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Op-Ed: How To Stimulate the US Economy


If the government wants to facilitate an early end to the crisis, there are some things it can do.


Editor's Note: Eric Von Baranov writes and speaks extensively about economic, geopolitical, technological and social trends. From the dot-com bust to the escalating War on Terror, Eric has accurately projected current events and now writes about the coming renaissance in America.

We will now hear the Great Depression invoked over again and again - and how this current economic crisis happened and how it could have been avoided. But monetarists can't forget one vital factor: An economy only grows when it produces wealth.

Debt is orthogonal to the issue of prosperity. If you have $1 in assets and $2 of debt with no income, debt is too high. If, however, you're Bill Gates and have $10 million in debt, it's probably a credit card bill you overlooked and will get to it next month. Such a debt to Bill Gates is not worth mentioning - although for the rest of us it would be devastating.

The monetarist view is that government should dramatically increase debt to keep liquidity in the system. But is this the solution? Will pouring $25 billion into a company with $2 billion in stock value produce wealth? It may defer bankruptcy and keep people off the unemployment rolls, but the cost is the same and the $25 billion will not fix the structural problems of General Motors (GM) or the US auto industry at large.

Money funneled into the banking system isn't the same as bailing out companies to prevent unemployment. It's a necessity to support banks to maintain the credibility of the credit markets. One black eye on US government paper and FDIC-insured banks lasts a lifetime. Depositors must have access to their money or the government risks a currency collapse.

The monetarist theory is correct when it applies to banking-system liquidity, but it's wrong when it comes to stimulus packages. The past 8 years have seen stimulus packages for the military without the building of wealth. Today's crisis is a result of dramatically higher debt and a depreciated dollar. If the government wants to facilitate an early end to the crisis, there are some things it can do:

  • Cut and slash the federal budget. The federal budget contributes little to GDP. By slashing the federal budget the government creates a surplus rather than a deficit. As a result of a surplus, the dollar is strengthened. Contrary to monetarist thinking, a strong dollar makes all US assets more valuable and foreign assets cheaper: American citizens can acquire foreign assets at a discount and corporations have a wider call on global capital. When these conditions existed under President Clinton, the economy boomed.

  • Support technology. New products command the highest profits. Competition continually narrows profit margins as new products move from specialty to commodity items. By creating new products, the economy for innovation becomes self-sufficient as profits fund even more innovation. Under such conditions, more money is available to start-ups, each of which has the potential to add dramatically to GDP.
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