The Fed Should Just Print Money & Send It To People
- Posted by TheArmoTrader
- on May 9th, 2013
The economy has been “depressed” for about 5 years now. No, I don’t mean we’ve been in a depression (but I do mean Balance Sheet Recession), but we have been running below trend, or as what economists like to call it, potential GDP. This output gap is causing not only spending to be higher than normal (because of automatic stabilizers kicking in) but also tax revenues to be lower than what they would be. Not that GDP is the be-all-end-all indicator of the health of the economy, it does still serve some decent function when measuring the economy.
So, what can we do to close this output gap? Some argue the Federal Reserve ($FED) should do more, some argue it should do less. Some argue we need fiscal stimulus spending, and some argue that we need to get government out of the way. While I am on the side of more fiscal stimulus with some monetary easing, I think I have a compromise that all sides can agree to.
The $FED should just print money and send it to people. Yes, I know this sounds crazy, and it probably is, but as they say: “It’s so crazy that it just might work”. This thought popped into my head after reading this Bloomberg piece that suggested we mail everybody gift cards. While I like that idea as well, I see printing money and mailing it to people as a better alternative (true helicopter monetary policy). Now, before you stop reading here, hear me out.
Just because the $FED prints money, it does not mean inflation, or let alone, hyperinflation. If it were to print $1 and send it to everybody, would you predict doom for the dollar? No you wouldn’t because the amount being added to the money supply is trivial. So you need to stop equating money printing automatically with inflation, because there are other factors (supply/demand) that come into play.
Now my proposal would be to send $200 (or more?) of freshly printed cash money to every household. There are about 115 million US households. This would amount to $23 billion of new currency in circulation. Now, this sounds like a lot, but it really isn’t. To illustrate this, take a look at the chart below. It shows the actual Currency in Circulation (red) vs potential in blue (had we printed the $23 Billion on January 1 of this year). As you see, there is a jump, but it isn’t very major. This isn’t going to cause a major jump in inflation (if any), but it will help the economy.
We could even adjust the plan and amount (maybe even up to $1000-which will match the amount lost to the payroll tax cut expiration) to make it more efficient & progressive. For example, I don’t think the higher marginal tax brackets are strapped for cash. We could make the plan so that the lower tax brackets receive the bigger chunk of the cash. And no, this isn’t class warfare because everybody will benefit from this plan. Let me expand & explain below.
1) Those receiving the cash will do 3 of the following things: Spend, Save, or Pay down debt.
- If they spend it, that’s great, it increases aggregate demand, sales pick up, more people will be needed for hire, unemployment falls down and the people who get the $200 consume good and services that they likely wouldn’t otherwise.
- If they save it (or invest it), that’s great too. Who wouldn’t want other people to have more savings and/or investments? At worst, if they keep it as cash, it could be used as a fallback option in the future if a family needed money for an emergency. This saving option is great too because it would not effect inflation a lot since there is no “money velocity” but it would provide families a much needed increase in wealth.
- If they pay down debt, this is great too because it will allow otherwise indebted people to either spend or save/invest.
2) Now what about that pesky inflation problem? Well for one, it will likely be a benign jump if anything. But here are the reasons to not worry about inflation.
- If inflation picks up, guess what the $FED is likely to do? Raise rates. For one, that would cool inflation. But more importantly it will cause the rates in fixed income investments (CDs, Bonds, etc) to go up as well. So savers would not get “screwed” here.
- Inflation erodes debt. This will not only help the US national debt (by lowering debt:GDP), but also consumers still stuck in private debt (be it mortgage, student, etc).
- Inflation expectations will pick up. Companies & investors alike would expect higher inflation thus will be pressed to invest now rather than later.
- Even if inflation remained stubbornly high(er), but unemployment fell down, this would be an OK trade-off than what we have now. Why? Because unemployment makes us more miserable.
- A pickup in inflation could be met with a faster pickup in wages. This is good for the long-term because it makes things actually more affordable.
3) Other benefits await as well.
- Consumer confidence is likely to pickup as unemployment falls down & retail sales pickup.
- It would not add to the national debt (not like that is a major worry).
- It wouldn’t put so much focus/pressure on monetary policy, which some believe is going too far.
- Stocks are likely to benefit from a stronger recovery.
- This is NOT a bailout! For one, the government is not picking winners and losers. Everybody, progressively, will get cash. Yes, the lower income brackets will likely benefit more, but given that stocks are likely to benefit as well more than makes up for that (the “top 1-5%” own most of the stocks in America). Also, it will naturally clear out those who are “immoral”. For example, if someone who was heavily in debt, instead used the money to spend rather than send them to debt repayments, than that person will eventually go bankrupt. A “moral” person will look out for his/her best interest. A “moral” person who has everything he/she needs can instead donate the money to charity. I don’t see any bailout/moral issue coming into play here.
There are only a few cons that I see.
1) We cannot get too reliant on this policy. Even though the government always “prints” new financial assets (be it cash, or bonds), constantly printing huge new amounts of cash is not sustainable.
2) If inflation picks up hard, it could hurt any benefits we gain from this. I don’t think this is likely, and any pickup in inflation is likely to be transitory IF this is a one-time thing.
3) Of course, political constraints. This is likely a political non-starter.
4) It is illegal! The $FED has specific powers granted to it and it cannot just mail people cash. Yes, this is hard to believe I know! (Sarcasm)
So in conclusion, everybody pretty much is set to win. Consumers, Investors, savers, spenders, & debtors all look to benefit from this. The only group that I could see not benefiting from this are creditors, but even then, they are not likely to be harmed to a high degree. I would argue that the increased risk of default by debtors is worse than a little erosion in the debt payments. We would finally see GDP growth pickup and our biggest crisis, unemployment, come down. And most importantly, living standards would be raised.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Jerry "TheArmoTrader" Khachoyan is currently an active trader, investor, market commentator, and Finance-Twitter participant. He started being involved with financial markets in September of 2008. He concentrates on using technical analysis and an understanding of macro to determine his trades and investments. He graduated UCLA with a degree in Political Science in 2013. The stock market to him is one of the greatest inventions by man.
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