Monetize This! A better way to fund the stimulus package

The usual objection to funding the government with credits drawn on its own central bank is that the result would be inflationary.  However, the scenario most feared today is actually deflation – a lack of available dollars to fuel the economy.  Asset values have collapsed, and savings have collapsed along with them.  People with only half as much money in their brokerage accounts have less to spend; people whose houses have plummeted in value cannot take out consumer loans against equity as was done in the boom years.  Funding a "stimulus" package with existing money that is merely recycled through the banking system as loans will not stimulate the economy but will only add to the problem, by adding to the collective burden to service debt.  Money that should have gone into more productive endeavors will wind up going into interest payments.  To bolster demand and stimulate production, recovery requires an infusion of new dollars – dollars that can be used to pay wages and salaries, which can then be used to buy goods and services. 

In any case, adding new money to the money supply will not inflate prices if the money is used in the production of new goods and services.  Price inflation results only when "demand" (dollars) exceeds "supply" (goods and services).  If the new dollars are used to create new goods and services, demand and supply will rise together and prices will remain stable.  If the goods being produced are income-generating assets – railroads, bridges, alternative energy sources, low-cost housing, medical services – so much the better.  The projects can be "monetized" in the same way that banks monetize mortgages – by entering them as assets on one side of their books and as liabilities on the other.  The funds received from the central bank can then be repaid to the central bank from the income the assets produce, extinguishing the debt and avoiding inflation.  Ideally, the projects would actually turn a profit, generating income for the government and reducing the tax burden on the public. 

The bottom line is that we cannot borrow our way out of debt.  Only new money will stimulate a debt-ridden economy – money that is interest-free and does not have to be paid back.  The direct road to that result would have been to nationalize the Federal Reserve and return the power to create money to Congress; but as Wright Patman found, that solution is controversial and could be a difficult piece of legislation to get passed.  In the meantime, the same result can be achieved by tapping into the government's nearly-interest-free credit line at the Federal Reserve.  Nearly-interest-free loans of accounting-entry money that never has to be paid back are a source of debt-free liquidity that can be used to fund projects that put people back to work, without increasing the interest burden on the government or the tax burden on the public.

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