Van R. Hoisington and Lacy H. Hunt write:
Despite the fact that most market participants expected higher inflation after the 2008 monetary explosion, the contrary has occurred. It has now been more than five years since the near 1800% increase in the Fed's balance sheet, yet the economy languishes, and prices remain under downward pressure. Why? The Fed does not control the amount of money circulating in the economy nor the speed at which it turns over.
Yes, we did expect inflation but not all for the same reasons. I expected that the Fed would heat up the economy; but instead, it increased excess reserves and began paying interest on those reserves. It did that ostensibly to gain yet another tool to use to control inflation.
What the Fed could do is charge interest on those reserves, which would cause the banks to want to move money out of excess reserves into regular reserves reflecting new loans. The only problem there is that the banks still need to be required to keep lending standards high enough to avoid another huge bubble. So, with what profits would the banks be able to paid the Fed interest on excess reserves before those reserves are moved a result of sound loans to solvent borrowers since there aren't enough entities in financially sound enough shape to meet all of the new higher and properly improved lending standards? How could the banks/lenders okay huge loans to move the interest-bearing excess reserves into the 10% (fraction) of the money multiplier (which multiplier really does still exist in the US)?
It's not just pushing on a string. It's pushing the string against a very solid brick wall.
That said, Van Hoisington and Lacy Hunt's prescription is austerity. Austerity is not the solution. Higher taxes on those earning more than $450 thousand a year is not the problem. The increase payroll taxes are part of the problem and regardless of what else is or will likely be done.
If the top tax margins had been increased and every dime of that perfectly reflected in a decrease in payroll taxes such that it would have been an exact transfer of wealth from those making $450 thousand plus a year to all of the employees as payroll-tax payers, all that would have happened is the following:
Those employees would have paid off debts, saved more, and spent more. That in turn would have translated into more profits for corporations, more earnings for shareholders, more wealth again for those investors earning more than $450K. It would have been a circle where the economy would have heated up, which it sorely needs, and where the top income-earners would have simply gained back by having the pie grow.
The above would not be the best solution, but it would be vastly better than what we are being fed by the austerity crowd.
The entire problem is debt. So, get rid of it.
The entire Federal Reserve System is a scheme to allow usury while being designed around supposed inflation control and secondarily, higher employment.
There is no good reason whatsoever that the federal government borrows at interest to create the legal tender. There is no good reason that the US Constitution doesn't mandate zero deflation/inflation via tax- debt- and interest-free United States Notes pegged exactly in real time via opensource algorithms to the real productive sector of the economy, what is called the industrial economy (Main Street) rather than the speculative/purely gambling economy that's typically called Wall Street.
I have to tell you that these austerity types try and try and try to ignore me, but ultimately it won't work. That's because I'm right.
We could easily pay off the National Debt and run zero fiscal deficits. We could also have a debt-free economy. It's called bottom-up, grassroots democracy. It would work if we were to try it.
Local enterprises could be owned and run by the locals, the community, all of them. The funding would be from the US treasury as the one and only bank (the public bank). That bank would completely control inflation/deflation via the accounts in the bank where all of the money, the only money would reside. Every account would go up or down together to control the supply of money against the velocity of money (circulation). Money that doesn't move doesn't impact price inflation, and price inflation is the only inflation that matters. The only way to have spendable money would be by producing what the whole, fully informed people want and agree to fund.
If the increase in money supply and velocity were to exactly match the increase in real productivity, we'd have unlimited economic growth with zero inflation or deflation. It's a fact! All ships would rise and nothing but. The only things that could stop it would be natural disasters which, unless they were to cause extinction or some other astronomically difficult, unusual circumstances, would simply be places or causes against which the people, humanity, via the new economy, would apply unselfish growth again and without delay.
Understand this. It has never been that the people as a whole have been stupid. It has always been that they've been kept in the dark. Given all of the information needed to make wise decisions, the people will choose the better options over what the elitists have been doing for millennia.