The Tennessee Ernie Ford Solution

The markets took great comfort in Ben Bernanke's testimony to congress yesterday, reading it as a statement that the economy could recover by the end of the year. However, his statement was in the subjunctive mood, not the indicative; it was a conditional statement: IF all the bailout plans work by the end of the year, THEN the economy will recover. Well, duh. But as well-intentioned as the bailout plans are, there is good reason to believe that we are nowhere near the bottom. Further, all the plans do--if they do anything at all--is restore the pre-crash economy. But that economy was not viable; it was a house of cards to begin with, and restoring it will not place the economy in a secure position.
For example, a large portion of the capital of the banks is tied up in mortage obligations and, more importantly, "derivatives" based on those mortgages. But the housing values are nowhere near their bottom, if historical averages can be trusted.
If housing prices correct to their historical averages, which is likely, then the banks balance sheets will weaken and there will be a lot more "troubled assests" for the Troubled Assets Relief Program (TARP) to buy.
The President also laid out his plans last night. It is certainly a comprehensive and well-meaning plan, but I doubt that it will work. The problem with the plan is that it fails to recognize the structural problems in the economy. Obama hopes to restore American manufacturing through a heavy investment in "green" technologies. But even if this was successful, there is no reason to think that manufacturing of these new products won't be outsourced. This is the Tennessee Earnie Ford solution: in the end, we will be "another day older and deeper in debt," but we will not have accomplished anything.
A nation can only grow prosperous by making things. It can never grow properouse by speculation. Our economy is built not on real assets, but on speculative bets. But in speculation, for every winner there is a loser; one party's gains are precisely measured by another party's losses. Only making things can make the nation wealthy, only in the farms, fields, forests, fisheries, factories, and mines can we find our future. Bailing out the old economy will at best give us the old economy. At worst--and more likely--it will bankrupt us.
So what should the President be doing? There are many things he could do, but there are at least four things he ought to do over the course of the next four years:

  1. Devalue the dollar. The worth of money relative to other currencies should reflect their trade balances. A country like the United States, with a constant trade imbalance should have a constantly "shrinking" dollar, which by itself is sufficient to bring trade back into balance. But we have the worst of both worlds: a strong dollar and a trade deficit. Devaluing the dollar over the next four years will make imports more expensive and exports cheaper.
  2. Devaluing the dollar will make lenders more reluctant to lend. But this is not bad news, it is good news. Instead of borrowing the money for infrastructure improvements, we should just print it. While this seems radical, the fact is that we borrow it from people who just print it up themselves: the banks and the Chinese. The idea of "printing" money conjures up visions of hyperinflation. And if the money is just printed to finance tax cuts and operating expenses, this is a possibility. But if it is used to finance actual improvements, like roads, education, and the like, there need be no monetary inflation, so long as there are unemployed resources in the economy. In other words, we can invest our own money in our own future, and provide both jobs and real improvements along the way.
  3. Finance the highways through weight and distance based tolls. Right now, the "free" ways constitute a subsidy to long distance shippers and the globalized economy. But if the shippers had to pay the full cost of transporting their products, local and regional manufacturing would suddenly have a great advantage over foreign producers, no matter how little they pay their workers.
  4. Buy up and break up the institutions that claim to be "too big to fail" (see Buy it Up! Break it Up!.)
Whatever happens, nothing good will happen without a restructuring of the economy. Geithner, Bernanke, and company are trying to chase falling assets and prop them up, but they will fall faster then the government can build supports. It is like trying to "catch a falling knife"; you are likely to get cut. We cannot go back to where we were because where we were was nowhere. The nation will have a distributist solution, or no solution at all.

5 comments:

Tom Wednesday, February 25, 2009 at 9:27:00 PM CST  

Mostly agree. We should print the money, seize the banks and sell off the assets, and raise transportation costs, and finally we should seperate health care and pension form employment.

The Guild Master Thursday, February 26, 2009 at 1:54:00 PM CST  

Some thoughts: if you devalue the dollar you will simply import inflation. If the US had a thriving manufacturing industry, people could switch from foreign to home-produced goods, but it doesn't. So much has been out-sourced abroad. In the short to medium term there is little choice but to buy from abroad and with a weaker dollar that's going to get more expensive.

You say that instead of borrowing for investment the US should print the money. Surely it should do neither: it should generate the wealth and save for it (and as a small businessman I practise what I preach). You are quite right to say that a nation can only prosper by making things and not speculating, but printing non-existent wealth that no one's earned is not much of an advance.

The road tolls idea - not a fan of more tax. It also has a flaw if it's meant to discourage foreign imports, because domestic users (if I understand you correctly) will be paying the same tolls. If you have a system where each different weight of vehicle and distance travelled is charged differently, it'll be a bureaucratic nightmare and will have considerable administrative costs.

Aaron Thursday, February 26, 2009 at 6:03:00 PM CST  

Quote: "So what should the President be doing? There are many things he could do, but there are at least four things he ought to do over the course of the next four years:

1. Devalue the dollar. The worth of money relative to other currencies should reflect their trade balances. A country like the United States, with a constant trade imbalance should have a constantly "shrinking" dollar, which by itself is sufficient to bring trade back into balance. But we have the worst of both worlds: a strong dollar and a trade deficit. Devaluing the dollar over the next four years will make imports more expensive and exports cheaper."

