Japan's Folly

Japan's economy has been in the doldrums for years.  So what are they doing? Their central bank is buying government debt just like the US Fed was doing.  Supposedly, these purchases keep interest rates low and stimulate borrowing and growth.  But the evidence is to the contrary in  a country with zero interest rates and still little investment. If this policy worked it would have worked before now, but evidence be damned! We live in a world driven by ideology and bankers.

Brussels Riots

Riots broke out a few days ago in Brussels as people protested the government's austerity policies. In Europe when people are fed up, they riot while in the U.S. our low income people accept their fate and believe it is their fault. Austerity policy has not worked anywhere in Europe, but they hold to it like a dog with a bone.  Germany lost WW II but they dominate Europe and the EU and insist all countries should follow them no matter how different are their economies.

Austerity Superstition

“Small and medium-sized enterprises in many countries, which are the engines of employment, are starved of credit. The prospects in the countries on the periphery of a reduction in today’s record-level unemployment are bleak. These countries face a lost decade of economic progress that will trap tens of millions of people in misery.”

“the E.C.B. will discover that just pumping in liquidity will not suffice to prevent economic conditions from getting worse.”

says William R. Rhodes, former senior vice chairman of Citigroup

Rhodes is correct.  This bleak picture does not need to be. The European Central Bank (and the Federal Reserve) could make loans to the treasuries of sovereign nations that they could use to employ the unemployed to construct much needed infrastructure.  This would increase consumer demand for products of the economy.  It is only myth and superstition that prevent governments from seeing the obvious.  Austerity is absurd.

China Teaches Us

China has had phenomenal growth that slowed and now is continuing. The New York Times reports "the renewed growth has been fueled by rapidly mounting debt, as state-owned banks and the central bank have funneled hundreds of billions of dollars in additional lending to state-owned enterprises and government agencies to finance further investment projects."  We could do this too.  Our Federal Reserve could loan money to the national and state and local governments to build much needed infrastructure.  We are mired in old thinking that austerity is the answer to unemployment.  The debt of Chinese state-owned banks and the central bank is only a bookkeeping phenomena of no consequence. Central bank debt is just an accounting matter.  It can go on until the economy can not produce further goods. The limit is the real capacity of the economy.  Does anyone doubt that our economy can produce more?

With respect to conflicts within the Euro zone countries, The New York Times reported:
"One dividing line is that the Germans, along with the Dutch and the Finns, remain adamantly opposed to what some consider the simplest solution: allowing the European Central Bank to become the euro zone’s lender of last resort and to buy sovereign bonds on the primary market, in unlimited amounts."
I am convinced that this is the best and only solution. It is a happenstance of history that a German is the President of the ECB and that the German thinking is dominated by a past experience of disastrous inflation. This ghost kept the ECB even from lowering interest rates until recently.
Italian leaders announced an austerity program to ostensibly improve their economic growth. Don't these people learn from experience? The British have been going down this road for some time and their economy is stuck in the mud. Some reductions such as in the very generous Italian public pensions are in order. But, massive reductions in government spending just create more unemployment.

Monetary Stimulus

Adam Posen, a member of the the Bank of England's monetary policy committee, wants central banks to print more money, a lot more. He suggests that the Bank of England and the British Treasury form a government backed bank to make small-business loans. He does not say specificially how this would be financed.
The Euro Zone is in crisis and needs some new ideas. The Bank of England has a program of purchasing the bonds of weak euro zone economies, but it is expected to stop. The European Central Bank may be forced to adopt the policy I have been advocating, namely to directly make loans to Greece, et. al. The EU countries have abdicated the right to do this, leaving only the European Central Bank.
It is unfortunate that Posen uses the term "print money" since this diverts thinking about the central bank creating money by making loans. If the central bank can create a loan to a bank on its balance sheet in order to buy bonds, it could surely make a direct loan to the Treasury who could use the money to invest in infrastructure and create jobs whose income could increase consumer demand. This is of course the method that should be used to finance Obama's new stimulus instead of more government borrowing and slashing entitlements. (Slashing military budgets is the right idea.)
Source: New York Times, Sept. 17, 2011

Taxes and Business

Republicans argue that we must give tax breaks to millionaires and business to create jobs. But, the fact is that American Corporations are sitting on $1.5 trillion in cash. Even if tax policy gives them more, they won't invest it when consumer demand and expectations are low! (Source: Harold Meyerson, New York Times, December 8, 2010)
We need fiscal stimulous, not tax breaks for the rich.

Fed to Buy Treasury Bonds

The Federal Reserve Bank is going to buy many of the Treasury bonds to be issued in the coming months. Good idea. Now the government will be paying the interest to itself. This is the same as zero-interest public debt that I have been advocating.
Now if the Congress would vote a healthy increase in stimulus spending and finance it this way, we might see the end of the recession.

Larry Beinhart writing in The Huffington Post shows that a big chunk of the stimulus went for tax breaks (a poor way to increase jobs he says, especially breaks for the rich). http://www.huffingtonpost.com/larry-beinhart/why-the-stimulus-package_b_781206.html?view=print

Quantitative Easing--Fed to Buy Bonds

The Federal Reserve announced today that it would buy Treasury bonds in the open market to lower long-term interest rates. This is billed as something new when it has already driven short-term rates to nearly zero without solving the problem. Instead of buying already existing bonds, I would suggest it buy new bonds from the Treasury as it greatly increases stimulus spending.
Obama should announce that we are gong to build a new high-speed rail system and/or a new electric grid, financed by a new Treasury loan from the government's own bank, the Federal Reserve. When entrepreneurs are discouraged and won't borrow to put people to work even at nearly zero interest rates, the government should borrow and fill the gap.
Note that if entrepreneurs would borrow from commercial banks, new money would be created. The Treasury borrowing is not different and should not be branded with the epithet, they are just "printing money."