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24Seven: Our proposal for the non-stimulus “stimulus” package

December 14, 2008 Leave a comment Go to comments

obama_odingaIt is all the rage now: create your own stimulus package for fun and profit!

The Messiah has put out a call for the states to pony up proposals to address the current downturn with a package of measures designed to offset growing unemployment and the dangers of a deflationary event.

The Wiki has this to say about deflation:

In economic theory, deflation is a general reduction in the level of prices, or of the prices of an entire kind of asset or commodity. Deflation should not be confused with temporarily falling prices; instead, it is a sustained fall in general prices. In the IS/LM model (that is, the Income and Saving equilibrium/ Liquidity Preference and Money Supply equilibrium model), deflation is caused by a shift in the supply and demand curve for goods and interest, particularly a fall in the aggregate level of demand. That is, there is a fall in how much the whole economy is willing to buy, and the going price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity – contributing to the deflationary spiral. Since this idles capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral. An answer to falling aggregate demand is stimulus, either from the central bank, by expanding the money supply, or by the fiscal authority to increase demand, and to borrow at interest rates which are below those available to private entities.

Don’t let the technical double speak confuse you. Deflation is the persistent collapse of prices for goods and assets, which leads to a fall in investment.

But, you say, if the prices of goods and assets are falling, shouldn’t investment be falling as well? Isn’t it a normal for the market to signal a glut with a fall in prices, and, therefore, a fall in investment in the production of a good?

Boy, are you sharp! That is completely true.

And, here we have the problem not only of a fall in prices for one or two goods, but all goods and together, signaling the owners of capital that not just one or two goods are in a glut, but all goods are in over-supply together.

What is then considered an economic problem is actually just what one would expect as one approaches the saturation point of any market: as the supply of all goods exceed the demand for those goods, prices begin to fall.

The result: the large numbers of layoffs we are now witnessing, and will witness over the next few months.

It is the kind of economic event which causes even the most fearless small government proponent of the Party of Wall Street suddenly begin sounding like Karl Marx – or, at least, Governor William J. Le Petomane:

Holy underwear! Sheriff murdered! Innocent women and children blown to bits! We have to protect our phony baloney jobs here, gentlemen! We must do something about this immediately! Immediately! Immediately! Harrumph! Harrumph! Harrumph!

But, hold on a minute: Wouldn’t falling prices just make those same products available to a wider group of buyers?

220-obama-brother-793467fPrices could conceivably fall to the level where 42 inch, high-definition, wide-screen plasma televisions could be afforded by slum dwellers in Nairobi and Maputo. Every poor Mexican farmer could drive a Ford pickup. And, Haitians would no longer consider dirt cookies an entree.

Initially, then, deflation might lead to a fall in investment, but eventually, the collapse of prices would mean a broader customer base for companies and a far larger market for their goods. Imagine, no longer would the favored target demographic be that rather narrow slice of humanity identified as 25-35 year old American suburbanites.

So, why would Washington be so desperate to combat deflation – and why was deflation the subject of Dr. Bernanke’s 2002 Federal Reserve paper – published near the bottom of the trough between to two peaks of the stock market’s double top?

Said Mr. Bernanke:

In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn. Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value …The financial distress of debtors can, in turn, increase the fragility of the nation’s financial system–for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default.

So, deflation means falling prices, which leads to less borrowing, and to an increase in the burden of debt on those who are currently paying off past obligations.

But, the kicker is the growth of debtors unwilling or unable to repay their debt – as in companies with declining revenue, and consumers who lose their jobs, or, face pay cuts, or, find they owe more on a house than it is worth.

This last problem turns it into a concern for banks, who begin to experience a rapid increase of deadbeats.

Just to be clear here, it should be noted the Federal Reserve Bank is a bank. It even has the word “bank” in its name to avoid confusion with agencies like the Massachusetts Turnpike Authority, or San Diego County Water Authority, which are, by and large, not banks or even in the banking business – although they too borrow from banks by floating bonds, and would have problems paying off those debts if deflation began to eat into tax revenues.

