Possible plan for the next recession?

[Machjo]

We usually seem to always get caught off guard both when recession strikes and when inflation strikes. I'm wondering if the following could be a way to plan for both simultaneously:

a. Any new spending increase or tax reduction of the Federal government's must include a clause that it will be put into effect as soon as the following three criteria are met:

1. the national inflation rate is below zero percent,

2. the Bank of Canada rate is at zero percent, and

2. the Federal debt is at zero or at a surplus.

This would ensure that government spending be done right when the economy needs it most and not in the midst of a heating economy when it needs such stimulus the least and when such stimulus could even prove harmful.

b. The Bank of Canada would be prohibited from printing, either materially or electronically, any new money unless the two following criteria are met:

1. the national inflation rate is below zero percent, and

2. the Bank of Canada rate is at zero percent.

And as long as it continues to have a Federal debt, that extra money is to go towards paying that debt.This would also provide an incentive for the federal Government to pay off its debt now before the next recession.

Any thoughts on this?

[Machjo]

I think such a policy would help to fight inflation, rising interest rates, and the Federal Debt now while ensuring that Federal stimulus spending would come right when we need it most.

To take an example, imagine we don't face any such severe recession again for another 15 years. With the policy described above, police cars, military vehicles, infrastructure, etc. etc. etc. would eventually be in dire need of replacement. So when the recession hits, then that spending would come in right when needed most. We would not need to waste money on make work projects and bailing out banks and corporate friends of the politicians anymore. Instead, the money would go where it's really needed in rebuilding old bridges, buying new police cars for the RCMP, replacing outdated military vehicles with new ones, etc. etc. etc. It would be a natural economic boom building what's needed rather than make work projects. Why are we not planing for the next recession now?

[Pliny]

We usually seem to always get caught off guard both when recession strikes and when inflation strikes. I'm wondering if the following could be a way to plan for both simultaneously:

a. Any new spending increase or tax reduction of the Federal government's must include a clause that it will be put into effect as soon as the following three criteria are met:

1. the national inflation rate is below zero percent,

2. the Bank of Canada rate is at zero percent, and

2. the Federal debt is at zero or at a surplus.

This would ensure that government spending be done right when the economy needs it most and not in the midst of a heating economy when it needs such stimulus the least and when such stimulus could even prove harmful.

b. The Bank of Canada would be prohibited from printing, either materially or electronically, any new money unless the two following criteria are met:

1. the national inflation rate is below zero percent, and

2. the Bank of Canada rate is at zero percent.

And as long as it continues to have a Federal debt, that extra money is to go towards paying that debt.This would also provide an incentive for the federal Government to pay off its debt now before the next recession.

Any thoughts on this?

Boy, you are really trying to tie the hands of government, aren't you? Essentially, you are saying that government needs certain restrictions in it's ability to act freely and that will create economic stability. You are proposing to take away the very tools it uses to avoid recessions and inflation - controlling the money supply and setting the interest rate.

[kimmy]

Can the Bank of Canada lending rate ever be at zero percent? Your family and friends might lend you money with no expectation of receiving interest, but no institution would.

-k

[Machjo]

Can the Bank of Canada lending rate ever be at zero percent? Your family and friends might lend you money with no expectation of receiving interest, but no institution would.

-k

The Japanese central Bank had lowered the rate to 0% temporarily once when the economic bust there was severe enough. The idea is that if the recession is so bad that it really needs federal stimulus spending, then it must also be bad enough for the Bank of Canada to lower the Bank rate to zero. If the Bank of Canada does not feel desperate enough to go that far, then we have to assume that the recession really isn't bad enough to warrant Federal stimulus spending either.

As things stand now, we follow what we might call lop-sided Keynesianism. Generally speaking, the idea would be for the government to raise taxes, reduce spending, pay off its debt, or any combination of the three in good times so as to control inflation, the debt, and excessive interest rates in good times so as to actually be able to afford stimulus spending in bad times. As it stands now though, the government spends in good times and more in bad times. I doubt that was what Keynes had in mind. And that what I mean by lop-sided Keynesianism.

[Machjo]

Boy, you are really trying to tie the hands of government, aren't you? Essentially, you are saying that government needs certain restrictions in it's ability to act freely and that will create economic stability. You are proposing to take away the very tools it uses to avoid recessions and inflation - controlling the money supply and setting the interest rate.

