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Right now, even a counterfeiter issuing dud dollars would be better for the economy than our deficit-fixated policymakers
Beneficent Counterfeiters and Economic Stimulus
President Reagan once famously quipped that everyone who is supports abortion has already been born. In the same vein, it is worth noting that all the policymakers who don't think we should worry about 9.6% unemployment have jobs.
This simple fact cannot be repeated enough times because it explains a huge amount about current economic policy. For the tens of millions of people who are unemployed, underemployed or have given up looking for work altogether, we are in a crisis. The economy is an absolute disaster, ruining their lives and also jeopardising the futures of their children and grandchildren.
But that is not the way that the people paid to contemplate economic policy in Washington see things. This gang is busy congratulating themselves because things could have been worse. They point out that if they had been even more incompetent that we could be in a second Great Depression with unemployment staying in the double digits for a decade.
Instead of worrying about the millions of unemployed workers today, they are worried about their deficit projections for the years 2018, 2020 or even 2025. This crew, which could not even see the $8tn housing bubble that was about to wreck the economy, wants the whole country to genuflect before their projections of deficits for 10-15 years into the future. This situation really would be funny if it did not lead to so much unnecessary suffering.
Obviously, we have to teach some elementary economics to the geniuses who design economic policy. The basic problem we face is a lack of demand. Note that this is the exact opposite of the deficit fixation "“ budget deficits are a problem when we have too much demand.
To better understand this demand problem, suppose that we had a super-effective counterfeiter: someone who could make near perfect copies of $50 or $100 bills. Suppose this person printed up $2tn of counterfeit money and began to spend it on all sorts of items. Our counterfeiter buys up houses and cars. They pay for incredibly lavish parties and trips. They hire all sorts of servants, groundskeepers and investment advisers.
What would be the effect of this counterfeiting scam on the economy?
In the current situation, it would provide an enormous boost to GDP and create millions of jobs. After all, everyone thinks the money is real. It is no different whether the counterfeiter and his underlings spend $2tn of counterfeit money or if firms suddenly start investing their hoards of cash or households begin to spend again as though the housing bubble had never collapsed.
That may sound troubling, but this is because the current economic situation is so extraordinary. In normal times, the economy is, at least partially, supply-constrained. Collectively, we want more goods and services than the economy is capable of producing. If our counterfeiter manufactured his $2tn in normal times, it likely would cause a serious problem of inflation. There would be more demand for cars, houses and other goods than the economy was able to supply. This would push up prices and wages, leading to a cycle of inflation that would persist until policy measures were taken to slow the economy "“ or the counterfeiter was caught.
In our demand-constrained economy, however, there is no problem of inflation. The economy can produce more of almost anything right now. The reason that we are not doing it is simply the lack of demand.
But the interesting part of the counterfeiter story is that his $2tn of phony money will not create problems even in the long run, assuming that he is eventually shut down. Suppose that the counterfeiter's lavish spending gets the economy back towards full employment around 2012, at which point he gets nailed by the FBI who finally figure out how to recognise the dud notes.
At that point, the $2tn will be grabbed out of circulation and destroyed. Assuming that the economy is strong enough at this point to remain near full employment even as this counterfeit wealth disappears, then there would be no lasting damage from the episode. The fictional wealth had generated demand when the economy needed it, but then was pulled out of circulation at the point when it could have generated inflation and "competed away" goods and services from others.
While it is unlikely we will see a successful counterfeiter on this scale, the government and the Federal Reserve Board can imitate the counterfeiter's actions. This is the story of fiscal stimulus: safe, fun and legal. Instead of putting people to work filling the counterfeiter's frivolous whims, we could have them work to build up the economy and meet important needs. The list of necessary tasks is long and well-known.
As is the case with the counterfeiter's illicit stash, the stimulus spending need not even create any long-term debt burden. The Fed could simply buy and hold the bonds issued to finance the spending. When the economy returns to more normal levels of employment, the Fed would raise interest rates, as it always does, to prevent inflation from posing a serious risk.
