Through the Looking Glass

For 75 years, since the depths of the Great Depression, American economists and policymakers have offered just one cure for economic problems.

Liquidity.

Liquidity means the injection of new money into the economy. This is done through monetary policy, cutting the cost of money directly by the Federal Reserve, or through fiscal policy, spending more than the government takes in.

Of course, there’s another word for liquidity, and that word is inflation. The film above, produced in 1928, illustrates the hyper-inflation which began the rise of Hitler in Germany.

Once a nation goes through hyper-inflation its people get the message through suffering. Your life’s savings disappear. You can’t afford food or other necessities. The government can’t really help anymore because they’re using the same worthless currency you are. Pretty soon you’re down to barter and the use of foreign currencies. It’s happened many times, especially in Latin America, and the answer of American policymakers was to peg those currencies to the dollar. The dollar was the strong currency.

Is it?

When you’re running deficits of $300 billion or more a year, you print money to make up the difference. When you cut interest rates below the rate of inflation, you’re printing money. When you offer tax cuts — to the rich, to the poor, to anyone — or a "stimulus" package you’re printing money. When you tell banks, give us your broken-down loans and we’ll lend you 100 cents on the dollar on them, you’re printing money.

Nearly everyone across the political spectrum, with the notable exception of Ron Paul, thinks these policies are dandy. And they offer little else in response to them. Paul, however, is a nutcase — getting rid of the Federal Reserve and going to a Gold Standard won’t solve the problem either.

The answer is to start paying down debt. The answer is to start producing more goods. The answer is to turn around our current accounts deficits, and our fiscal deficits, and start paying down our loans. This is what worked in the 1990s, and yet no one has proposed it in 2008.

Instead we get whining when lines of credit which aren’t being used correctly are cut off. (Borrowing on your house to pay for pre-school is stupid.) We get nods of approval for more deficits from people like James Surowiecki, who should know better. We get predictions of doom from Nouriel Roubini, but no clear course out.

What can be done?

1. 
   Get the f$&@ out of Iraq, and Afghanistan. The latter is far more of a threat to China and Russia than it is to us. Let them deal with it. This will cut our military budget in half.
2. Return us to a progressive tax system. Warren Buffett
   should be paying a higher percentage of income in taxes than his
   secretary. He gets more value from stability than she does.
3. Create a glidepath to a surplus. Major fiscal changes need to be put in gradually.
    
4. Really fight the War Against Oil. You can produce
   alternative energy through efficiency, through solar, through
   geothermal, through wind, through water, and start investing in storing
   the remainder as hydrogen.
5. Get a dirty job. We need millions of new dirty jobs. Jobs that produce goods, jobs in infrastructure repair, jobs outside offices. Mike Rowe (right) needs to become Smokey the Bear.
    
6. Think frugality, not spending. Personal balance sheets
   need to be adjusted. It’s a process that may take most of a generation,
   but we need to get back to the mindset. This is where leadership is
   most important.
    
7. Encourage inflation elsewhere. Countries that are building
   surpluses today, especially China, need to start moving toward balance
   and spending more of their money at home. Encouraging consumerism is
   also the best thing we can do to move those countries toward democracy
   because the ultimate consumer good is education.
    

The United States is losing its status as the Hyperpower. That’s over.
We’re broke. We can’t afford it anymore. We need to do everything
possible to cool the world’s temperature, in a foreign policy sense,
rather than raise it as we’ve done this decade. Just as we need to cool it in an economic sense. The engine is out of oil, it’s overheating, it’s seizing-up.

None of this is going to be easy. None of it is going to be short term.
None of it is going to really avert a recession, probably a bad one.
Our economy is as out-of-whack on the inflationary side today as it was
on the "sound money" side in 1928. The "housing recession" is in fact a
slow-motion stock market crash, with precisely the effects on the real
economy that October, 1929 had.

Every  economy needs more balance, and the economy of the world as a
whole needs balance. That is a key part of this generational crisis. 

When will the economic grown-ups appear?