rumitoid wrote:
There is nothing Left or Right about them, and seeing them in that way is at least an in encumbrance to clear thinking yet more likely a treasured blindness. Opinions and views are just that: opinions and views. Their efficacy or lack thereof is not dependent upon either a label of Left or Right nor a backing by either party. THINK! I know it may hurt but if you stay honest, we have a chance to get through our divisiveness.
This is not an opinion or a view. It is a description and a prescription:
Think of the US economy as a wash bowl with water being the money. Imagine three sets of faucets and corresponding drains representing different ways that money enters and exits the economy. The analogy will show how control of the money flow can attain and maintain a prosperous economy while avoiding severe inequality.
WATER LEVELS
Because supply and demand determines value, a dollar becomes precious when the level of water is near the bottom. The economy freezes solid in a deflationary crisis. Who would spend a dollar today if it would buy more tomorrow? We have a severe depression with an unemployment rate over 25%, bank failures, and very low GDP.
When the level is higher but still below the half mark, the economy hovers between deflation and inflation. We have a serious recession with 10% unemployment and little GDP growth. The market is in turmoil.
When the level is not much above the half mark, the economy is precarious with a low inflation rate, a 7% unemployment rate, and a slowly rising GDP. Its our US economy during January, 2014!
When the level is higher but not too close to the brim of the bowl, we have prosperity at last! We have a 2% inflation rate, a 4% unemployment rate, and a 3% GDP growth rate. Not too hot, not too cold. Goldilocks!
When the level is close to the brim, a lack of slack causes shortages and too much money is chasing too few goods. Harmful inflation rises above 3% and the unemployment rate drops below 4%. Quick, Fed! Raise the interest rates!
Closer to the brim, the economy becomes unstable due to an increased velocity of money (transactions per week at a given water level). Prices vainly pursue rising costs. Imagine how bad it gets when the bowl overflows!
Of course, we want the economy to attain and maintain the prosperity level. To attain that level, we have to manage the flows. To maintain that level, we have to micro-manage the flows.
WATER
The transfer of funds among owners does not affect the level of water in the bowl. However, severe inequality of wealth takes a large portion of the money supply out of economic service and lowers the effective water level. Also, excessive private debt is equivalent to creditors hoarding funds - with the same effect as severe inequality.
The US Treasury offers several types of term-deposit accounts called treasuries, similar to a certificate of deposit or CD. Thus, a US bond is equivalent to a savings account. Neither the amount of funds contained in these accounts nor the transfer of funds between these accounts and other accounts affects the water level.
The Fed may also buy treasuries in the market with cost-free keystrokes, relieving the Treasury of corresponding debt. The
Fed may also sell treasuries but must return 94% of its earnings to the Treasury. Neither the amount of funds in the Feds account nor the transfer of funds between the Feds account and other accounts affects the level of water in the bowl but could, by its influence, change the interest rates of the treasuries at auctions.
FAUCETS AND DRAINS
The Bank-Loan faucet creates money out of thin air. Of course, these loans create debt, not savings, but the economy cannot tell the difference. The corresponding drain is Loan-Repayment, where the money vanishes. Could we manage our economy by controlling lending? Effectively, the loans always add to the water level, with the amount added increasing as the water level rises. Near the brim of the bowl, bank lending is the main cause of inflation. Since the economy determines the bank flows, we cannot manage the economy by controlling lending.
The only other private source of money is the Export-Receipts faucet. Import-Payment is the corresponding drain. A trade surplus would increase the water level. Our current trade deficit is lowering the level.
Could we manage the economy by controlling trade?
Governments set trade policy but millions of individuals everywhere, acting in their own interest, do the trading. Again, it is the relative state of the various economies that determine the flows of trade rather than the reverse. So we cannot manage our economy by controlling trade.
The Federal-Spending faucet increases the water level. IRS-Revenue is the corresponding drain. To prevent inflation, taxation drains away most of the spending. To keep the excess money out of circulation, the IRS destroys its receipts, shredding bills and melting coins for scrap. Thus the drain outflow is not connected to the faucet. Since tax revenue is not available, Congress never spends other peoples money to help the poverty-stricken.
Congress creates fiat money out of thin air, exactly the way banks create loans. The federal dollars spent and not repossessed by the IRS are saved by the private sector, increasing the water level. Under the previous gold standard, the Treasury matched the savings with bond auctions, a practice still continued but no longer necessary with our fiat currency.
Instead, unrelated to federal spending, the Treasury could now offer a rational amount of bonds for trade collateral, pensions, insurance, bank reserves, etc., just as banks offer CDs. Such a practice would end concern about the national debt (total accumulated private savings) and the annual debt interest expense.
Could we manage the economy by controlling the IRS-Revenue drain? Tax legislation can be brutal. At most, we could set a stable flow rate at a reasonable level. So we cannot manage the economy by controlling tax rates.
So, by elimination, we have found that the only way to control the economy is by Congressional spending. We have also found that the only rational restraint on Congressional spending is the threat of HARMFUL inflation.
To ATTAIN prosperity, Congress must spend enough money (but not more!) on much-needed infrastructure.
To MAINTAIN prosperity, Congress must spend enough money on infrastructure while the Fed controls interest rates and the administration micro-manages the economy by careful scheduling of infrastructure projects.
To the extent that Congress spends more than that amount of money, Congress would cause harmful inflation.
To the extent that Congress spends less than that amount of money, Congress would cause unemployment.
To the extent that Congress allows the occurrence of unemployment rates that weaken the bargaining strength of labor and promote inequality, Congress would be wilfully malevolent and should be rejected by American voters.