Personally, I couldn't care less what you or anyone else thinks of him. I see a man that wants to complete & expand FDR's agenda. That's where I am, politically, and economically. I see a victim of character assassination, and, frankly, since all the "respectable opinion" has been proven to be grossely wrong (if not outright betrayal), I considered it time to examine that which has been rejected. Where you see hubris, I see creativity and affirmation of life, I see cooperation with those unseen forces of life (something that hasn't been done for many millenia, ask the Thunderers yourself), I see the REAL green policy. I also listen to Richard C. Cook (mr. "credit as a public utility"), and Stephen Zarlenga of the American Monetary Institute (the "other chicago school" of economics) that has to do with the social credit movement.
This is only concerning the "worldly" side of life. The occult, or "unseen" side is actually of greater interest to me, and I do not discuss that publicly.
Printing up dollars is not intended to "stimulate" the US economy. It is intended to allow the financiers to make money in other Jurisdictions and destabilize those economies.
This is what happens.
The banks and lending institutions borrow these dollars from the fed at what is in essence negative interest rates.
They take these dollars and invest overseas by buying up government issued debt paying 4 percent and more. This pushes inflation in those countries higher while at the same timing earning "free money" for the investor.
The profits are then used to buy up resources and industry in those countries or just laundered back to the shareholder or head office.
Captitalism at work. No one "produces" anything. The US is more immune to inflation because as reserve currency they have the entire world as a market for their dollars whereas other countries currencies are limited to their own countries.
The returns on these dollars are higher when invested overseas then when invested in the USA and with Globalization money is not restricted by borders. Why would a Bank of America as example lend money to already up to their ears in debt citizens of the USA and earn 3 percent when they can double their returns by investing in Brazil?
It worth noting that the Government of China owns all of those banks so those banks can only do business that the Chinese Government sees as a benefit to that country.
US banks are under no such restrictions. The mantra of "Free markets and de-regulation" ensures that THEIR only net benefit will go to management and Shareholders even if those shareholders live in Saudi Arabia.
Another good post - thanx GW, you have a way of making things clear to those of us who may tend to get lost in all the usual financial jargon. Keep it up!
"Captitalism at work. No one "produces" anything."
This new round of QE2 may very well signal the beginning of the end of U.S.-dominated finance capitalism---the currency war to end all money wars. And with it, hopefully, the birth of a whole new set of human relations, based on real labor and authentic humanity.
However, in the "mean"time, there might be devastating difficulties for people in third world economies, as food prices go up and local industries get devastated by short term speculators.
Kuttner writes, "The cure for the Great Depression was World War II". This is the orthodox belief, but it has been challenged. The war did not so much cure the Depression as disguise it; and since, in the course of the war, America had destroyed its competition, subsequent American prosperity is not surprising.
Higgs, Robert. "Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s." Journal of Economic History Vol. 52, No. 1 (March 1992) http://www.independent.org/tii/news/920300Higgs.html
"ABSTRACT: Relying on standard measures of macroeconomic performance, historians and economists believe that “war prosperity” prevailed in the United States during World War II. This belief is ill-founded, because it does not recognize that the United States had a command economy during the war. From 1942 to 1946 some macroeconomic performance measures are statistically inaccurate; others are conceptually inappropriate. A better grounded interpretation is that during the war the economy was a huge arsenal in which the well-being of consumers deteriorated. After the war genuine prosperity returned for the first time since 1929."
Fed gives 600 billion to Treasury secured by treasury bonds guaranteed by taxpayer dollars plus interest, now Treasury loans 600 billion to pet banks and companies at no or low interest to be invested in overseas ventures or pump and dump market schemes. Stimulate the economy? Bhwahahahahaha.........., this is getting like a bad acid trip.
"bridges, roads, ports, water and sewer systems"
Quoting Adam Smith. Good one.
