Alternative to QE? The Lehman Bros. Plan.
The plan for US government would rely on competition and the free market, not quantitative easing and regulations. The financial firm Lehman Brothers was allowed to fail, the American people should be, too.
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First, under deflation, the prices of capital goods fall dramatically. This initially happens with stock prices plunging, but eventually the prices of office buildings, warehouses, retail stores, etc., also fall.Skip to next paragraph
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Second, the price of labor will fall as the unemployment rate rises. Wage rates are somewhat "sticky" compared to stock prices and leasing rates for commercial space, but they do tend to fall in real terms if they are not propped up by government intervention and unemployment insurance.
Third, the prices of consumer goods will also fall — but not as much. The demand for "nondiscretionary" consumer goods is not elastic. Things like milk, flour, tobacco, electricity, daycare, and iPhone apps have what economists call "income-inelastic demand" because we don't change the amount we buy either when our incomes increase or decrease. In the past, for example, the quantity demanded of margarine has actually increased when our incomes go down.
This means that in the deflationary-corrective process, the prices of land, capital goods, commodities, and labor are falling relative to consumer goods. This provides potential profit opportunities for entrepreneurs to purchase these greatly depreciated resources in order to make products to sell to the consumer. In other words, the deflationary process is more like a shock absorber than the black hole imagined by mainstream economists.
Not only do profit opportunities emerge, but wage-labor opportunities are scarcer and less attractive. Both influences encourage entrepreneurial behavior, and this is a key factor in any corrective recovery process.
Following the Lehman Bros. plan will result in a contraction in bubble-generated activities and an expansion of consumer-generated activities. Saving will expand relative to consumption. The largest firms will shrink or go out of business, while smaller firms will expand to capture remaining market share. New firms will be started to take advantage of profit opportunities — and to respond to the lack of employment opportunities. It is a well-known fact that small firms create the bulk of new jobs — however, what is not as well-known is that new small firms create the most jobs of all.
Remember that during the minidepression of 1980–82, Paul Volcker raised the federal-funds rate to 20 percent, ending the stagflation of the 1970s and ushering in one of the most prosperous periods in American history. This period also provided an economic environment rich with cheap resources that Microsoft took advantage of to become a huge success in the PC-software market. Note too that the dot-com meltdown provided the same environment for Google to take advantage of in order to become the king of the search market.
The Bernanke/Bush/Obama approach results in nothing but misery and mounting government debt. The Lehman Bros. plan rebalances the scales between the fat-cat, "too big to fail" corporations and the entrepreneurs who will help shape our future.
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