President-elect Barack Obama is pushing forward a $775 billion stimulus package. $300B of that is going to low- and middle-income earners as tax cuts. That's great, isn't it? US economy is getting more money into the system at a time of historical economic downturn.But wait. That is just half of the deal. The other half is this: $775B is taken from someplace else. That "someplace" is going to be $775B poorer. At a time of historical economic downturn, mind you. So where does the money come from? There are three places a government a get this money:
- Taxes
- Federal Reserve
- Borrowing
There could be a fourth place and that is surplus in government budget, but that also is a result from taking it first from some of these places. And USA infamously has the massive deficit. So scratch that.
1. Taxes
Well, they are giving tax cuts as earlier mentioned, so this probably isn't going the be the method. And if they would, they would first tax the people, and the same money back. As ridiculous this sounds, it is basically how everything works. But it isn't done in the US. It's just not IN these days.
2. Federal Reserve
This is the government's most reliable weapon in it's arsenal. There is no way the Fed - at least under Bernanke's control - would ever refuse to loan money to the government. Even at extremely low interest rate. Wow, free money! Well why doesn't the government just ask the Fed to create $50 trillion and loan it, so we can get everything done at once; end the crisis, zero unemployment, huge space program on way and pave the freeways with pure gold? It's free money isn't it? And if you believe John Maynard Keynes (like most modern economists), it will create at least triple that amount of income in the economy, in stages. Excuse me while I briefly am the party pooper and say: in your dreams, baby.
What this method of obtaining cash can and will do is create inflation. Period. If you create more money than there are goods available, that is the only result. Are there more goods produced in USA? No. That is why they don't create that $50 trillion every day. Even Bernanke knows that.
Inflation makes everyone's purchasing power diminish. If they give everyone $400 tax cut, and they have to print that money, the effect is that goods cost more money and you lose the same $400 that way. This is just taking blood from the right hand and putting it into the left hand. Do you in effect have more blood in your veins? If you believe what you read in the newspapers everyday, then that is reasonable logic to you.
3. Borrowing
This the people understand a bit better. Government can borrow this money from banks, individuals and other governments. But as you know, this money has to be paid back. If you as an individual borrow money from a bank, is your overall economy that much stronger? Of course not. You haven't received any free money. Well, there are people who do loan money and never think about paying it back, just thinking that they got rich, wohoo! That is part of the problem why we are in this mess in the first place.
In any effect, borrowing is what the US government will also try to do to obtain this money. I say "try" because it is increasingly difficult for them to persuade banks, individuals and other governments to loan money to US, because US is exactly that guy who keeps loaning money and never pays it back. Especially when the crisis that got started in America has now spread across the world, the would-be lenders have to tighten their belts and think twice who they loan money to. There are economists that think that this is going to be a huge problem.
Borrowing money will not create real wealth, unless you invest it really wisely to produce new wealth. If you just spend it on consumption, that money goes to China/etc. whoever manufactured the goods the people bought.
Conclusion
The media is fervently avoiding any sort of analysis or even mentioning the other half of the deal. Extremely rarely I see anyone in mainstream media talking about where the money is coming from and what are the effects of that. I mean, I could be totally wrong about what I have said about different ways of getting money and what are the result from them, but I think no one can deny that there is the other side of the Moon, and that it has as much real life effects than the visible side.
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Prof. Benjamin Shalom Bernanke Exposed
"The debate about the ultimate causes of the prolonged Japanese slump has been heated. There are questions, for example, about whether the Japanese economic model, constrained as it is by the inherent conservatism of a society that places so much value on consensus, is well-equipped to deal with the increasing pace of technological, social, and economic change we see in the world today.
The problems of the Japanese banking system, for example, can be interpreted as arising in part from the collision of a traditional, relationship-based financial system with the forces of globalization, deregulation, and technological innovation (Hoshi and Kashyap, forthcoming). Indeed, it seems fairly safe to say that, in the long run, Japan’s economic success will depend largely on whether the country can achieve a structural transformation that increases its economic flexibility and openness to change, without sacrificing its traditional strengths.
In the short-to-medium run, however, macroeconomic policy has played, and will continue to play, a major role in Japan’s macroeconomic (mis) fortunes. My focus in this essay will be on monetary policy in particular. Although it is not essential to the arguments I want to make—-which concern what monetary policy should do now, not what it has done in the past—-I tend to agree with the conventional wisdom that attributes much of Japan’s current dilemma to exceptionally poor monetary policy-making over the past fifteen years (see Bernanke and Gertler, 1999, for a formal econometric analysis).
Among the more important monetary-policy mistakes were 1) the failure to tighten policy during 1987-89, despite evidence of growing inflationary pressures, a failure that contributed to the development of the “bubble economy”; 2) the apparent attempt to “prick” the stock market bubble in 1989-91, which helped to induce an asset-price crash; and 3) the failure to ease adequately during the 1991-94 period, as asset prices, the banking system, and the economy declined precipitously
Bernanke and Gertler (1999) argue that if the Japanese monetary policy after 1985 had focused on stabilizing aggregate demand and inflation, rather than being distracted by the exchange rate or asset prices, the results would have been much better. Bank of Japan officials would not necessarily deny that monetary policy has some culpability for the current situation. But they would also argue that now, at least, the Bank of Japan is doing all it can to promote economic recovery.
For example, in his vigorous defense of current Bank of Japan (BOJ) policies, Okina (1999, p. 1) applauds the “BOJ’s historically unprecedented accommodative monetary policy”. He refers, of course, to the fact that the BOJ has for some time now pursued a policy of setting the call rate, its instrument rate, virtually at zero, its practical floor. Having pushed monetary ease to 2 Posen (1998) discusses the somewhat spotty record of Japanese fiscal policy; see especially his Chapter 2.its seeming limit, what more could the BOJ do? Isn’t Japan stuck in what Keynes called a “liquidity trap”?
I will argue here that, to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan. Most of my arguments will not be new to the policy board and staff of the BOJ, which of course has discussed these questions extensively. However, their responses, when not confused or inconsistent, have generally relied on various technical or legal objections—- objections which, I will argue, could be overcome if the will to do so existed.
My objective here is not to score academic debating points. Rather it is to try in a straightforward way to make the case that, far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism."
Prof. Benjamin Shalom Bernanke
Japanese Monetary Policy: A Case of Self-Induced Paralysis?
For presentation at the ASSA meetings, Boston MA, January 9, 2000.
A Credit Free, Free Market Economy will correct all of those dysfunctions.
The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.
A Specific Application of Employment, Interest and Money
Press release of my open letter to Chairman Ben S. Bernanke:
Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.
Yours Sincerely,
MC Shalom P. Hamou
Chief Economist & Master Conductor
1776 - Annuit Cœptis.
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