Reflate the Economy - Now

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Reflate the Economy - Now
by Ben Stein
Posted on Monday, November 17, 2008, 12:00AM

Herewith a few thoughts about the economy, public policy and retirement.

First, a note to the mighty international powers convening at the White House for the G-20 Summit to consider the world economic and finance slowdown. In this situation where aggregate demand is collapsing and where credit is desperately tight almost everywhere, the future dangers facing us are all on the deflationary side.

That means there is virtually — for all practical purposes -no limit to how stimulative fiscal and monetary policy can and should be. The dangers of inflation at this point are extremely modest. There is a worldwide commodities debacle. There is almost no new corporate financing. Even mighty China is slowing hour by hour. Inflation is not a present danger.

In this situation, the governments that care about their citizens should and must have extremely expansive policies. That would include running very large deficits — which we are doing, not even mentioning tax hikes until the situation is stabilized, and possibly cutting taxes as a temporary measure. Public works projects, tax rebates, even to people who paid no taxes, extensions of unemployment insurance payments — all of these are necessary. Bailing out the big auto companies, offering loan guarantees to encourage banks to lend, making sure lending facilities are in place for credit card issuers - all of these should be done and immediately.

Obviously, this is also a time for extreme monetary growth. As we economists would say, the velocity of money — that is, how often it changes hands — is falling rapidly. This means the Federal Reserve can pump up the quantity of money greatly to offset that fall without fear of inflation. There are the usual "pushing on a string" limits to how well this will work but it must be attempted.

The real issue choking the economy now is lack of lending and fear by the banks and other lenders. This must be met by explicit solvency guarantees from the central banks. There should be no pussyfooting around this. It's a matter of extreme urgency.

The sums involved will be substantial, but tiny compared with the losses to the world if we slide into a world wide depression. I offer as an example that it might have cost the government about $30 billion to $60 billion to save Lehman. That was deemed too expensive. The losses to the U.S. from the panic caused by that blunder are on the order of $4 trillion to $ 5 trillion. This is what is at stake if we do not spend the hundreds of billions and maybe a trillion or more to reflate the economy now.

Mr. Obama clearly has a better idea about this than Mr. Bush, who is dragging his feet about Detroit and other aspects of reflation. I hate to say it, but I think we are lucky Mr. Obama won the election. Of course, time will tell.

I desperately hope I am wrong and I may well be, but the government has to put in a bottom here. Otherwise, the bottom is very hard to see. Again, I hope very much I am being too pessimistic.

Secondly, the broad stock market is now at levels it hit roughly ten years ago on the Dow Jones Industrials Average and the S&P 500. This means something horrifying. If there are to be no long term gains in stocks, the retirement projections of almost everyone are simply demolished. Unless a pre-retiree is terribly lucky, he or she cannot count on meaningful gains in stocks. Obviously, the interest on bonds is modest and aside from Treasuries, they have been hit hard as well.

If workers can only rely on dividend and interest income and not on long-term capital gains of 8% or 9% per annum, pre-retirees have to save enormously more than they had anticipated to adequately fund their retirement. This is serious business.

Again, I hope I am wrong. Historically, stocks have major recoveries after falling as low as they have in recent months compared with the 15-year moving average of stock prices. This is what my pal Phil DeMuth, of Conservative Wealth Management, tells me, and he is a super smart fellow. But I would also consult my pal Ray Lucia, who requires his clients to have a very large amount of cash or short-term Treasuries to get through long difficult stretches. Ray's advice has turned out to be spectacularly sensible. But, again, if we have a lot of low return cash and low return stocks and low return bonds, we have to save much more than we thought we did three or even two years ago.

This makes reflation even more desperately needed. I hope Mr. Bush will wake up, stop listening to Dr. Evil, his Treasury Secretary, Henry Paulson, and work with President-Elect Obama to get a large, serious stimulation package into the economic bloodstream pronto.

This is getting ugly.