It's all very simple. Unfortunately, our Washington politicians lack the courage to take the necessary steps to get the economy back on its feet. That means that the best hope we have right now might be a very successful counterfeiter.
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12 October 2010 3:29PM
I'm not going to feel so bad for keeping dodgy pound coins in circulation now.
12 October 2010 3:36PM
Well Mr Baker, this is an extraordinary article and for a moment I looked to my calendar, just to make sure it was not April fools day! Are you serious? Firstly why is your article entirely America centric? this is a British newspaper. Whilst their problems are similar to ours they are not the same. Secondly paper money is no different to toilet paper. It is only worth what you think its worth. (ever been caught short out repping? I can tell you a bog roll is worth its weight in gold at that moment) A printer of counterfieit money does what an authorised printer does. EG: he takes a nice piece of paper and prints a number on it, £5.00 or £10.00 or whatever. We BELIEVE that bit of paper is worth a sum of money, but what is a sum of money? More bits of paper? Read your bank notes they are actually "promisary notes" It reads "I promise to pay the bearer on demand the sum of......." but the Bank of England will not hand you over an equivalent of gold, because the gold standard was scrapped. It is in fact a broken promise, a lie. And printing more just devalues the stuff further. Thirdly, economists know everything but understand nothing. We do not create jobs by giving people more money to buy a car made in France, a TV made in Poland and a calculator made in China, all we do is make somebody elses economy richer and our own ever poorer. Throwing confetti money at folks is just plain daft. If you want to create jobs throw your text books in the bin. And think anew. Bring back proper apprenticeships in the much maligned "metal bashing industries". Protect those industries from cheap subsidised imports. Protect them from smash and grab takeovers. Abandon the failed experiment that is globalisation. Reintroduce proper trade where I buy from you and you buy from me, instead of this rediculous state of affairs where we import import and import again, whilst ever more clever barriers are put up against our goods and services. Accept that our people need proper jobs not "life stlyle" jobs and lets start creating wealth not printing phoney money either legally or illegally. Jobs are more than just an income stream provider, they define who you are and we need to reinstate the pride of engineering and mechanical crafts. And lets not forget engineering is very high tech these days and Britain invents just about all of it but benefits from none of the wealth creation it engenders.
12 October 2010 3:54PM
Duh - The Federal Reserve are counterfeiters!
They can order money printed without having to give up anything of value, so tell us why that is not counterfeiting with a get out of jail free card?
"Give me control of a nation's money and I care not who makes the laws." - Mayer Amschel Rothschild
(The Rothschild's are the federal reserve banks primary stockholders)
12 October 2010 4:48PM
Dean,
I think you deserve a lot of credit for spotting the housing boom, predicting the recession and for opposing the moral-hazar-ridden bank bailouts, but you have to help me out here. How is printing money anything but a massive tax on the holders of money?
12 October 2010 4:57PM
@lownoise.
The tax bill from HM Revenue and Customs gives Sterling value. Unless you give them Sterling, you go to jail.
That is enough to get everybody in the UK to trade their labour and goods to obtain Sterling, and that kick starts the Sterling economy.
Of course if the government doesn't *spend* any Sterling, then you will go to jail anyway because no matter what you do and what you produce you can't get any Sterling from anywhere else.
And that demonstrates that in a fiat economy, the currency issuer *must* spend currency *first* before anybody else can do anything.
Thus the notion of the currency issuer borrowing its own currency is a complete fabrication - left over from the gold standard era.
12 October 2010 4:59PM
ABC. Anything But Cash. That's what you want to be holding when the USA decides to inflation-default its way out of debt. I've upped my gold allocation accordingly.
12 October 2010 5:11PM
The phrase 'printing money' is only used by people who don't understand what money is.
When a Government pays public sector workers, it is creating money. When a tax payment leaves the payers bank account, the money is destroyed forever along with its spending power.
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