So let me get this straight. You think the government should increase spending in good times and then just increase it more in bad times? That to me is a classic case of lop-sided Keynesianism. Ideally you want the government to restrain itself in good times so as to be on a strong footing in bad times. Seeing that the government itself has proven not responsible enough to do this, then perhaps laws are needed to restrict it somewhat.

[Pliny]

So let me get this straight. You think the government should increase spending in good times and then just increase it more in bad times?

I said that? I don't think so.

That to me is a classic case of lop-sided Keynesianism. Ideally you want the government to restrain itself in good times so as to be on a strong footing in bad times. Seeing that the government itself has proven not responsible enough to do this, then perhaps laws are needed to restrict it somewhat.

The government should not not be influencing the economy.

[Jack Weber]

I said that? I don't think so.

The government should not not be influencing the economy.

And the economy should never be totally free from government regulation...

Friedman and Hayek were wrong!!!

[Machjo]

I said that? I don't think so.

The government should not not be influencing the economy.

And how exactly does the government not influence the economy while still spending money on a police force, the military, etc. Whether it intends to or not, a government will influence the economy. So that becomes a moot point. And that brings us to the next question which is 'how' it influences the economy.Would it be preferable for the government to be spending on new police cars in the midst of an economic boom in the car industry where car prices are over-inflated already, where the car indusry is competing for workers as it faces a worker shortage, as the price of the resources needed to build the cars is rising owing to demand for these resources outstripping supply; or would it be preferable for the government to get a better deal on the cars when the car industry is in the midst of an economic recession? Personally I'd rather wait for a recession and get 10% off or so on the cars than buy them when the economy is overheating when the price of those police cars is bleated. It would seem to me to just be wise economic policy. At the same time, it saves money on the welfare and EI rolls in recessions since it essentially prevents recessions. It thus kills two birds with one stone: cheaper police cars and job creation simultaneously. Why would you propose we buy those police cars without putting any thought into it? The same applies to military vehicles, etc. etc. etc.

I know Sweden has a similar policy. For example, when the clothing industry is in recession, the Swedish military will load up on uniforms for years to come, and then not buy any more except when necessary until the next recession in the clothing industry.

The idea that the government can somehow spend on the military, police, courts, the justice system etc. etc. etc. without having any impact on the economy is ludicrous. It's not even worth asking the question of how to avoid any impact, since there will inevitably be an impact. The more important question is how to insure it will be a positive rather than negative impact.

[Machjo]

And the economy should never be totally free from government regulation...

Friedman and Hayek were wrong!!!

And even Friedman contradicted himself. At one point he was proposing a voucher programme for schools, arguing that the government should invest on the demand rather than the supply side of education (though Sweden has adopted a voucher porgramme too, I doubt very much that it agrees with Friedman on most points). But how does the government introduce a voucher programme without any kind of regulation whatsoever? It must:

1. determine the value of the voucher.

2. Define the criteria that must be met to participate in the voucher programme.

3. Determine the administrative system that would manage the voucher programme.

So while I can agree with Freidman's idea of demand-side as opposed to supply-side government funding, which is extensively used in Sweden and has proven to be quite effective, I reject the idea that such funding ies equal to no government regulation whatsoever.

[maple_leafs182]

Here is a plan.

Don't trust the government to do the right thing and start buying silver.

[Pliny]

And the economy should never be totally free from government regulation...

Friedman and Hayek were wrong!!!

That sounds convincing.

What in the economy needs regulating?

[Pliny]

And how exactly does the government not influence the economy while still spending money on a police force, the military, etc. Whether it intends to or not, a government will influence the economy. So that becomes a moot point. And that brings us to the next question which is 'how' it influences the economy.

It should just be another company. But how much of a standing army do you want? Should we have a national police force or maybe just provincial or municipal? The government i have in mind is fairly samll compared to what you have in mind.

Would it be preferable for the government to be spending on new police cars in the midst of an economic boom in the car industry where car prices are over-inflated already, where the car indusry is competing for workers as it faces a worker shortage, as the price of the resources needed to build the cars is rising owing to demand for these resources outstripping supply; or would it be preferable for the government to get a better deal on the cars when the car industry is in the midst of an economic recession? Personally I'd rather wait for a recession and get 10% off or so on the cars than buy them when the economy is overheating when the price of those police cars is bleated. It would seem to me to just be wise economic policy. At the same time, it saves money on the welfare and EI rolls in recessions since it essentially prevents recessions. It thus kills two birds with one stone: cheaper police cars and job creation simultaneously. Why would you propose we buy those police cars without putting any thought into it? The same applies to military vehicles, etc. etc. etc.

