Pablo Díaz de Rábago
February 10, 2009
The new US government is on the verge of defining priorities in the use of the remainder of the TARP moneys and has to make a hard choice, i.e. what should deflate and what should not.
In an “Alice in Wonderland” kind of nightmare, we are standing before the apex of the debt super-cycle and our pumping machine has to decide the characters that need to be reflated to life first, since all of them are badly punctured.
The obvious ones are the banks since they seem to be (of have been) the agents for money creation. Inflate the banks and the rest of the world will be reflated, or so the saying goes.
Well, in this world of turmoil, the only thing we know for sure is that banks are not in any position to commit the same mistakes and are not reflating further. Moreover, since the size of the banking industry is one-fifth of the financial assets, they alone will not bring the zombie back to life.
Well, then reflate the companies then. But as we have seen, companies are also in no mood to help since theirs is the most volatile of economies, similar to the flowers of a too exhuberant plant that has suddenly withered with the lack of water. At the most the water will keep companies barely alive through the cycle, which is no small achievement.
Only one other option for reflation is left: the king of aggregate demand, the consumer. One idea would be to mail to every person a Federal Reserve Bank credit card with a large balance of money (either long-term credit or even free money) that would vanish if not used within each and every month. This mechanism, coupled together with a decision of G20 economies to set a say 5-year 5% inflation target to be revised in 2015 to go back to the 2% long term trend would generate a 30% nominal “free” cushion of government debt (diluted with inflation) and help dilute the debt bubble whilst sustaining present economic activity.
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