10.24.2014 0

‘Let them have cash’

let_them_eat_cakeBy Robert Romano

Pulling a modern day Marie “Let Them Eat Cake” Antoinette, Brown University professor Mark Blyth and hedge fund manager Eric Lonergan boldly propose to do what no central bank has done before: Just print money and give it to people.

Seriously. You can’t make this stuff up.

Writing in Foreign Affairs in an article sub-titled, “Why central banks should give money directly to the people,” Blyth and Lonergan marvel how traditional approaches to monetary policy designed to boost lending and credit creation — and thus spending and aggregate demand — have led to boom-to-bust cycles of asset price distortions followed by crashes.

In the process, economic growth was harmed, unemployment rose, and after the crash, a true recovery has appeared distant.

That part is all true. The modern financial economy has a fundamental flaw in that it relies too much on new debt to spur growth, as opposed to real production and innovation.

Yet, Blyth and Lonergan’s ambitious plan — “cash transfers could jump-start the economy” — printing hundreds of billions or even trillions of dollars is not the solution.

They would also print about 20 percent of the Gross Domestic Product — about $3.5 trillion — and put it in the stock market, benefitting Wall Street with yet another corporate handout. And then after 15 years, it would pay out to the people.

Leaving aside considerations of inflation and asset value distortion, it won’t work. The problem is not too little consumption or investment in equities. We consume more than ever. There is more money in equities than at almost any other time.

The problem we face is that too much consumption and production is absorbed by excessive debt and a cost of living and doing business that is too high. The causes are regulatory, fiscal, and monetary in nature — and that all falls at government’s feet.

It has resulted in money becoming severed from real value and production.  The way to address high unemployment and low growth is to reduce first and foremost the cost of doing business here so that there is an incentive to create jobs here, not by printing money.

Blyth and Lonergan just want to fuel consumption. Print, say, $2,000 and give it to hundreds of millions of people.

It would accomplish almost nothing. It’s just welfare. Perhaps there would be some temporary spending boost, but much or most of the money would simply go to paying off debt,

So, at best, Americans might temporarily be able to clean up part of their balance sheets. But even then, household debt per household stood at more than $106,000 in 2013, according to data compiled by the Federal Reserve and U.S. Census Bureau. So, that gets reduced to $102,000 or $103,000 or some such.

Whoop-de-do.

The fact is, we have tried things like this before. In 2008, the Bush administration put forth a $150 billion stimulus on the eve of the recession that included $300 tax rebates for lower and middle-income individuals.

It did nothing as the economy hurdled off a cliff.

Besides all of that, having the Fed just print money to buy equities or be given to people is against the law, strictly prohibited by the Federal Reserve Act. And for good reason.

Not only would it let the Fed pick even more winners and losers in the marketplace, and be a huge welfare handout with little value.

It’s insane.

Robert Romano is the senior editor of Americans for Limited Government.

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