Money Money Money
Money is a very interesting topic in economics. Unlike most other goods, almost every developed nation runs a monopoly on money, even the “free market” ones like America and Britain. And almost no economist (besides a few renegade Austrians) think this is a bad idea. Actually, it’s almost entirely the opposite: most economists think responsible governments SHOULD control the supply of money.
The reason is actually pretty simple: deciding whether or not to print more money isn’t that hard to do. You just look out the window and see whether the economy is over-heating or under-performing. Generally speaking, it’s not even tough to figure out how MUCH money to print either. The Federal Reserve has a fancy equation called “The Taylor Rule” that tells them what the interest rate should be, and they keep printing money or taking it out until they get to that level.
We can turn the whole system over to a PC and we’d be fine 90% of the time.
Here’s the rub: when the economy goes through a major hiccup, it means that the guy in charge screwed up. Biiiigggggggggg time.
And if you’ve been paying attention to the economy lately, you’ll see that that the recovery has stalled. The US lost jobs again. And those private jobs we did gain? Not anywhere near enough. If the US added 300,000 jobs a month, it’d take FIVE YEARS for the unemployment rate to fall back to 5%.
The economy is in baddddddddddddd shape right now. If the Bush tax cuts completely expire, we will almost definitely have another recession.
So, the guy in charge of the money supply? Yeah. He screwed up. Thanks Ben Bernanke.
But we shouldn’t be too quick to blame him, because Bernanke himself knows exactly what we should be doing. The problem is that he needs to convince other people: he needs to convince the other members of the Federal Reserve Board, and he might need to convince Congress and the general public not to throw his sorry ass out. Why? Because what we should be doing sounds freaking insane.
Print. More. Money.
I bet half the world tunes out right there. The idea is preposterous. Printing money to solve our economic problems? Terrible words pop into mind. Hyperinflation. Zimbabwe. Nazis! Isn’t inflation a bad thing? Isn’t printing more money to escape an economic crisis what irresponsible governments do and counter-productive anyways?
Goddam, I’d be lying if I said I wasn’t proud that we’re smart enough to know printing money endlessly is a bad idea. Seriously, I’m going to cry. Where are the tissues?
But, if you know anything about economists, you’ll know that their favorite phrases are “on the other hand” and “it depends.” And printing more money to solve a crisis? Well, that depends on the type of crisis, too. Sometimes printing more money makes sense. The money supply has to be flexible and respond to the needs of the economy. If the supply is too low, a recession results.
Think of it this way. What if we fixed the supply of money forever right after we kicked the British out? As the nation grew, with ever more people, businesses, and trade, money would become harder to find. Trade in parts of the country might very well fall back to barter, simply because there isn’t enough money.
Such an economy would not perform very well. The country needs more cash to service the needs of a growing economy and population.
Basically, it’s supply and demand. Demand for money sure as hell isn’t fixed, so there’s no compelling reason supply should be, either, which means we have to print more money sometimes. In fact, the whole reason we have dollars in the first place is because Great Britain tried to limit the amount of currency going to the colonies. Since money was in such sort supply, Americans used Spanish dollars instead of British pounds. The name stuck after we became independent.
Much like every other good out there, demand for money doesn’t change just when the economy grows or we have more people. It changes on the basis of how much people expect they will need money. How much cash do you have in your wallet right now? I have $34, which is pretty damn high. Usually I only have about $10 on hand. Unless I’m going to Six Flags, where I might carry $50. If I’m going on vacation, I might have $200 on hand, because you never know what stupid stuff will happen. If suddenly half of America goes on vacation, I expect that the demand for money is going to shoot up for just that reason.
Recessions are often caused by wild changes in demand like this, especially this recession. Banks suddenly start thinking that their subprime mortgages are going to fail? Hold on to the cash. Businesses see that they can’t get loans anymore? Hold on to the cash. Families worried that they might lose their jobs? Hold on to the cash.
Suddenly money is flying out of the system faster than Republicans from a gay pride parade. Households find that they can’t hoard enough cash just by working, so they stop buying new stuff. Businesses suddenly don’t have enough cash, so they lay off workers. Everyone tries to stockpile money, but there just isn’t enough of it for everyone and the economy at the same time. Unemployment results, because the only way for everyone to “win” is for everyone else to fail. It’s a zero-sum game when a hoarding crisis starts.
We know what this would look like if it happened. Unemployment shoots through the roof and inflation falls to nothing. And the sudden savings means a biggggggg influx into capital markets, so interest rates fall lower and lower. In case you haven’t been following the economy, this is exactly what is happening right now.
Ben Bernanke looks at this situation, and he sees the problem. Among other things, there’s this huge demand for dollars out there, because everyone is terrified. So, he knows what he SHOULD be doing. Like he told the Japanese, he wants to jump in his helicopter, fly over New York City, and drop money out of the sky until the recession is over. But other people won’t let him.
Because they are afraid of inflation.
Won’t it CAUSE hyper-inflation? Probably not. It only creates inflation if we’re increasing the supply faster than demand. Right now, demand is so absurdly high that it’s almost impossible to meet it: that’s why we have this unemployment problem, we can’t adjust. Pumping more money into the economy won’t create hyper-inflation, but meet the demand people have, allowing the unemployment rate to go down and inflation to return to its normal level, as opposed to the falling inflation we have right now.
Over time, as fear dies down and people don’t want to hold as much money, there’s a chance that inflation could start, but the Federal Reserve has ways of draining the excess money from the economy. The chances of a hyper-inflation episode are very low.
On the other hand, the chances of prolonged economic malaise are not low. It’s a certainty. Remember, even at 300,000 jobs added per month, it’ll take 5 years for unemployment to go back to 5%. That’s 2015. And our last jobs report was a loss. At this rate, we’re looking for a return to normal unemployment, optimistically, by 2017, and possibly not until 2021. The US has undergone at least one depression before, and another advanced economy (Japan) never really recovered from one just in the 1990s.
On the other hand, the closest we’ve come to a hyper-inflation problem in the US in recent history was the 1970s, which, while not pleasant, isn’t necessarily the worst thing in the world. Double-digit inflation for a while did not ruin us.
With that on our plate…well, there’s really no reason not to do the obvious.
Print more money!
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