Give anyone some money and they'll save it, not spend it. They'll save it because next week milk and eggs will be more expensive, while houses and electronics will be less expensive. on craigslist. nobody is buying new stuff when the guy down the street is selling his PS3 to make rent.
Essentials are increasing in price. Luxuries are decreasing.
What company is going to create jobs in this environment? And what if you did create jobs making more of X: now X is cheaper. Deflation.
We need inflation. And that means pissing off the Chinese.
We need to accurately price assets. And that means letting some banks fail.
You don't hang out with many American middle class people do you?
Most have 2 weeks of savings or less.
If you give somebody money who is already a saver and who already appreciates the virtues of saving -- like myself or probably you -- yes, I'd save it. But that's because I spend a fixed amount, have no debt, and save excess income.
If you give a small windfall (I dunno, $100 to $5,000) to most american families, that money will be spent. Probably a good chunk towards paying down household debt, and the rest to fixing things that have long been neglected. That could be the family car, a leaky roof, etc.
The OP and the discussions here keep referring to people or companies getting money, and then spending it, or perhaps saving it, as if that were the end of that money. That's not how the economy works.
Savings should be the most obvious. You're not going to save your money by hiding it under your mattress. You're going to at least put it into a bank, of not invest in equity or debt instruments. In all of these cases, the money is going right back into the economy to be used productively. If you put it into a bank, they'll loan it back out to someone in a mortgage or such. Equity investment directly fund businesses. And so on. So when you're saving, you're really redirecting the money to someone who believes he has a use for it -- and who believes strongly enough that they're willing to pay for the right to try it. And this is actually what the OP wanted in the first place, but the current system has better controls for ensuring that the money is used productively.
If I spend the money -- say, on a leaky roof, as you suggest -- then that money is going to the roofing contractor, and thence to his employees and the producers of the shingles and other materials. Again, it's being used productively.
Less obvious is if I spend the money on a TV, for example. Some of that money goes to the retailer. But much of it is going to, say, a Chinese company that makes it. This gets into more economic theory like "comparative advantage", which I'm not going to explain here, but simply state that in the bottom line it still makes us better off. People will protest that this contributes to the so-called "trade deficit". In the case of this discussion (at the very least), that trade deficit is a good thing. If we (collectively, somehow, for the sake of simplicity) owe a Chinese company some money, that is precisely the same thing as them pumping stimulus money into our economy! Perhaps you buy a Japanese car; that "trade deficit" is actually executed by, say, Toyota using the "owed" money to build a factory in America, and that again is exactly what we want.
The banks just stuff them into a safe haven. Hence the phrase "Pushing on a string".
Your roofing contractor might pay his employees, or he might try to do more with less people and pay off some debt. Or they might pay of some debt.
As soon as that money enters the bank, its gone, as far as the economy is concerned. It used to be that money was passed along in a long chain of transactions. Now there is a non-zero probability that at any point in the chain, the money goes into a bank to pay off debt, and at that point, its gone for good.
How do we change the bank's behavior? We have to create an economy where loaning out money is the only way to preserve value, instead of the opposite.
Paying off debt is not spending. In an older time, the bank would then be able to lend out that money to someone else, but at this time, they aren't. They are just sticking it in the Fed where its safe.
The differences between a recession and what we have now, a depression, include that interest rate changes are impotent and price deflation.
Benanke did his disseration on the Great Depression and essentially stated that to fight price deflation they should have used monetary inflation. That's what we're doing. They don't even publish the M3 anymore but estimates are that the currency printing presses are going at full speed. The problem that Ben didn't anticipate is while rates are low and people want to borrow, banks -- flush with cash to lend -- don't want to. The monetary inflation can't keep up with deflation, which (you're right) is lethal.
I'm not the one modding you down, and I should clarify: by "inflation" I mean "increase in prices", as opposed "greater monetary availability".
The fed is, with QEx attempting to provide greater liquidity, thinking that this will cause price rises, and in turn spur spending and transactions. Of course its having no effect whatsoever. String pushing at its best.
Also: the only people who want to borrow right now are those who are borrowing just to stay fed. Rightly, the banks dont want to lend to them.
by "inflation" I mean "increase in prices",
= price inflation
as opposed "greater monetary availability"
= monetary inflation
You can't control price inflation/deflation, you can only control monetary inflation.
It doesn't matter why the banks don't want to lend, the point is, Bernanke's plan can't work until they do. (But let's be honest: it won't work in any case.)
You can't control price inflation/deflation, you can only control monetary inflation.
I disagree. Gas prices go up when the dollar drops (not the only reason, but a guaranteed one). Make the yuan and the yen vastly more expensive, or just block imports at the port, and prices will go up. Maybe even to the point where it will be cost effective to pay americans to make them.
Give anyone some money and they'll save it, not spend it. They'll save it because next week milk and eggs will be more expensive, while houses and electronics will be less expensive. on craigslist. nobody is buying new stuff when the guy down the street is selling his PS3 to make rent.
Essentials are increasing in price. Luxuries are decreasing.
What company is going to create jobs in this environment? And what if you did create jobs making more of X: now X is cheaper. Deflation.
We need inflation. And that means pissing off the Chinese.
We need to accurately price assets. And that means letting some banks fail.