the US has spent more overseas than what foreign countries buy from it, the difference currently being USD 40 billion per month. This raises two questions. Why indeed does the US not run out of money if it only flows out of the country? Why indeed do foreigners accept the dollar, and why do they participate in unsustainable processes?
The Fed would be much more efficient and it could achieve its target by printing much less money if it made its purchases of enormous value in the market of real goods rather than on capital markets. That is, by purchasing goods rather than bonds. In good measure, the central bank will go to the baker’s to fetch its donuts, to the pub for the regular pint, and to the hairdresser’s to get its hair trimmed, and will use newly printed money to pay for all that. That would be real economic stimulus and job creation, and we could say goodbye to deflation.
In an attempt to cash in on the recent popularity and prevalence of bitcoin, inventors have launched a good number (i.e. hundreds) of cryptocurrencies. What they have in common is that all of them are based on the pioneering bitcoin technology, except that some of them (e.g. litecoin) also involve meaningful developments. However, the majority do not add anything of significance to the technology. However, now something new is taking shape, an enhancement on the concept called Ethereum.
Not long ago, there lived an American economist who thought that it would be best to close down the Federal Reserve, the US central bank. A rather drastic view. What makes it particularly interesting is that it wasn’t voiced by some extremist, sidelined, unrecognised scholar. On the contrary. This view was held by Milton Friedman, one of the most influential economists that ever lived, a Nobel Prize winner economic counsellor to President Reagan.
Despite a zero interest rate the threat of falling prices is imminent, which hurts the economy rather badly. In a famous 2002 speech, former Fed chair Ben Bernanke proposed a conceptual solution to this very situation: as the printing press is a monopoly of the state, newly printed money should be injected into the economy, which will prevent deflation. Later on he also had the opportunity to do the stunt in practice.
I have a problem with the concept of a monetary system driven by interest rates. My problem is that it will work well only in a certain range of the parameters describing the state of the economy. Interest rates may only be an efficient means of influencing inflation where debt, foreign currency debt, wealth inequality, etc. are not excessively high, but people’s expectations for future inflation also make a difference. That’s what I call the working range of the system. Outside that range, risks and side effects will increase radically.
Recently there’s been a lot of talk about the excessive indebtedness of the world and the need to deleverage. However, debt is the mirror image of savings; that’s what our monetary system is built upon. If debt has become too high, this also means that the amount of savings has reached an unsustainable level too. The landslide hitting the world economy in 2007/2008 is termed ‘credit crisis’, while it could reasonably be called a savings crisis as well.