Earlier this week, the Federal Reserve, in the second part of their two-part series entitled 'Fatal Conceit: The Return of QE', announced that they would be enacting a tax of $600 billion on each and every U.S. citizen in order to appease Wall Street and the newly commissioned QE Czar in Washington (rumour is this will be Paul Krugman). The money "raised" from this de facto tax would be spent as any reasonable-minded central planner would advocate: by temporarily propping up asset markets for 6 months through monetizing the federal debt. This will effectively kill two birds with one stone for the Fed, allowing Wall Street to engage in their pursuit of massive bonuses in a hyper-liquid environment, and allowing Obama to go merrily on his way creating new jobs (WANTED: WINDOW-BREAKER (night shift) / WINDOW-FIXER (day shift)).
Although these policies will undoubtedly, somehow, possibly rescue the ailing U.S. economy from the precipice of the hyperinflationary Japanese-style deflationary spiral awaiting it, I have decided to come up with a set of policy perscriptions that the U.S. government may want to consider in the event of the surfacing of unintended consequences . Now, instead of the typical Austrian perscription (i.e., cut all spending and allow everything - including the U.S. middle/lower class - to be liquidated even though there is a massive debt overhang), my policies attempt to find balance between maintaining economic sustainability and preventing the chaos and various negative externalities that 100% austerity measures would cause. Also, my policies recognize that income and wealth inequality has been on the rise in America for decades now as a result of federal reserve inflationary policies and a system of legislation that allows the people or corporations with the most expensive lawyers to set up very high barriers of entry to the American Dream.
5 Easy Steps to Rescuing the U.S. Economy (in a Politically Feasible Manner)
1) Allow Ron Paul to have a go at cutting out all pork in the budget.
The Department of (Mis)Education, at least half of all military spending, entitlements directed at anyone beyond the poverty line, any subsidies for anything (including but not limited to college students majoring in sociology, the sugar industry, farmers), the criminalization of marijuana, social security (which is nothing but a transfer payment system anyways), all need to go. If anyone complains about not helping the weakest among us, respond by saying that unemployment programs (i.e., people are given benefits depending on their willingness to learn a new trade and prove their ongoing learning of said trade), as well as welfare and food stamp programs will either be untouched or improved. It also would not hurt to raise taxes somewhat on the very wealthy (i.e., incomes above $1,000,000) since taxes are going to have to be raised eventually anyways.
2) Declare a one-time jubilee of $X on all personal debts, with half coming from forcing the lenders to eat the losses and the remaining half coming from printing money to pay off the banks. For the rare American that is debt-free, they would get the entire amount in cold hard cash.
Where $X is the amount needed to make the average mortgage LTV ratio for the bottom 1/3 of American homeowners equal to 90% instead of the 130% it's at now. All of the ancient civilizations had to enact a jubilee at one point and it's the only way for the U.S. to maintain any semblance of a non-feudal society at this point.
There is no question that the balance sheet of the average American is in dire straits. Rampant speculation in the housing market fuelled by low interest rates and a sad ignorance of how house prices work resulted in a severe disequilibrium. Either we let all the "irresponsible" banks and homeowners go under, or we recognize two unfortunate-but-true facts. 1) The fragile banking system that exists today is mainly a product of government influence and the entire TBTF system could be torn down once at least some of the banks are sufficiently capitalized, and 2) Many Americans were forced to go into too much debt as a result of their jobs being offshored thanks to record low artifical interest rates and the slave-type conditions the Chinese are willing to accept - they deserve at least some compensation for these phenomena.
Sure, the amount of money printing and debt forgiveness required here will be very inflationary and painful, but since actual people (and not corporations or banks) will be getting the initial infusion of cash, they will benefit the most. Net creditors (i.e., mainly banks, China and Japan) and pension funds will be hurt the most, but hell, the banks deserve it and China and Japan had it coming anyways (default or money-printing, pick your poison). To avoid a complete dollar collapse, the U.S. gov would have to a) commit to never money printing like this again for the foreseeable future, and b) drastically cut all spending. Seeing as how politicians always pledge to cut spending and never do, the only way to avoid dollar collapse may be to take a year or two actually cutting spending (i.e., see policy (1) above) before enacting the jubilee. Sure, banks and some corporations will take a lot of the pain here, but these are precisely the parties that have unduly gained for decades at the expense of the American worker, thanks to government intervention, and who are sitting on record cash balances or will rapidly see higher sales anyways.
3) Eliminate any tax that dissuades the hiring of Americans (e.g., payroll tax, social security, etc.), introduce tax credit and deductions for hiring Americans, and tax firms for every worker they hire that is not American.
Labor-arbitrage must be stopped, even if it means making American corporations less competitve. An eroding middle class is not sustainable and will only lead to feudalism, given the quantity of impoverished workers in the world willing to work for peanuts. Americans simply cannot compete with poorer foreign workers, and every nation needs to look after its own populace first and foremost before considering charity. Of course, the other (and better, albeit not as politically feasible) alternative is to allow free trade but to make the income tax system significantly more progressive or to even consider equalization payments between tax brackets. Severe levels of wealth inequality are simply unfair. Even if you believe that people deserve what they work for, it is a fact of life that money is made not only through creating value, but also through cheating, being lucky and inheritance. Given that these cannot possibly be measured reliably, they must be estimated and applied uniformly (through a progressive taxation system, for example). The level of "acceptable" wealth inequality is of course determined by the electorate in any democracy, through their voting. To the extent that the electorate is willing to forego economic growth in exchange for fairness of result, a progressive tax system is ideal. People must understand that this depression did not happen overnight for most Americans, but has been in place for decades and only hidden by increasing levels of unsustainable leverage.
4) Declare that no bank is too big to fail. Set up a government-run and free electronic money system whereby depositers no longer have to rely on the banking system to receive money or make payments/write cheques.
The whole concept that the government must insure the deposits of banks and that a massively leveraged banking system is required for capitalism to function efficiently is absurd. As Nassim Taleb likes to say, nature gave human beings two lungs and two kidneys for a reason. In any free society, people should be allowed to deposit their money somewhere and money should function as a store of wealth, free from the effects of a banking system that is prone to over and malinvestment during times of euphoria, as any group of investors is apt. Thus, the government should set up the electronic infrastrure required for people to deposit money in accounts and use their money as they wish, without the money being borrowed or used surreptiously. Sure, lots of banks will fail, and some may need to be taken into receivorship if the crises escalates. But at least a lot of parasitic banks/bankers/executives will be purged from the system and unable to gain access to an almost cost-free source of funds (God knows the FDIC underprices their insurance...)
5) Once the effects from the jubilee, budget cutbacks, labor arb tariffs and banking system remodelling policies are observed, and the financial system and American people are on somewhat solid ground, bring back the Gold Standard and alter the mandate of the Federal Reserve such that it solely engages in macroprudential supervision/research and must seek the permission of congress, the President and more than 50% of the U.S. population prior to printing any money - money that will be given to each and every American in equal instalments (see Policy 2 above). Then, allow interest rates to rise and be determined by market forces. Let the chips fall where they may.