I agree and disagree. Yes we will have to revalue the dollar but we need to reorganize the system first and then revalue it by treaty into a fixed exchanged rate system along with every other currency because floating rates prevent long term economic investing and I believe the economics of permanence. We need stop thinking that cheap consumerism is productive and move our orientation to long term thinking of 50+ years.

Quote: " 2. Devaluing the dollar will make lenders more reluctant to lend. But this is not bad news, it is good news. Instead of borrowing the money for infrastructure improvements, we should just print it. While this seems radical, the fact is that we borrow it from people who just print it up themselves: the banks and the Chinese. The idea of "printing" money conjures up visions of hyperinflation. And if the money is just printed to finance tax cuts and operating expenses, this is a possibility. But if it is used to finance actual improvements, like roads, education, and the like, there need be no monetary inflation, so long as there are unemployed resources in the economy. In other words, we can invest our own money in our own future, and provide both jobs and real improvements along the way."

Yes a national interest free credit system is exactly what the Constitution calls for but the condition for lending is that it must be "productive" not gambling, speculation, drugs, and prostitution and no gangrene jobs like building giant windmills that waste energy, space, and materials.

The entire of idea of Hamiltonian banking system system was suppose to be national banks distributing sovereign national credit. I say cut out the middle man and have the local treasuries lend the money for the system.

Quote: 3. "Finance the highways through weight and distance based tolls. Right now, the "free" ways constitute a subsidy to long distance shippers and the globalized economy. But if the shippers had to pay the full cost of transporting their products, local and regional manufacturing would suddenly have a great advantage over foreign producers, no matter how little they pay their workers."

I agree for the highway system and wouldn't mind if that system collapsed altogether but I think we replace it with Maglev Rail.

Rail doesn't have many off the effects of a highway system because rail doesn't allow for suburbanization because of the nature of the technology. Suburbanization requires you can have many turn off points whereas rail works better with fewer stops so the city remains the city and country remains the country. We should have never build the highway system and gone with FDR's plans for rail.

Rail also improves the social culture because rather than wasting 3 hours of our time isolated in traffic being hostile to other drivers while getting to work with rail you can sit and talk to other people or read and also you don't waste time in traffic so you arrive in 30 minutes and that means 2 and a half hours more family time.

What should pay for the cost rail should be the property taxes because we can tax away the excessive rent that could be charge because of the increased property value brought the rail.

Quote: 4. Buy up and break up the institutions that claim to be "too big to fail" (see Buy it Up! Break it Up!.)

Why buy them up? They are bankrupt and it is a crime to allow bankrupt institutions continue to operate as if they weren't because that is fraud. Seize them and put them into Federal receivership and start bankruptacy reorganization. Cancel the gambling debts and separate the commercial banking function from the speculation. Write off the debt it as it is a Biblical principle of Jublilee.

No, we don't the pay the Banksters for their worthless paper before we break up the institutions. We overturn their tables and drive them out using a whip.

John Médaille Friday, February 27, 2009 at 9:48:00 AM CST  

GM, yes, devaluation will increase inflation; that's part of the point. Right now, we face deflation, which is far more damaging because it increases the value of debts and decreases the ability to pay them. In a debt-based economy, this is the ultimate killer. But while it imports inflation, it also re-imports our jobs, and jobs are the key to the economy.

You are right that you cannot print wealth, but money is not wealth; it is merely an accounting system. So long as there is unused land, unemployed labor, and idle capital, you can print the money necessary to bring them together in productive ventures. This can be done to the point of real scarcity, that is, labor shortages, etc. Labor shortages would be a nice problem to have right about now.

As for tolls, they are not a "new" tax; the roads are already paid for by taxes. They are not really "free" ways. Instead, it allocates costs to cost-causers, which is the essence of both social justice and economic efficiency. Distance will suddenly become the issue it ought to be. Suddenly, importing from the interior of China to Arkansas will be shown to be not an efficiency, but dependent on a subsidy. Texas, for example, will have an advantage not only over Chinese manufactures, but New York as well. The economy will both localize and diversify. These are good things.

Aaron, toll roads would immediately benefit the railroads by removing the subsidies on highway traffic. The most efficient transportation system for each particular case would win, rather then the subsidized one.

I am an agnostic about fixed exchange rates. Although there seems to be an advantage, as you point out, it would also seem to me that they must be re-adjusted on a regular basis, since situations change over time.

JimB Friday, February 27, 2009 at 1:54:00 PM CST  

You're right - all we're doing is covering Wall Street's gambling debts. This is their "shining moment" on the monopoly board of life.

"IF all the bailout plans work by the end of the year, THEN the economy will recover"

IF a frog had wings THEN he wouldn't bump his butt when he jumps. I've taken a couple of programming courses. Congress needs to hire a programmer to add a "veto proof" ELSEIF statement that says "all bets are off, the Fed goes to Zero and we start over with debt free money issued by the treasury AND Wall Street Bankers and Fed Board members go to rehab or jail without passing GO"

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