Did you ever look at a dough-kneading machine at work?
If you did, you'll have no trouble understanding why it is impossible to
predict how a measure that we take, will affect the economy.
That's because––like the dough in the machine––the
economy is simultaneously squeezed at one side and pulled at another side while
being twirled round and round by the activities of all of us who are both the
producers and consumers of the economy.
Thus, any action taken by the treasury or the central
bank, will change the long-term performance of the economy as much as you would
change the outcome if you added a pinch of flour or a drop of water to the
dough while the machine is working it.
Does that mean there is no use thinking about the
economy, since it is going to do what it wants anyway? No. It does not mean
that. What it means is that while we may be confounded by the response of the
economy to measures that we take now and then, we can still have a clear
picture of how the economy operates at the fundamental level. This is to say
that while the dough in the machine will do what it wants, it will become the
loaf of bread we meant it to be, when all is said and done.
It's a good thing to have that in mind when assessing
the validity of what is said during the ongoing debate regarding what needs to
be done with the debts that almost every government is incurring to mitigate
the effects of the COVID-19 pandemic. There is no doubt that sooner or later,
coronavirus will be eliminated, but the debts will still be here. The important
question, therefore, is what to do to mitigate or eliminate the lingering
effect of the debt loads caused by the pandemic.
Willis L. Krunholz offers a number of ideas in the
article he wrote under the title: “How Trillion-Dollar Deficits Kill
Blue-Collar America, And Coronavirus Bailouts Make It Worse,” and the subtitle:
“Because of the coronavirus bailouts, the federal deficit is now expected to be
$3.7 trillion for fiscal 2020. This is a huge drag on Americans' earnings and
retirement security.” It was published on May 11, 2020 in The Federalist.
But since we cannot rely on economists to reveal what
we already know, which is that the economic dough in the kneading machine will
be “on the one hand” squeezed this way, and on the “other hand” pulled that way
–– we'll have to go to the fundamentals of things and look for answers there.
Furthermore, we need to remember that it will do no
good to look for the fundamentals that have been in circulation for decades,
and rehash them. It's because doing so will take us to the one hand of one
economist or the other hand of another economist, and we'll all be back to
square one. We must therefore leave that box altogether, and think outside of
it to breathe the fresh air of a new economic model.
In the American case, adding nearly $4 trillion of
deficit to the debt that's already there, is something that must be dealt with
seriously because in the way that it is unhealthy for individuals and families
to be highly indebted, it is so with the nation as a whole. But what is a
national debt? It is money that's borrowed by the government in the name of the
population. The principal and interest are paid back to the lenders with taxes
that the government collects from the population.
The analogy is often made about the country whose GDP
is valued at $20 trillion, sitting on a $20 trillion debt––as being the same as
a family earning $100 thousand a year and sitting on a debt valued at $100
thousand. Well, part of that is true, and part is not. It's because a
government borrows from foreigners and from its own citizens. What it borrows
from foreigners is the same as a family borrowing from a financial institution
such as a bank. But when the government borrows from its citizens, it is said
that, “We're borrowing from ourselves”.
In fact, this part of the analogy too is partially
true and partially false. That's because the truth can better be expressed as
follows: “Some of us who need it, borrow from some of us that have a surplus to
lend.” But what does that mean in practical terms? To answer this question, we
need to illustrate with examples.
Imagine country “A” being self-sufficient in
everything when the climate conditions are right, but never has a surplus of
anything it can export. Unfortunately, once in a while the country experiences
drought or hurricane or volcanic eruption, and finds itself short of one
commodity or another. It borrows from abroad to buy what it needs. Time after
time, it adds to the debt by borrowing even more to pay back the old debt and
the accumulated interests. This means that the debt load keeps increasing and
never diminishes.
Now imagine country “B” also being self-sufficient in
everything and blessed with perfect climate conditions all the time, which
makes it so that the country does not need to borrow from abroad. But lo and
behold, it borrows from itself. That is, it borrows from some of its citizens
in the name of all the citizens. It does so, not because the population does
not produce enough to fill the needs of everyone; it does. But the problem is
that the distribution of the money that’s printed to represent the wealth, is
distributed unevenly among the population. This makes some citizens ultra-rich,
and others ultra-poor, and that's what compels the government to borrow from
the rich in the name of all, and spends it on the poor, most of whom are the
ones producing the wealth that the ultra-rich are allowed to accumulate using a
rigged system.
The current situation in many countries is that
approximately one percent of the population owns most of the wealth in the
country, in addition to being owed a year's worth of sweat and toil by the
entire population. This is pornographic insanity that needs to be addressed.
It so happened over the last few decades that several
countries were unable to pay back the debts they had accumulated. Two or three
centuries ago, the lender would have sent an expeditionary force to occupy the
home of the borrower and loot it of its natural resources. This did not happen
during the last few decades, however. Instead, the lenders forgave some of the
debt while institutions such as the World Bank and the International Monetary
Fund also helped in several ways.
There is a lesson here for what to do with a national
debt that is no longer tolerated. The part that is owed to foreigners must be
paid back when possible. The part that is owed to local lenders must be
substantially eliminated (as in forgiven,) but done so over time. There are
many ways to accomplish this feat. The best way, in my view, is for the
treasury to stop issuing debt instruments to begin with. And then, authorized
by Congress, the government will borrow what it needs from the Fed at zero interest
and no obligation to pay back the principal. As to the debt instruments of long
maturity which are floating out there, the government will buy them back at 90
percent of their face value the first year. This will go down to 80 percent the
second year, and will continue to diminish by 10 percent year after year till
the last certificate has been bought back.
Since you cannot convince many of the rich to divest
themselves of what they have by donating most of what they own to the
government or to charitable organizations, you must use the method of diluting
what they own. The way to do this, is for the Fed to print as much as the
government can distribute to the general population without any of it going to
the ultra-rich.