The Silver Bullet

Earlier this week, I summed up my blueprint (see related articles in “The Blueprint” menu on the side of the page) by discussing the interplay between some of the issues I’ve covered in my posts, as well as providing links within the summation for your reading pleasure.

As I approach 33, I have seen a lot over the years when I consider it all.  First, I saw a beloved equity bull market in the ’90s that apparently made many folks delusional as to what is par for the course when it comes to investing.

Second, I saw an economy that has not wanted to deal with the pain of responsibly dealing with the repercussions from living the bubble life, as evidenced by former Fed Chairman Alan Greenspan, current Chairman Bernanke, and likely soon-to-be-Chair Janet Yellen thinking that printing money can magically solve our current unemployment problems and/or ‘flation issues.

I am not trying to sound unappreciative.  I truly do appreciate the service these folks at the Fed have provided for our country.  But it’s not working.

I don’t need lessons about how rates aren’t low enough, that negative real interest rates and inflation would be a good thing for the economy, etc.  It is not true that the only two choices are to print more money or have totally unregulated wild west creative destruction.

The lack of differentiating between the important nuances of asset vs. consumer price ‘flation cannot be overstated.  Furthermore, there is a difference between de-leveraging and deflation.

The Federal Reserve should have one primary goal, a focus on ensuring consumer price inflation is not a problemIt is time to prioritize.

Despite what many folks say, this focus does not restrict growth and prevent any societal help for the poor or unemployed.  If anything, my discussion below of the great article by @reformedbroker implies that monetary policy is not helping the people it is supposedly intended to help.

For a country that swears by specialization so hard that it has arguably become overspecialized, you would think it would understand that it makes sense to have specific tasks given to specific agencies and have them focus on ensuring it successfully carries out its main priority.

I respect that monetary policy does have a place in the policy arsenal, but there is a limit to its abilities.  I was disturbed by the NYT article profiling Yellen this week.  This belief that unemployment can be solved by printing even more money is not rational.  The problem is not that interest rates are not low enough.

As I discussed in my last post, I believe recent comments by the current Chairman indicate he may be advocating positions based upon what he believes to be practical necessity, rather than theoretical optimums.  However, I am confident that my proposal is palatable to Congresspeople in both political parties, as well as citizens affiliating with any political party or economic schools of thought.

We are lucky enough to have the reserve currency and the benefits that come with it, such as the time to address our problems for the longer term and, in doing so, having some leeway with how we transition.

Yes, the changes in my proposal will lead to larger deficits in the short run, but they will also lead to solvency in the long run.  We don’t have a liquidity problem, we have a potential solvency problem.  The silver bullet is the fix.

I am first, and foremost, a believer in capitalism, but I am fully aware of the fact that we are not starting from time 0, so the lack of a fresh start requires creative thinking to get us to the promised land.

Tax reform in conjunction with interest rate normalization, rather than increased quantitative easing (QE), is optimal for two main reasons:

First, it has the potential to help the entire country, not just folks who benefit from monetary policy.  @reformedbroker‘s article this week on The Reverse Robin Hood Recovery echoes my sentiment that folks with equities disproportionately benefited from recent policies (one chart from the great article is below, click on chart or article link for full article and great charts from it courtesy of the Pew Research Center).

Not everyone owns stocks, but everyone is potentially affected by our tax system.

pew 0

Second, the cost of cutting taxes for all will be accounted for on our financial statements.  I’ve actually had numerous folks say this benefit is a negative.  Sorry, but honest accounting is a good thing. 

I realize some folks think the Fed balance sheet will be unwound fully and that there will be no economic cost of expanding it other than the bank subsidization/recapitalization during the process.  Addressing that issue would take longer than just one sentence, but suffice it to say that the Fed balance sheet will continue to grow faster and larger than consensus estimates.

Fortunately, it’s all good.  I have crafted a plan that both minimizes short-term pain as well as begins to forge the path toward a future free from excessive intervention so that the wealth of human capital in the country can flourish.

The one thing I’m not concerned about, despite what I see in the news all day every day is that the US lacks human capital.

I have been lucky enough to be surrounded by the country’s finest and can safely report that we are good to go.  We just need to harness our human capital to ensure that we deal with this cold before it becomes a bigger illness.  I am confident my plan is the silver bullet in helping do so in the most effective and pain-free fashion.

Related Reading:

@forexlive: Put economics back in the philosophy department

@moorehnDow Jones high should not be mistaken for growth in the US economy

@moorehn: When will this do-nothing Congress wake up to America’s jobs crisis?