Review of the recession and how to end it


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  1. The problem is suboptimal output and employment which is evidence of a lack of aggregate demand.
     
  2. Less important what caused the drop in aggregate demand
    • The end of the subprime expansion in 2006 reduced the demand for housing
       
    • The wind down of the one time Q2 2008 fiscal adjustment (Q2 2008 GDP was up 2.8%)
       
    • The Mike Masters inventory liquidation that began in July 2008 added supply from inventories, reducing output and employment
       
    • A shift in the propensity to spend due to the pro cyclical nature of credit worthiness

     

  3. My proposals for restoring aggregate demand:
    • A full payroll tax holiday – This tax is taking $1 trillion per year from workers and businesses struggling to make ends meet $1,000 per capita in revenue sharing for the States (approx. $300 billion total).
       
    • Federal funding for a $8 per hour full time job for anyone willing and able to work that includes federal health care.
       
    • Caveat – Unless our demand for motor fuel is cut in half, restoring aggregate demand will also empower the Saudis to set ever higher prices for crude oil which will cause our real terms of trade and standard of living to deteriorate.
       
    • Political options for reducing imported fuel consumption:
       

      • Regressive – utilizing allocation by price (Carbon tax, fuel taxes)
         
      • Closer to neutral – mandating higher fuel economy requirements for new vehicles, offering incentives to trade up to more fuel efficient vehicles
         
      • Progressive – substantially reducing speed limits to discourage driving and advantage public transportation

     

  4. Redirect banking to serve public purpose
    • Ban banks from all secondary markets.
       
    • Allow bank lending only to serve public purpose.
       
    • Do not use the liability side of banking for market discipline.

     

  5. Analysis of current situation
    • Our leaders believe they must first ‘get credit flowing again’ to restore output and employment.
       
    • Unfortunately the reverse is the case; restoration of output and employment will restore the flow of credit.
       
    • Government is removing about $1 trillion per year in payroll taxes from employees and employers who can’t meet their mortgage payments and wondering what is causing the financial crisis.
       
    • All moves to date by the Treasury and Federal Reserve have only served to shift financial assets between the public and private sectors. Nothing has directly added to aggregate demand.
       
    • Therefore the economy has continued to deteriorate, with only the ‘automatic stabilizers’ slowly adding financial assets and income to the private sector, as the counter-cyclical deficit rises.
       
    • The rate of federal deficit spending (not counting TARP and other shifting of financial assets that does not directly alter demand, as above) now exceeds 5% of GDP and seems to have begun moving the economy sideways.
       
    • The new fiscal package starts taking effect in April. While modest in size, it isn’t ‘nothing’ and will further support GDP.
       
    • Employment will not grow until real output of goods and services exceeds productivity growth.
       
    • Fuel prices are already moving higher.

     

  6. Conclusion
    • Leadership that doesn’t understand how the monetary system works has needlessly prolonged the recession and delayed the recovery.
       
    • They have put a premium on ‘confidence’ as the President spends countless hours in front of the TV cameras, when in fact loss of ‘confidence’ means only that federal taxes can be lower for a given level of federal spending:

      lower confidence = less private sector spending = less aggregate demand = lower taxes or higher federal spending to sustain output and employment

    • The headline USD trillions they have directed towards the financial sector has accomplished little or nothing beyond burning up expensive political capital and credibility.
       
    • They are in this way over their heads, and it’s costing us dearly.
       


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6 Responses to Review of the recession and how to end it

  1. warren mosler says:

    The cities are currency users, not currency issuers

    Reply

  2. Anti Mosler says:

    She has been mayor of one of canada’s largest cities for 31 years. They are debt free and have 700 million in reserves, why is she so popular and keeps gettin re-elected?

    http://www.youtube.com/watch?v=fY79KbCptTo

    Warren shouldn’t you have a talk with her how she is holding her people back by not going into debt?

    Reply

  3. Dave Begotka says:

    Our leaders believe they must first ‘get credit flowing again’ to restore output and employment.

    What if this is planed?

    What if BUKAKA is right and all of these “leaders” are whores?

    What if the government is “For the Money & By the Money”?

    It seems in the big picture America is being beaten down so the rest can rise? Is that easier than keeping things good here and bringing up the rest of the world? Because if it is CHEAPER or EYSIER you know witch banana the monkey will grab!

    Warren your proposals makes soo much sense, and in an honest system would kick butt!

    But if we monkeys cannot stop violence, war, overpopulation, and GREED our financial system will be in the same gutter.

    What if BUKAKA is paranoid?

    I think if we put Warren, Ron Paul, Jessie Ventura, Richard Gage, Alex Jones and the OBAMAMENTAL in a debate with BUKAKA as the moderator honesty might have a chance. But you will need to give away free cheesy poofs for anybody to watch!

    Dudes! We could put it on Youtube and get a ZILLION HITS!

    Reply

  4. warren mosler says:

    Ramping up Iraq makes sense, but seems they are in the process of forming an alliance with nuclear armed Iran, and that combo isn’t likely to necessarily act in our best interests?

    Reply

  5. Richard McRae says:

    Warren,
    Indeed, they are in way over their heads.

    I see the Restore America plan is continuing to develop — good points, all. On oil, why not rebuild Iraqi infrastructure, turn on the pipes, and start shipping to America? Cut Saudi out of the loop and drive down prices. The World Bank estimates a $1B investment per annum would be required to restore output — the major oil producers might be eager to go in with the loss of resources in other regions (Venezuela, Russia, etc.). Iraq is #3 in reserves with a 158 reserve to production ratio.

    Cheers,
    Richard

    Reply

  6. Richard McRae says:

    Warren,
    I see the Restore America plan is continuing to develop — good points, all. On oil, why not rebuild Iraqi infrastructure, turn on the pipes, and start shipping to America? Cut Saudi out of the loop and drive down prices. The World Bank estimates a $1B investment per annum would be required to restore output — the major oil producers might be eager to go in with the loss of resources in other regions (Venezuela, Russia, etc.). Iraq is #3 in reserves with a 158 reserve to production ratio.

    Cheers,
    Richard

    Reply

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