Ending the Next Depression

Update: The circus has apparently begun.

There are many strategies that can be deployed to prevent the next recession from becoming a Depression. But as I noted in my post about Ben Bernanke, the aim in these cases is to reduce liquidity.

Bernanke errs in thinking the next Depression will need more liquidity, which is what the last one needed. This will have the opposite cause, and will thus need the opposite cure. In fact, if we had that 1931 Federal Reserve Board things might work out OK. But we don’t.

Remember, the big enemy this time is inflation, caused by an enormous number of "Eurodollars" and bonds held in foreign hands. You don’t solve that problem by printing money. You solve it by convincing people you will, given time, make good on your debts, by getting them to hold on to the money they have.

So:

1. Cut the military budget. Get out of the occupation business. Get out of the "force projection" business. Concentrate on small, quick operations with limited goals and true national defense. Save hundreds of billions there.
2. Cut business subsidies. This is the fastest way to new free trade agreements. It also saves money.
3. Bring back the Clinton tax system. Cancelling the Bush tax cuts and re-instituting the Clinton rates is not going to kill an economy that’s already dead. You need a glide path which leads to surpluses again.
4. Buy Latin America. The dollar’s still worth something there. These are going to be fast-growing markets. Reducing our military projection will help here, but we need to treat these economies as equals in order to fend off competition from China. It won’t be easy, but it can be done. This will also cut immigration.
5. Education and Research. This is where our limited government money must go. Big projects (in conjunction with allies), university research, and K-12 education will all pay big dividends. Everyone needs fiber to the home, but that needs to be a utility, which sells bits to all service providers on an equal basis. (The Internet is your Interstate Highway System.) Split the Bells between provisioning and services, or let them fail. Their choice.
6. Economic Nationalism. Stop supporting the export of jobs with subsidies to companies that do it. Those who don’t live here do not deserve our protection.
7. Use the Bully Pulpit. People need to know that you’re trying things, that you’re doing something, that you’re on their side.

Reducing our gross dollar liquidity will not be easy, but it’s
important to change the trend. Allowing the gradual conversion of much of that
float into Euros, Yen and Renminbi will mean a falling dollar, which
helps exports.

People will demand action, but most of these policy changes need to be
gradual in order to be effective. A sudden economic nationalism means
lower trade, which we don’t want, for instance. Lower military spending
and less spending on subsidies hurts the industries effected.

A lot of what needs to happen is going to be for show. Pride in
American manufacturing, and in American-based companies, costs little
but can pack a punch. A bully pulpit for American research costs
nothing, but can be of enormous benefit.

The next recession is going to be nasty. Real estate is going to go way
down, earnings will fall, the dollar will be at risk of collapse. Smart
investors are already geographically diverse.  That means you should already have a substantial part of your assets in countries that use other currencies — Yen, Euro, whatever.

After the fall I’d buy tech, if the
right policies were in place, especially moderately-sized companies
(but diversify those holdings because some will fail). Commodity prices
will fall in any downturn, although I have long recommended keeping a
floor under energy prices so we can work on alternative sources.

It’s going to be a bumpy ride, and I don’t expect the present
government to be able to handle any of it. But I have a lot of faith in
the American people, if they’re called on rationally, to sacrifice for
something that will yield benefits to ourselves and our children.