December 17, 2008

Helicopters Take Off

Here is a nice Forbes article that anticipated Bernanke's zero-interest rate announcement. It notes that the Fed meeting was just a way for to signal that his monetary helicopters are flying.

Once the Fed decides to mint money, it doesn't actually have to do anything exotic to push rates negative if it wants. The Fed could start buying back treasuries for higher than face value instead of issuing new debt, as happened organically in the short-term treasury markets recently.

But there is probably a better way to drop cash into the American economy. The trade deficit tells us that there is no fundamental shortage of consumer spending in the U.S., even with the current crazy contraction. The American shortage is in production, manufacturing, infrastructure and business investment.

Here's to hoping that Ben doesn't give $5,000 away to consumers as Forbes anticipates. We are better off sending minted money to industry and infrastructure - it is the difference between giving a man a fish and teaching him to fish.

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