Two Flat-Screen TVs in Every Great Room
Monday November 11, 4:39 pm ET
By Igor Greenwald
biz.yahoo.com
AN INTEREST-RATE CUT is well and good. But what we really need to keep recession
and deflation at bay is an extra tax-free five grand in our pockets, courtesy of Uncle
Sam and Uncle Greenspan.
Because if economic entropy is really the bogeyman it's cracked up to be, a rate cut
won't be nearly enough. We'll have to spend our way out of this quagmire with crisp
new Benjamin Franklins.
Fortunately, all it would take to make
this happen is an act of Congress.
That increasingly right-tilting body
should swiftly authorize a special
bond issue, if you will, to write a
$5,000 check to every man, woman
and spoiled child in the U.S.A. This
landmark, highly popular piece of
legislation would also authorize the
Federal Reserve to buy the entire
$1.45 trillion (give or take) bond
issue with freshly printed banknotes,
thus injecting still more liquidity into
the financial system. The bond
paper might then be used to heat all
Federal Reserve facilities this
winter.
Why risk such a radical solution? We might as well, because the Fed's rate cut last
week looks more like a pose than a policy.
Oh, the Street was pleased, at least for a day: The Street is conditioned to salivate at
the word "rate cut," and this one came just as the optimists were scrambling to justify a
rally of 20% to 25% in response to the slightest earnings uptick.
But now it's time to ask the question that defines our freedom-loving consumer union,
namely, "What's in it for me?" And in the case of last week's rate cut, for most
Americans the answer will be, "surprisingly little."
The rate cut obliges the central bank to buy enough short-term securities to keep the
federal-funds rate at 1.25%. This injects liquidity — that is, money — into the banking
system by lowering the cost of overnight interbank loans. The magic, it is hoped, will
spread from short-term rates to the long end of the yield curve, resulting in lower
mortgage rates and easier credit.
But not in my case, since, like so many other consumers, I've already purchased a
home this year. My initial mortgage rate was so low that I won't be able to refinance until
there's a soup kitchen on every Main Street, so I'm not exactly looking forward to the
opportunity.
I already have my pick of zero-percent auto loans, but now that my lease is up I'm going
to borrow a considerably smaller sum to buy out the four-year-old car I drive. I'm
borrowing at a reasonably low rate that didn't drop last week because the Fed wished it
so. And I'd rather pay a bit of interest than buy a new car: If the economy is in as bad a
shape as recent statistics suggest, taking on a big debt doesn't seem the smartest of
options.
Meanwhile, the Fed is notoriously powerless to lower the credit-card rates that have
compounded consumer debt to its current record. After the banks get their monetary
injection, they won't let their most troubled customers cop a buzz by lifting their
maxed-out credit limit. And that goes for Lucent Technologies (NYSE:LU - News) as
much as for your average charge-card deadbeat. The rest of us already have all the
cheap credit we could want, so what's the point?
The point, of course, is confidence, of the sturdy kind needed to avert a vicious cycle of
ever-lower demand leading to ever-cheaper prices and hence still lower demand. If you
think lower rates can bring about such confidence, take a look at the current rates in
Japan, the deflationary basket case. No, the thing to do is to print up enough cash for a
big fiscal handout, and then hope we spend it instead of sticking it under the mattress.
But don't take it from me. "The cure for deflation is very simple," Nobel laureate Milton
Friedman told The Wall Street Journal last week. "Print money." Yes, print it — and
then bring it on over. (For the record, Friedman doesn't actually think deflation is a real
problem.)
Sure, there'd be a big surge in the money supply. But Timothy Rogers, the chief
economist for Briefing.com, points out that this isn't exactly uncharted territory for the
Fed, which pumped up liquidity in the bad old inflationary 1970s and again in the
run-up to Y2K, when in the name of avoiding imagined riots at ATM machines the
central bank unleashed a flood of new funds that flowed straight into the Nasdaq
bubble.
The difference is that our debts have mushroomed since then while our portfolios have
shrunk, so that instead of investing the money we might well need a one-time bonus to
pay those credit-card bills. In the process, all that extra cash would almost certainly
unleash a salutary bout of inflation that would put the deflation fears to rest, just like
Friedman promises.
Deadbeats, remember, love inflation and, with the highest debt leverage ratios in a long
time and the biggest current-account deficit known to man, we are nothing if not a
deadbeat superpower. Not only would a direct handout boost domestic consumption, it
would have the added benefit of soaking predatory lenders and those crazy foreigners
who keep sending us their money.
The same Wall Street Journal story that quoted Friedman suggested that, at one
brainstorming session, Fed officials pondered such wacky ideas as combating deflation
by buying used cars. Hey, give me the cash and I'll buy the used car. I'm not sure
Greenspan is especially good at spotting lemons.
Japan ruined its public finances trying to jolt the economy out of a deflationary spiral
with ever-greater public-works spending. But as always happens over there, the
consumers got stiffed, much of the dough ending up with shady construction firms good
mainly at building networks of corrupt politicians. No one has thus far tried printing
wads of cash for immediate direct distribution to the citizenry. Think of it as a tax cut
financed by the dollar's (still) high standing around the globe. A dollar-equity loan, if
you will.
Are there risks to the plan? Glad you asked. The dollar and the stock market might
very well collapse. Worse, supplies of flat-screen televisions might run low. But we
would still have a bit more fun than if all this comes to pass after a series of rate cuts.
Race you to the ATM. |