If big government is the ideal then I like your idea better.

I know Sweden has a similar policy. For example, when the clothing industry is in recession, the Swedish military will load up on uniforms for years to come, and then not buy any more except when necessary until the next recession in the clothing industry.

The idea that the government can somehow spend on the military, police, courts, the justice system etc. etc. etc. without having any impact on the economy is ludicrous. It's not even worth asking the question of how to avoid any impact, since there will inevitably be an impact. The more important question is how to insure it will be a positive rather than negative impact.

Once again that's pretty big government.

But we are getting away from the points that government attemtps to keep the economy stable but is a failure. It inflates at a controlled rate. It encourages consumerism with easy credit and low interest rates. It discourages saving in this way. It tightens credit and raises interest rates when the economy starts to heat up.

So you are suggesting in your OP that it not be able to do those things.

[Machjo]

It should just be another company. But how much of a standing army do you want? Should we have a national police force or maybe just provincial or municipal? The government i have in mind is fairly samll compared to what you have in mind.

I was simply taking examples here. But even supposing that the government comprised nothing more than Parliament Hill, the same principle would apply. Would you want the government to be replacing its old seats and renovating parts in desperate need of repair right when costs are high or in the midst of a recession. It's not the size of the government that matters here, but how it spends its money to take the larger picture into account.

[Machjo]

But we are getting away from the points that government attemtps to keep the economy stable but is a failure. It inflates at a controlled rate. It encourages consumerism with easy credit and low interest rates. It discourages saving in this way. It tightens credit and raises interest rates when the economy starts to heat up.

So you are suggesting in your OP that it not be able to do those things.

I'm not quite following you here. So I'll just respond to what I think you're trying to say and you can correct me later.

Essentially I'm saying that government intervention in the economy to, for example, try to pull the economy out of recession ought to be used sparingly and not abused. It's like medication. If you take it only when you're sick, it will prove far more effective than if you;re addicted to it already.

Beyond extreme cases, then the government ought to let the market adjust as much as possible and simply create the democratic framework around which it could happen. For example, by eliminating the minimum wage and introducing co-determination legislation, then workers could negotiate salaries with their workers on their own without the need for so much government intervention, and in times of recession could even choose to negotiate salary reductions so as to save their jobs rather than be legislated out of the market by minimum wage laws.

Again, direct intervention by the government to explicitely manipulate the economy ought to be used sparingly.

[Pliny]

I'm not quite following you here. So I'll just respond to what I think you're trying to say and you can correct me later.

Essentially I'm saying that government intervention in the economy to, for example, try to pull the economy out of recession ought to be used sparingly and not abused. It's like medication. If you take it only when you're sick, it will prove far more effective than if you;re addicted to it already.

Beyond extreme cases, then the government ought to let the market adjust as much as possible and simply create the democratic framework around which it could happen. For example, by eliminating the minimum wage and introducing co-determination legislation, then workers could negotiate salaries with their workers on their own without the need for so much government intervention, and in times of recession could even choose to negotiate salary reductions so as to save their jobs rather than be legislated out of the market by minimum wage laws.

Again, direct intervention by the government to explicitely manipulate the economy ought to be used sparingly.

I see more clearly what you are trying to say. And I agree with you.

I believe though that you are missing the point that the reason we have recessions, depressions and basically a rollercoaster economy is because of government manipulating the economy. They are constantly monitoring it and using the economic tools they have to try and maintain a stable low inflation rate. They want to avoid deflation and runaway inflation.

Now we can say that there were depressions before there was the central bank and that would be true. But those depressions would have been caused by banks issuing too much paper in proportion to it's deposits.

[Machjo]

I see more clearly what you are trying to say. And I agree with you.

I believe though that you are missing the point that the reason we have recessions, depressions and basically a rollercoaster economy is because of government manipulating the economy. They are constantly monitoring it and using the economic tools they have to try and maintain a stable low inflation rate. They want to avoid deflation and runaway inflation.

