As I’m sure many of you are aware of, there are some immediate economic problems facing the United States right now. A big one is that our economy isn’t doing much lately; it’s in a bit of a stall.
The idea behind capitalism, as a system, is that people with money available to invest in things actually invest in things that will make these wealthy people more money. A side benefit of this system is that these relatively wealthy people have to hire less wealthy people to put their various schemes in motion. This ’side benefit’ really is a side benefit — if wealthy people could make money without paying any wages, they’d take that option every time. Or not, maybe, but they have done so every time they’ve gotten the chance.
If money itself was a real thing that had real value, this system wouldn’t work very well, but, happily, we have a kind of money that has a shifting value. Typically, when the system we have adopted works correctly, that value actually goes down a little every year. Yup, inflation. What this does for us is make wealthy people worry that if their money isn’t ‘working’ for them, it’ll eventually go down in value and be lost.
Side note: The inflation that helped European countries discover and develop capitalism wasn’t our modern, government-controlled-bank-controlled inflation system, they got their inflation from Mexico via Spain in the form of newly-mined Potosí silver. An historical accident, really. Anyway:
This means that people with cash laying around will try to invest it in things that return more than inflation will take away. Putting that money into a savings account (remember them?) made it available to that bank to loan to somebody who would pay back a little more than the bank would pay you in interest. The guy who borrowed your savings deposit would try and use the loan money to put himself in a position to pay back the loan and still make a little more. Another option was to skip the bank and invest directly in the dude (or gal) who had some money-making idea. That’s a simple way of describing the stock market.
Another side note: A lot of bank loans went to working folks who wanted (or needed) cars and/or homes for their own use. These borrowers were just betting that they were good for the money, and that having a car or a home was desirable; the effect is the same: someone got paid to make a car or part with a home, and the bank made a little more than they paid you for saving with them.
In any event, this whole system was kept going by the idea that money that sits around just goes down in real value, so people with money kept putting it back into the system hoping to stay ahead. So we had a situation where money sought out opportunity. Most of those opportunities involved people earning wages, which is money, so everything kept moving.
This turned out to be a pretty good system, all-in-all, and, arguably, a much better system than communism. (What as, to simplify, communism tried to take ambition out of the equation — with the results history has demonstrated.) Until…
Until
Inflation gets taken out.
Oopsie. Without inflation to worry about, money looks like a great thing to, er, invest in. When inflation goes away, cash is an awesome thing to have in your portfolio. Why invest your money (and risk losing some of it — always a risk even when the system is working correctly) when it’ll be worth just as much tomorrow as it was worth today? Or, maybe, even more?
That’s pretty much where we are today, sadly. A lot of banks have plenty of money (thanks, in many cases, to the fact that they were ‘rescued’), but they’d be stupid to put it into anything risky. There are also individuals who have money — lucky them — who are quite happy to hang on to it.
Where does that leave us?
Snide version: Depends on who ‘us’ is.
Thoughtful version: It leaves us wondering when inflation will come back and money will start flowing into the economy that we rely on.
OK, then, how might (a little) inflation get put back into the system? (A teensy, teensy bit of inflation, I promise.)
The banks can coast indefinitely on their (now healthy) reserves, so until something else comes along to change things, they’re gonna sit on whatever cash they can accumulate.
Yet another side note: Right now, the banks can get cash from the Federal Reserve for, well, pretty much for free. The banks love this cheap cash when cash is so awesome. The Fed is making this cash available in the hopes that the banks will put it into the economy. Good luck with that, Fed.
The government could print more money, right? That would cause inflation, wouldn’t it?
Yeah, but we have a grown-up economic system. The ‘let’s just print money’ thing does appear to add to inflation, but it really just multiplies inflation. Germany and Zimbabwe have both done it in living memory, but they did it to pay bills they couldn’t borrow to cover. They would have borrowed if they could have, but their economies were too messed up. This, in both cases, led to what is called hyper-inflation, which made their money worse than ‘variable’ in value, it made it worthless.
What the United States government is in a position to do is exactly what Zimbabwe and Weimar Germany couldn’t do: borrow.
Just like the potential home- or car-buyer mentioned previously, the U.S. government can tell potential lenders “I’m good for it, I’ll sign right now.”
Our government can get cash, right now, at less than 3%. Being the government (as opposed to a bank), it doesn’t need cash to sit on, it needs cash to invest. If it can get the economy growing again, it’ll have the income to pay back the loan. Just like some person who wants to buy, oh, a hot-dog cart, the U.S. government can say “when I have this cart, I’ll be able to pay you back.”
Here’s the cool bit: Once the government jumps in and starts borrowing (and spending) money, inflation will come back. It doesn’t even matter what the government spends money on. (WWII worked great for this, and WWII isn’t much remembered as terribly productive. Important, Noble, even, but WWII mostly blew shit up.) Once inflation comes back, private money (the money the banks and wealthy people have) will go back into the economy again.
It gets better. Timed right, the government can jump back out of the borrowing market before rates go up much and let the private money take over. That should leave the economy growing faster than the 3% the government can borrow at today.
Which means:
Our government could pay back all the loans with less money than it borrowed. And save the economy, which is to say “the capitalist system”.
So, you are advocating for increasing the deficit?
Yup. Deficit spending is the only tool we have to keep capitalism alive, and capitalism is the best system we have right now.
