A few days ago I blogged about the fallacy of supplanting household consumption with government spending as the predominant driver of aggregate demand by arguing that public spending often does not produce the goods and services that consumers hold dear. So pushing gov’t spending aside, how do we best put people to work in the short term against the waves of negative reinforcement?
I believe the answer is to export inflation to surplus countries. According to Bloomberg, roughly half a million retail jobs have been lost since last fall. Imagine if the Treasury were to issue debit cards to every American consumer with $1000 of funds to spend within 60 days. The result would be an immediate spike in retail activity. Hopefully this would work its way into the banking system as the number of corporate and consumer bankruptcies decline, and fewer corporations are forced to draw on contingent loan facilities to access operating cash.
Here’s an excerpt from Business Week on Robert Mundell’s prescription for the economy:
To stoke U.S. demand, Columbia University’s Robert Mundell, who won the prize in 1999, proposed the government hand out to consumers a half-trillion dollars’ worth of spending vouchers that have to be used within three months. “It would be a tremendous boost to the economy,” he said.
As the revenue from sales are repatriated to Asian manufacturers, Asian monetary authorities must print home currency in order to purchase the dollar at the pegged exchange rate. In the short term, the newly created money could be sterilized by the local gov’t at relatively low cost. But as the supply of gov’t notes eventual outstrips demand, the borrowing rates of the sovereign goes up along with those for corporations and consumer. At some point, the Asian monetary authorities would be faced with the choice of either to allow inflation spire out of control or to stop active intervention in the forex market and allow the value of the dollar to slide. A weak dollar would make US exports more competitive.
Why must the US export? David Goldman at Inner Workings explains:
A stimulus concentrated in the US will disappear into the bottomless pit of demand for financial assets. To save and work at the same time, Americans need to export. And the amount of financial and real infrastructure that has to be built to accomplish this is daunting.
It is not a matter of turning the supertanker around. First the supertanker has to be built.
Once the Asian monetary authorities give up on the dollar, the adjustment of the excess workforce from the retail service sector to the manufacturing sector in the US can then begin.