You observe an economy sinking in recession. As this occurs, real interest rates are rising, and the currency is strengthening. What shock, or set of shocks, could have caused these events?
Bernanke’s problem, and ours. This picture shows the target Fed funds rate, the usual tool of monetary policy; the 10-year Treasury rate; and two rates that actually matter to the private sector, the mortgage rate and the rate on Baa-rated corporate bonds. The Fed has had no success in reducing mortgage rates, and corporate borrowing costs have gone up, not down. Add in falling expectations of inflation, and in real terms monetary policy has gotten tighter, not easier.
We've had a bad investment climate because productivity has outstripped purchasing power. Why invest in real productive assets when there is no one to buy their output? Instead, money has gone sloshing around from bubble to bubble. Now, the bubbles are all played out, but what is putting more money into people's pockets? There is deflation, which helps, but does not require increased productivity or investment.
We are in a situation much like the 1930s. The money supply in the 1930s was twice as large as the money supply in the Roaring 20s, but in the 1930s, people kept their money locked up in 0.8% treasury securities, while in the 20s they bought real estate and stocks. The big fear in the 1930s was of another bubble based on all that cash. That, and not having enough income to buy food.
Government spending is the only way out of this trap. The value of money must be lost or people will simply squeeze it. The only tax on money is inflation and it must be applied with relish. It ain't drill, drill, drill. It's spend, spend, spend.
And tax, tax, tax those economic rents. Hint: Progressive taxation is a tax on economic rent. No person EARNS a 3 million bucks in wages. If you don't believe that then tax it at 70-80 percent and observe that the people making that wage do not suddenly decide to be street sweepers instead of VP's and middle managers.
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