Now we can say that there were depressions before there was the central bank and that would be true. But those depressions would have been caused by banks issuing too much paper in proportion to it's deposits.

Correct me if I'm wrong, but are you proposing a libertarian minarchist or perhaps even anarchist philosophy whereby the government simply cease printing money altogether?

[Pliny]

Correct me if I'm wrong, but are you proposing a libertarian minarchist or perhaps even anarchist philosophy whereby the government simply cease printing money altogether?

I am not an anarchist but am for limited government, perhaps a minarchist libertarian. I haven't decided how much government is best. To me both anarchy and totalitarianism (the true political dichotomies) are undesirable ideological states.

The government could be allowed to create money but generally what has happened in history is once they take over the manufacture of coinage, or whatever is being used by it's citizens as money, it becomes debased. Our money has actually disappeared and we are left with what were once referred to as money substitutes, i.e., paper dollar bills redeemable for money, becoming the "money". Our money today is basically reduced to being tokens.

I think it best that money be created privately. Government's role would be to ensure it were not debased in any way and it's value guaranteed.

[Machjo]

I am not an anarchist but am for limited government, perhaps a minarchist libertarian. I haven't decided how much government is best. To me both anarchy and totalitarianism (the true political dichotomies) are undesirable ideological states.

The government could be allowed to create money but generally what has happened in history is once they take over the manufacture of coinage, or whatever is being used by it's citizens as money, it becomes debased. Our money has actually disappeared and we are left with what were once referred to as money substitutes, i.e., paper dollar bills redeemable for money, becoming the "money". Our money today is basically reduced to being tokens.

I think it best that money be created privately. Government's role would be to ensure it were not debased in any way and it's value guaranteed.

Something like this?

http://en.wikipedia.org/wiki/Islamic_gold_dinar

[Pliny]

Something like this?

http://en.wikipedia.org/wiki/Islamic_gold_dinar

Or the African Kruggerrand.

Twenty coins could get you a brand new car.

The way to keep government honest is to have honest money.

Honest trade involves a mutual benefit for both sides of a trade.

Paper fiat currencies do not satisfy the contractual obligations of a trade. Paper fiat currencies are a claim on other goods. Everything is fine until the ponzi scheme fails and is finally revealed for what it is. The one left holding the worthless paper currency is the loser.

Just watch what is happening in Greece right now. It is a very important event. Either the European Union will bail them out or it will mark the beginning of a financial collapse. I'm betting they will bail them out but that will inflate the currency causing problems with devaluation. If they don't bail Greece out of their economic mess then watch for civil unrest spreading into other shaky economies.

The entitlements in Greece are too great. Creating the funds, essentially inflating the currency, to fulfill the obligations will devalue the currency. So whatever occurs I think we are witnessing a huge banking crisis.

Governments when they adopted the Keynesian plan and central banking promised no more depressions. Obviously they have failed. What to do at the next recession? We shouldn't even be asking that question. Honest money and proper banking would avoid recessions and depressions.

Edited May 3, 2010 by Pliny

[maple_leafs182]

The Dow was down nearly 1000 points at one point today, I'm warning you guys again, this recession isn't over, government intervention has made it worse, buy silver now.

[M.Dancer]

The Dow was down nearly 1000 points at one point today, I'm warning you guys again, this recession isn't over, government intervention has made it worse, buy silver now.

If it is down, they buy...

Silver is flutuating rather widely as buyers quickly become sellers...

Edited May 6, 2010 by M.Dancer

[bush_cheney2004]

If it is down, they buy...

Silver is flutuating rather widely as buyers quickly become sellers...

Buy on the dips....but keep some powder dry for even more to come. Those Greeks must be really pissed off!!

[Oleg Bach]

My dad watched the begining of the first cracks forming in the old SOVIET UNION. He said the system got so top heavey with a huge government and over extended bureacracy that 10% of the people did the actual work and real wealth creation...while the other 90% formed a parasitic and unsustainable system of uselessness...sounds familiar hugh?

[Bonam]

My dad watched the begining of the first cracks forming in the old SOVIET UNION. He said the system got so top heavey with a huge government and over extended bureacracy that 10% of the people did the actual work and real wealth creation...while the other 90% formed a parasitic and unsustainable system of uselessness...sounds familiar hugh?

Yes that's generally what happens in socialism/communism.