As long as we allow the market alone to dictate value by defining all values as functions of/in terms of financial/corporate self-reference(ie. efficiency, productivity, profitability etc.) the problems that plague our economy are only going to worsen. Valuation is a social phenomena -what appears to be 'economical' in one area, in one generation, can rapidly change and be held 'uneconomical' even when none of the baseline costs involved have changed in the slightest. Take nuclear power in many European countries-once nuclear power was considered to be the most economical form of energy production-but 20 years later, even though it would cost less to produce new nuclear plants now, it is widely held to be 'uneconomical'. This is not an argument for or against nuclear power-personally I oppose nuclear power- I mention it here simply to illustrate that changes in perceived values/costs, on a societal level, can transform that which was considered 'economical' into something seen as very 'uneconomical'.
This is why corporations are no longer investing in manufacturing capacity here in the states. American corporations believe they can produce a better shareholder value by firing workers, shutting down plants, purchasing other companies, off-shoring production, outsourcing work, repressing wages and benefits and buying back their own stock-than they can by increasing domestic manufacturing or paying their workers a living wage. Similar the finance industry believe they make more money flooding the international currency markets with cheap loans, which they produce on their keyboards, playing games of arbitrage-than they can investing in things which would produce more jobs or better wages.
The myth propagated by Milton Friedman and perfected by Alan Greenspan that Americans could all participate in the 'American Dream' by themselves becoming 'financiers' via their 401k, HSA, privatized social security, pensions floated on stock market, and personal ATM's in the form of home equity loans against home mortgages has laid bare the lie that simple consumerism could sustain our economy. In the time right prior to the financial collapse there was more credit available, to more people, in larger sums than has ever been the case in recorded history. Yet somehow all this available credit did not put people to work, did not improve wages and improve the quality of life. On the contrary Americans buried themselves up to their neck in debts that millions will never be able to repay.
The asset price speculation (the financialization) in the housing market-the idea that the value of homes would be ever increasing has permeated almost all other segments of our economy. Each year our health care costs rise-because the only limit to the expenses is what the insurance companies are able to extract from the customers in the form of premiums. The FIRE industry(Finance, Insurance and Real Estate) are fundamentally non-productive enterprises-they produce nothing of value, they only produce credit and debt. Our student loan system has financialized the cost of higher education-leading to unstoppable surges in tuition fees year after year after year damning generation of Americans into near permanent debt-peonage.
The realization of the 'American Dream' is won by forcing others into debt-peonage. Those who are most successful in our society are those who can extend credit, and in so doing, force others into debt. Wages have been repressed across America for nearly 30 years now-at the same time that high-wage manufacturing jobs have almost completely vanished. Pursuing the 'American Dream' now means being up to your neck in debt because the services that we desire and those that we need cannot be financed by the wages that we earn.
Unfortunately due to the cold war, we have backed ourselves into a rhetorical trap. It is politically incorrect to talk about planning the economy nowadays. Sure mass work programs focused on repairing, upgrading and improving our national infrastructure could help, temporarily, ease our current unemployment. Sure more stimulus funds could help abate the colossal wave wiping out public service jobs in state after state faced with bankruptcy due to 'balanced budget' requirements, which are strangling our society. But no amount of investment in the FIRE sector is going to lead to living wages and real employment. No stimulus is going reverse the tide of deleveraging which is still going on and must continue for the next years.
If our politicians fail to set national investment goals-and make the availability of cheap money contingent on meeting those goals there is no way out of this mess. They need to define targets of domestic manufacturing -because the FIRE sector is not going to invest in manufacturing unless forced to. Our politicians need to end the subsidies that have given industrial agriculture such an economic incentive that small farmers and farming communities have been unable to compete. America needs to wake up and realize that a service economy is nothing else than the debt-peonage system which has enslaved people for the last 7,000 years. Local communities must be empowered to pursue domestic manufacturing and agriculture according to the needs of the local populace and surrounding ecosystems. This must be nationally coordinated-but the communities must be empowered implement these changes as they see fit. Wages are born out of value-add, if the work we Americans do is primarily non-productive their is no value-add, no valuation, taking place. Extracting value out of natural monopolies does not equate to a just distribution of wealth-it (re)produces systemic inequality.
