The Infinite Stimulus Package
Re-Booting the Economy with a New Currency
by Thomas J. Elpel, March 29, 2009
The 2008-2009 national and global economic meltdown has cost millions of people their livelihoods, homes, and retirement incomes. While the pain of this crisis is real, the source of the problem is imaginary, like a global psychosomatic illness. When we follow the money trail, we find that the problem stems from imaginary numbers and that the simplest solution may be to imagine something different.
From an outside perspective, the financial crisis is comical, especially in America, because we are the richest nation in the world. There are more houses than people to live in them and way too many cars on the road. There are so many clothes, couches, electronic gadgets and toys, that most people are constantly giving stuff away to thrift stores, pitching nearly-new merchandise in the trash, and rotating things around the house from one pile to another trying to keep from being completely overwhelmed by it all. The stuff already exists, regardless of the financial crisis, but we are caught in a numbers game that says we don't really own it until we make the last debt payment.
We spend most of our lives working to pay off debts: a home mortgage, credit card debts, educational loans, car loans, business loans, debts to friends and family members, and debts on furniture and entertainment centers. By collective agreement, we push numbers around to maintain ownership through loans, payment plans, interest rates, etc. We go to work to obtain numbers (income) that we can pass along to other people (payments), and everything works fine as long as the numbers keep moving.
Strange and awful things happen, however, when there is an interruption in the flow of numbers. When one family is unable to make their mortgage payment, they have to move out of their house. The house is still there, but they are not allowed to live in it any more. Their inability to pay introduces a hiccup in the system, affecting the banks and people that expected to get paid. The system usually absorbs the shock without hugely adverse consequences. This time, however, the ripple effect is much bigger, causing a feedback loop that just keeps getting worse and worse. Ripples from the U.S. housing are being felt around the world. Millions of people who had jobs and houses a year ago are suddenly jobless and homeless this year, all due to an out-of-control accounting hiccup.
Congress and the president are trying to remedy this current crisis with massive bailouts and stimulus plans, spending $1.5 trillion so far in the effort to get the numbers moving again. In theory, all this money will be paid back by our children and grandchildren-who coincidentally lacked representation at the negotiating table. Technically speaking, however, it isn't possible to borrow from the future, since all goods and services exist in the present. We would need a time machine to bring anything back from the future. Borrowing from the future is an accounting trick. None of it is real in a physical sense. Debts exist only on paper within the financial system.
Money spent by the Federal Reserve is even more imaginary. While Congress publicly debates and votes on spending measures, the Federal Reserve does not. The Federal Reserve is a quasi-public banking system that regularly creates money out of thin air and loans it to member banks, which loan it to the public and charge interest for the service. The Federal Reserve is using its own tricks to stimulate the economy, creating $1.8 trillion in new money (so far) to buy Treasury bonds and mortgage securities, with much more spending to come. It is all imaginary money that did not exist until just recently.
For clarity, suppose that the entire economy consists of ten loaves of bread and $10. In this economy, each loaf of bread is worth $1. However, if the Fed creates more money, inflating the money supply to $20 to represent ten loaves of bread, then each loaf of bread is worth $2, and every dollar you owned before is worth half as much. Creating new money dilutes the value of the money in your bank account or stuffed in a mattress.
It is a numbers game. If the government can get the numbers flowing properly again, then the economy will function much as it did before and families will be able to get jobs and move back home.
However, if the situation becomes serious enough, then the best possible solution may be to recognize that these are imaginary numbers, and we can imagine them anyway we want. As an illustrative example, if the Fed inserted $1 million in every bank account in the country, then most people would have enough money to pay off all their debts. Or we could skip the theatrics, and just zero-out all debts at the same time-sort of like an infinite stimulus package. Then everyone could go home and enjoy their houses, cars, and entertainment centers and everything would be completely paid for. While that may seem far-fetched, it is no more bizarre than creating trillions of dollars out of thin air to keep the current crazy system alive.
The downside of creating too much new money or zeroing out all debts is hyperinflation. Hyperinflation strangled the German economy after World War I, and more recently the Zimbabwe economy. Hyperinflation was so extreme in Zimbabwe that the government started circulating $50 billion notes-about enough to buy two loaves of bread. If we destroy the U.S. dollar, then we have to switch to an alternative currency, such as the Euro, or imagine a completely new currency. For the sake of discussion, let's call this new currency the Digit, since most money exists only as digits on computers anyway.
Suppose we zero-out all bank accounts and start fresh with the Digit. To get the economy rolling again, all bank accounts are dialed up to 1,000 Digits so that people have money to spend right away. Obviously, it is impossible to implement a new currency fairly, since some people would come out ahead, while others would lose. But losing one's job and home due to an accounting hiccup isn't fair either, and millions of people are already suffering that fate.
The transition to a new currency could be relatively smooth. Consider that a car dealer or grocery store has to keep the sales flowing to pay off the debts for the property and the merchandise they sell. But if all debts are zeroed out, then the car dealership and the grocer suddenly own their real estate and all the inventory on hand. They can sell that inventory to get the Digits to keep restocking. Without a frame of reference, vendors might price their goods high to start with, but lower them as necessary to generate sales. The free market would quickly reveal how many Digits each product is worth.
Switching to a new currency is a good opportunity to stimulate the green economy as well. American automakers, for example, are already dependent on the government bailout to retool factories to produce more efficient cars. But they must also build and sell more gas-guzzling cars and SUVs to help fund the transition. That's insane. There are too many inefficient vehicles on the road already. When we re-imagine the economy, we can make it however we want it. We can give automakers billions of Digits to enable them to stop production immediately and retool all their factories for more efficient vehicles. Similarly, we can load up the coffers of humanitarian organizations or conservation groups, and assign the federal government a trillion Digits to spend while waiting for tax revenues to come in. However, there must be a limit to how many Digits are created or the Digit would be as worthless as the dollar.
Zeroing out all debts and destroying the dollar would cascade through the global economy as well, forcing other countries to follow suit, until the entire planet is debt-free. Maybe Moses was onto something when he proclaimed that all debts should be forgiven every seven years. The economy is overdue for a reboot.
Granted, it is unlikely that our leaders will be brazen enough to zero-out debts and reboot the economy, but the crisis seems less scary when we acknowledge that none of it is real. At the very least, we can all benefit from a fresh perspective and some out-of-the-box thinking.
Thomas J. Elpel is the founder/director of Green University, LLC of Silver Star, Montana, and the author of Direct Pointing to Real Wealth: Thomas J. Elpel's Field Guide to Money, a guide that most people should have read a long time ago to avoid the current financial chaos.