Wednesday, January 7, 2009
Money Makes The World Go Round
Today, I feel in the mood to talk about money. We all know what money is, and for most of us, we never seem to have quite enough of it. Lately, there has been a lot of talk in the news about getting the economy going again and getting people back to work. Almost every economist in the United States has some plan or idea of action that the Federal Government should take. This is the easy part, having a plan. The hard part is getting the plan converted into action. Politics enters into the equation because politicians are going to vote on the bill that will stimulate the economy. I know how to get the money spent in the fastest way possible, but my equation is quite simple because I am not a politician. But, before I present my plan, I would like to talk a little about money and its relationship to the side effects from the Federal Government’s spending plan.
The most immediate concern of the new administration is getting money into the hands of working people and retired people too. At this point, there should be little concern for inflation or the inflating of the money supply. The Federal Reserve Bank can set the reserve requirement to expand or contract the money supply, but, like pushing on a string, unless people want to borrow and banks are willing to lend, the money supply will not expand (Last year, in one of the MONEYTHOUGHTS postings, I discussed how commercial banks create new demand deposits from loaning money, and how the Fed, by setting the reserve requirement for commercial banks can influence the growth rate of the money supply. So, we have already covered that ground before.) At this point, the only debate among economists is what is the fastest way to get money into the hands of the people. Concerns about inflation are taking a back seat to concerns about deflation. Deflation is when prices of commodities, products and services decline in price. It is unlikely that the service industry will be able to cut prices as declining labor costs will only make the economic situation worse. At this point, deflation is a bigger threat to the economy than inflation or the rapid expansion of the money supply. In the future, the Fed will have to raise interest rates to prevent a rapid rise in inflation, but again, that is most likely months or years away. With all due respect to former Fed Chairman Martin, the “punch bowl” needs to stay in the center of the room, on the table and filled regularly.
My idea is quite simple. Put money back in the hands of consumers so they can keep the economy moving in the direction of a recovery along with infrastructure projects that have had to be shelved by states because of their budget deficits. The only problem with my plan is that the politicians can not take credit for bringing dollars to their state or district. This may sound like a petty reason, but it is the real reason it may not be done. And, I am talking about much more than $600 per person. Perhaps the number needs to be multiplied by a factor of ten. I know, I am a socialist or better yet a communist for making such a suggestion, but, at this point, labels are not what is going to get our economy moving. True, some people who don’t need the money will save it or invest it, but I think that there are a whole lot of people out there that would use that money to pay down debt and spend on those items they need for themselves and their families.
If you think my idea for getting our economy moving again has merit, then write or call your representative and tell him or her what you think. 2009 does not have to be a bad year. 2009 can be the year that our economy starts moving in the right direction.