Deflation has the same effect on the Federal Reserve Bank, as it does on your bank – it increases the likelihood its customers would be unable to make good on their obligations.

The real problem, however, is their biggest customer goes by the name of The United States of America.

Just as deflation makes it more onerous for the average person to carry a debt burden, as their income falls and value of their houses and other consumer items drop, deflation also mean less tax revenue for The United States of America, as well as the Massachusetts Turnpike Authority, or San Diego County Water Authority.

As Ambrose Evans-Pritchard points out in a recent article:

Once the killer virus [deflation] becomes lodged in the system, it leads to a self-reinforcing debt trap – the real burden of mortgages rises, year after year, house prices falling, year after year. The noose tightens until you choke. Subtly, it shifts wealth from workers to bondholders. It is reactionary poison.

Suppose you are a Moron, and for some strange reason you decide you want to kill a million Arabs.

Well, you go to the Treasury and are informed that after decades of deficit spending, building a fairly efficient Arab killing machine, there is no money in the coffers to actually get the machine in place and commence with the holocaust.  So you float some bonds to fund the entire project, which are purchased by huge investment vehicles like PIMPco, and use the proceeds of that bond sale to slaughter Arabs in their beds, on the streets, from the air, on the ground, and in such large number you can begin to approach the ruthless efficiency of German patriots without all that mucking about with concentration camps and cyclon-b.

Now deflation begins to exert itself and suddenly your revenue is falling, and it is getting harder to service your accumulated public debt.

What do you do? Ambrose has an idea:

Ultimately, it leads to civic revolt. Democracies do not tolerate such social upheaval for long. They change the rules.

Mvd221738Which brings us to Ecuador, who decided this weekend to stop paying off its debt.

Ecuador’s President Rafael Correa said yesterday that his nation is defaulting on its foreign debt, fulfilling his longtime populist pledge to leave international creditors in the lurch. The default, Ecuador’s second in 10 years, could rattle already jittery investors who have pulled billions of dollars out of emerging markets in recent months as the global financial crisis has spread. It could also set back U.S. interests in Latin America, as Correa now seeks to deepen financial ties with allies like Iran, which this week granted the South American nation a new $40 million credit line.

And, a note from our friend and brother Threecrow,  who wonders if this could be contagious:

What would happen if all nations did this? Is the USA close to needing to do this? If this was done in an anticipated, organized manner, in other words, a world wide grand moment of forgiveness, what would be the result?  Could we come to a state of economic tabla raza?  Just being naive in a thoughtful way.

As will be seen from the above discussion on deflation, in fact, the entire world market seems to be trying to create just such a world wide grand moment of forgiveness: It is precisely this end toward which deflation is aiming.

And, it is against this world wide grand moment of forgiveness that the Messiah’s call for ideas on a stimulus package is directed.

If we now go back to that discussion, we can see the lack of 42 inch, high-definition, wide-screen plasma television in the shanty towns of Nairobi are not so much the natural result of scarcity as they are the deliberate economic policy of the United States, and has the sole intent of enriching the bondholders of American debt to the disadvantage of the slum dwellers of Nairobi.

As a result of this deliberate policy, these folks have been denied plasma televisions with over 200 channels of DirectTv reruns, IPods, and the entirety of minimum requirements of civilized life – the least of which might be running water, sanitary living conditions, and rudimentary medical care. It is also the why dirt cookies are a delicacy in Haiti, and why poor farmers from Mexico are mowing our lawns and sitting our children in San Diego.

The stimulus package Barack Obama is set to enact when he becomes president will, above all, accelerate the impoverishment of billions of citizens in every country, even as it encourages the employment of Americans here at home.

And, employment is the selling point, because millions of Americans are dreading the coming year of nasty economic news with the sort of anguish with which a condemned man faces the hour of his execution: massive employment is inevitable, as are the idling of billion of dollar in productive capacity.

