Monday, August 08, 2011

Money Talks

Just to be clear, the panic in the stock markets and the looming economic crisis is NOT about the recent credit downgrade of the U.S. or fears of an American default. They are about the planned solution to these bogus threats, namely reduced government spending.

The proof? While the stocks plunge, the U.S. dollar rose against most world currencies and so did U.S treasury certificates - the very instruments that the Republican's held hostage and which S&P downgraded. Stocks fell because investors understand that major cuts in government spending will seriously depress aggregate demand for goods and services. And businesses only make money by satisfying demand for goods and services. The dollar and treasuries rose, because no one takes seriously the idea that the U.S will really fail to pay back its loans. Most of that debt is held by the rich, and the rich, after all, control Congress. (Only a truly radical left would allow default, thus freeing the masses from having to pay, while screwing the bond holders - disproportionately the comfortable, the rich and the super-rich, as well as foreign governments.)

So what would I do if I were king? Keep on spending! How to finance it? Increase taxes - or just let the Bush tax cuts expire, which, by the way, the President can do all by himself, by simply vetoing the legislation required to extend them. And by "quantitative easing" - aka printing more money?

But won't that cause inflation? Yes. But inflation is not necessarily bad, if it is steady, not excessive, and not uncontrolled. Inflation at 5-6% a year for 5 or 6 years, would eat away at the real value of all that debt - both public and private - and free up both governments and consumers to get back to the real business of the economy - creating goods and providing services that people need and can afford to pay for. And this in turn will put people back to work so they can afford what they need. (Special compensation would have to introduce for poorer seniors and others on fixed incomes.) Such a policy would reverse the negative loop we are currently in, and begin a much needed positive feedback cycle.

Is this cost free? No. Both taxes and inflation will - on average - hurt the rich more than the poor: which is, sadly, why none of this will not happen, at least not with this Congress and this President.


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