Return of the Great Depression

When the Federal Reserve lowers interest rates, this encourages people to spend, rather than save. Earning 1% on your savings simply isn't very exciting. During an inflationary period, 15% might not be very exciting. The alternative is to spend. Not only do people spend what they have. Low interest rates encourage them to buy on credit.

The combination of increased consumer demand and low interest rates encourage businesses to borrow, in order to meet that demand. This puts more money in the hands of both employees and investors, who naturally tend to spend rather than save.

On the surface, this sounds very pleasant. Jobs are plentiful. Profits are increasing. Everybody's happy. But how does the Fed lower interest rates? It accomplishes that primarily by purchasing treasury bills, and paying for them with money it created out of thin air. The more dollars we have in circulation, the less each dollar is worth. This phenomenon is known as inflation. It amounts to an across the board pay cut. In an inflationary environment, you might find yourself increasingly impoverished each year, even though your wages continue to increase.

I agree with those economists who argue that a small consistent rate of inflation isn't necessarily a bad thing. In a stable market, the prices of various commodities can be expected to rise and fall. The market price of labor can also be expected to rise and fall. People tend to be much more agreeable to their grocery bills going up, than to their pay being cut, even though the end result might be the same. So, we'll just have these regular across the board pay cuts, and allow employers to counter them by granting pay raises when appropriate.

Though current practice links the two together, it is the lowering of interest rates, rather than the expansion of the money supply, which leads to excess capacity. Excess capacity, in turn, leads to layoffs, unemployment, and bankruptcies. The Fed can sometimes counter this, by lowering interest rates. But at some point, doing so would result in hyper-inflation, and a complete breakdown of the monetary system. So they accept the pain of a recession, when it appears to be the lesser of the two evils.

This might be tolerable, if we could just accept that we are going to have a recession every few years. Unfortunately, the amount of stimulus needed to generate a recovery tends to increase over time. At some point, we could be looking at a recession, even though interest rates are near zero. That was the state of affairs just prior to the stock market crash of 1929. It is also what we are facing today.

What can we do about this excess capacity? We can utilize it, by expanding government programs, such as welfare. We can put a lot of people to work with a massive program of infrastructure improvements. We can start a war. War does not create prosperity. But it can increase employment temporarily.

I hope we can avoid World War III, though I can't say I am optimistic about that. I do think it would be helpful to understand that countries often go to war, not because they have no alternative, but simply because they have nothing better to do with their resources.

As for the other two possibilities, I believe there is much there that is worth discussing. But I won't dwell on that now. The main point I would make at this point is that neither of these approaches fully addresses the problem. We need to stop creating excess capacity, instead of merely looking for ways to siphon some of it off.

The Fed could expand the money supply without lowering interest rates, by purchasing gold, or any other commodity for that matter. The gold standard was abandoned for good reason. I am not advocating its return. However, I do believe gold offers the Fed a method of expanding the money supply, without lowering interest rates. Instead of setting interest rates, let the Fed regulate the price of gold, by buying and selling it, rather than treasury bills, on the open market.

By purchasing treasury bills, the Fed also subsidizes the Federal Government. Let's do away with the shell game. When Congress needs to raise money, they can raise taxes, borrow, or levy the Federal Reserve.

If Congress takes too much from the Fed, the Fed will have no choice but to raise the price of gold, to prevent its inventory from being depleted. We will have inflation, and it will clearly be the fault of Congress. If Congress borrows too much, they will drive interest rates up, and dampen business expansion by competing with private borrowers. And if they raise taxes, well, nobody likes to pay taxes. People will continue to fight about these things, but I believe the boom/bust cycle would come to an end.

There is one other role I envision for the Fed. Though I believe it should be illegal for the Fed to loan money to a bank, or to anyone else, they could offer banks a nominal rate of interest on demand deposits. So when you deposit money into your checking account, the bank deposits that money into its checking account with the Fed. Certificates of Deposit could work the same way. The bank could pool all the money it collects for Certificates of Deposit, and deposits it into a Certificate of Deposit it has with the Fed. The Fed offers banks the same services that we want the banks to offer to their consumers.

And if you want to take out a mortgage, where will that money come from? There will be no shortage of investors willing to part with their money for thirty years, once interest rates are high enough to entice them.

I also think we should consider retiring the thirty year treasury bond, and replacing it with a thirty year annuity. Rather than paying off the principle at maturity, amortize it as we would amortize a mortgage. That way, when the government borrows money, a significant amount of the pain would be felt immediately, rather than 30 years later. Annuities would also be more attractive to retirees and other income oriented investors.

If we do as I suggest, what is the likely short term result? We will have a massive wave of layoffs and bankruptcies. That is going to happen in any event. Rather than postponing a depression, and making it worse in the long run, let's just dive into it.

Massive unemployment does not have to mean starvation. I recommend expanding the Food Stamp program, and simply giving everyone the maximum allowance, with no means test. I don't have to prove that I can't afford to buy my own books, in order to borrow from the local library. We also have public schools. Let's just give everyone a food allowance.

And while we're at it, let's throw in a housing voucher. Currently, I believe $100 a month per adult, and $50 per child, would be reasonable. That isn't going to give you a real nice place to live. But it will ensure that everyone has a roof over their head.

One thing I do not think we should be doing is raising the minimum wage. I would actually like to see it eliminated entirely. If the minimum wage is $15 an hour, and a robot can do your job for $10 an hour, where does that leave you? On the other hand, if everyone is guaranteed the basic necessities for survival, the living wage suddenly becomes a meaningless concept.

And how are we going to fund all this generosity? Raise taxes, and I don't mean just on the rich. Though the necessary tax increase would be substantial, I believe the effect would be minimal. If your taxes increase by $500 a month, and you receive $500 a month in benefits, and we're talking about food and shelter, things you were going to buy anyway, it's a wash. Some people would actually pay more than they receive, while others would pay less. But I think it would be doable.

But what of the retiree whose $200,000 stock portfolio suddenly becomes just so much worthless paper? If you find yourself in that position, I'm sorry, but you are not going to starve. If the government intervenes to prevent this from happening, like it or not, you are a welfare recipient, but one who has the illusion of self sufficiency.