It is indeed a sad conundrum: you join the long line of unemployed persons in America, or, Nairobi slum dwellers go without the SciFi channel.

So, we decided to propose an alternative stimulus package for the Messiah which might be able to bridge these two objectives: you continue to have a job, and Kenyans get to eliminate Nairobi slums in the process:

First, no stimulus package. That’s right, any stimulus package will only maintain high prices for goods and make it more difficult to erase those nasty slums in Nairobi. Deflation should be allowed to work its way into the prices of goods and assets until these goods and assets are within reach of every human being on the planet. And, guess what, the more prices of American goods fall, the more residents of Nairobi will be able to buy them.

Second, no unemployment. People tend to get upset when they are summarily thrown into the streets with no means to support themselves. So we want to see everyone has a job despite the persistent collapse of prices. We would propose to reduce working time to twenty-four hours per week initially, with 3 times the normal hourly wage for any time worked in excess of this amount. We call this the 24Seven non-Stimulus Plan – since it has the word stimulus in the name, politicians will be fooled into voting for it.

Third, abrogate all debt, public and private. We  just go the Ecuadorean route and default on all debt. You might argue that this would be messy, so, we thought it might make sense to at least add a deflation clause for the principal on all debt, public and private. That way if you bought a house for $200,000 and prices fell by 5 percent, your principal would be adjusted accordingly to reflect the fall – to $190,000, and your mortgage payment would be adjusted to reflect this new balance. This would give a levels of governments and bond-issuing corporations the incentive to hold down prices.

Fourth, eliminate all taxes. We think this is self-explanatory. And it would put at least $1.5 trillion dollar back in the pockets of working families to make up for reduced wages and income resulting from the fewer hours of work.

So that is our plan, The 100 Percent Iron-Clad Guaranteed 24Seven no-Stimulus Stimulus Plan.

And, the Messiah doesn’t even have to give us any credit for it.

  1. December 14, 2008 at 10:59 am

    You just forgot to mention that, contrary to inflation, deflation can and will ultimately lead to a general bankruptcy of the productive sector … which, pretty much, destroys this ‘semi-automatic-the-worse-for-the-better’ scenario of yours. But, hey, on the brighter side, undertakers will prosper like never before … most specially if they manage to arrange low price funerals, specifically designed for the unemployed …

    • charley2u
      December 14, 2008 at 11:51 pm

      I am not sure why you think it would lead to the general bankruptcy of the productive sector, but, bankruptcy is not the end of the world. Companies can still function in the aftermath of such a scenario. Besides, with measures to protect domestic producers from the predatory interests of bondholder bankruptcy can be contained.

      Show me a way US industrial companies can be successful as inflationary stimulus policies continue to force off-shoring, and make domestic production uncompetitive.

      You state deflation will ultimately lead to bankruptcy, but I challenge you to show me how inflationary policies has helped domestic producers. Steel, textiles, electronics, and now what is left of auto – each of these met their demise under Washington’s expansionary policies, and each were blamed for their failures, when Washington’s inflationary policies were actually responsible.

      This is just the domestic impact. If we include the number of poor countries which have been priced out of American goods, the true tragedy of Washington’s policies really come into relief.

  2. December 15, 2008 at 4:41 am

    Why deflation will bring about a chain of bankruptcies? It’s one of of the effects of deflation … as I’ve written before, inflation hurts those who live on a monthly wage … deflation closes down factories and industrial ventures in general while devaluating everything else … What you call ‘Washington’s inflationary policies’ never existed … such inflationary measures were imposed not by the goverment but by the ones who managed to prosper under an environment of ever increasing values … the American citizen has no empirical experience as to what is really living under an inflationary economy … I don’t have an answer as to what our industries should do to get out of this mess … outsourcing their industries might be good for them … but it’s leading our country into systemic unemployment.

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