Suppose that the present economic crisis is 30% real, 50% media hyped panic and 20% game-playing. What is game playing? If a corporation has long wanted to get rid of some workers this is not easy to do in normal times because a big lay-off would lead to a slump in share price. With the excellent excuse of the credit crunch it now becomes possible to lay off thousands of workers.
Fear of losing a job leads people to curtail their spending, which in turn lead to more job losses in the usual cycle. Stimulating the economy is not that easy. There is the traditional Keynesian approach of building bridges and roads. The government puts money into things that would eventually be needed anyway, and in doing so pays extra wages as a way of injecting money into the domestic economy.
Raising interest rates in the Friedman response to inflation does work reasonably well. This does not imply that the opposite will work. Does reducing interest rates to zero actually stimulate the economy. At such interest rates there is little motivation for banks to lend even if they can acquire funds more cheaply.
In any case in the Eurozone interest rates are set by the Central Bank and not by each country. There was inflation in Ireland but they could not raise the interest rate. So the means of adjusting the local economy are limited and perhaps ineffectual. What are the levers for adjusting the local economy?
Bailing out banks and putting money into specific sectors, as the US is currently doing, is very much a band-aid approach. Perhaps there is a need for something more fundamental.
What I am going to suggest here is a sort of reverse taxation – not a lessening of tax but a reverse taxation.
We can fix the present economic crisis by using ‘fics’ (pronounced as ‘fix’). These are Functional Internal Currencies.
Unlike the trend towards globalisation with the Eurozone, dollar zone etc. we take the opposite direction of localisation. A ‘fic’ operates only within one specified country.
The exchange rate between a fic and the regular curency is managed on a weekly or even daily basis.
We could start with a ‘spending currency’, which we can call ‘the bon’. You can buy two bons with one pound. When you come to spend your bons they are equal to one pound each. The retailer eventually exchanges bons for pounds: one for one. So the government is directly subsidising spending. The public cannot exchange bons back into pounds. Furthermore the bons are dated so they have to be spent within a certain period.
There is room for manoeuvre at various points. The exchange rate is managed and controlled. The amount of bons issued in a week can be limited. At retail level only half the retail price could be paid in bons – or another ratio. There is danger of simply replacing normal spending with the bon instead of actually stimulating spending.
There is a great deal of flexibility in the way the bon could be controlled. It provides a new lever for managing local economies. I believe something of the sort was suggested in the 1930 depression.
Other fics could include the following. A saving currrency to encourage people to save – perhaps with an inbuilt interest factor. There could also be an investment currency to make investing more attractive. There might even be a property currency to control the wild variations in the property market that so damage the rest of the economy.
This is an area, which needs a great deal of thinking. I believe that something of the sort is inevitable for a more effective way of managing the economy.