IWBC: Than you for the indepth analysis. I've learned a good deal about economics and the peculiarities of the American (led by Wall Street) faux "brand" in these threads. You laid a lot out with precision.
Thanks, I appreciate the compliment. I must confess that I still feel like I am barely scraping the surface of these issues. A lot of my thoughts in this area have been informed by Steven Keen and Michael Hudson-I have learned a great deal from them, but I have not learned enough yet to really articulate where I diverge from them. My instinct tells me that the points I listed above only count for half of the story. The other side of the story I find much more difficult to articulate, because it's articulation lies in contradictory tension to what I wrote above. We need to find ways to plan the kind of work being done in our society, so that people can have work and AT THE SAME TIME we need to dismantle the artificial necessity of work induced upon us by debt-peonage and wage suppresion.
Historically agricultural jobs and manufacturing jobs are ways of providing people with skill-intensive work which yields “living wages”, allowing people who are not “brainiacs” to have a great sense of dignity in their work. Nowadays our economic prognosticators are calling for a workforce which is ever more flexible(exploitable), which is constantly re-educating itself(which is fine for those who have a propensity for learning but which is hell on earth for people for whom education was difficult and/or unrewarding), and which is highly mobile(people who are willing to sacrifice familial/community relationships for personal economic gain). People who need/desire close familial/community relationships are incompatible with this job market. People who have difficulty(for whatever reason) with constantly having to re-educate themselves are incompatible with this job market. People who need/desire to be able to tightly identify themselves with their work, as in the case of having a sense of dignity about themselves and their work are also incompatible with this job market. The millions of people for whom work means working with their hands, who need/desire the sense of instant gratification which is found in “hands-on” work are completely out of place in the new job market. The only jobs available for these people are low-wage jobs which offer little or no benefits and little to no security. The job market of tomorrow bares absolutely no relationship whatsoever to what countless millions of Americans need and/or desire.
The conclusion I draw from this is contradictory yet simple. The economic system which necessitates debt-peonage must be stopped(the overwhelming majority of debt/credit will never, ever be paid off-on an individual level, on a societal level, and on the national/international level-globally). Those products and services which constitute the “common weal” of society must be de-financialized, and given back to the people. Ways need to be found, through national coordination and local implementation to enable people to work, ending wage repression and eliminating the scourge of unemployment(the status and stigma), and decoupling work from existential rights(health, food, shelter). The value of work is not in the first sense financial/monetary, preconditioning the right to exist based on the necessity of working- devalues the work done and the humans doing the work. Work has, to the extent that it requires something of us that we can be proud of, an intrinsic value, which is not captured or reflected in money. When money becomes the raison d’etre of work, due to debt-peonage and wage repression, our lives become mere means to an end, an end which itself has nothing to do with our lives.
What you've clearly elucidated is the EFFECT of valuation proceeding from a widely held materialist based human conciousness. The "haves" will create material solutions as opposed to humanistic solutions for the "have nots" as long as this material bent is held deeply for all involved. Sadly the current set up, (lack vs opulence) perpetuates this material valuation. I believe, unfortunately, castastrophic event or events will be necessary to jar us out of this current dysfunctional dream.
There is no need to create more money. There is plenty of "money" out there, it's just not in circulation. That's because of the changes in the tax structure that were introduced during the (Milton Friedman planned) "Reagan Revolution."
There is too much money in too few hands. Friedman's theories imply that concentrating wealth at the top of the income ladder will result in a more equal distribution of wealth. That's oxymoronic, and as we've seen doesn't pan out.
When wealth (money, assets, etc.) concentrates at the top of the wealth ladder, it never leaves until there is such a severe breakdown that the entire system collapses. Even then, the previously wealthy (unless they have been executed or otherwise utterly disposessed) are usually the only ones left with enough assets to cobble together a new economy and the whole thing starts all over again.
You can't have a poker game if one player has the cash to make the others fold without even showing a card.