How to Make the Obama Stimulus Plan Work

The fundamental problem in the US economy today is that the amount of money in the United States has declined due to the enormous write-offs taken by financial institutions. As money has been lost from the economy all money still in existence has increased in value. When money increases in value in an economy certain things have to happen.

People will slow their pending so consumer spending will decline. Asset prices must decline to reflect the gain in money’s overall value. The prices of goods and services must decline to reflect money’s gain in value. Borrowing will decline as only fools or desperate people borrow money that is gaining in value. All of which causes unemployment to rise as businesses cut back due to a decline in sales and overall economic growth must decline under such circumstances.

To make a stimulus plan that will work under such circumstances the plan must address the fundamental problem – the loss of money in the economy which has caused money itself to gain in value. One way to address this problem is to cut taxes and so far the stimulus plan talked about by Congress and President Obama does have tax cuts in it. Tax cuts help because when money gains in value it becomes much harder and more onerous for people and businesses to pay taxes. Instead of paying the same dollar amount in taxes as last year people and businesses are really paying higher taxes today because the money they are paying to the government has increased in value since last year.

The second way to address the fundamental problem effecting our economy has to do with how the stimulus package will be funded. If Congress authorizes the Treasury Department to borrow the money to pay for the stimulus package the effect will be negligible on the US economy. Why? Because when the Treasury Department goes into the marketplace and borrows money they are borrowing money that already exists. Doing so creates no new money in the economy so it does not address the loss of money in the economy that is the root cause of all the problems.

There is a simple solution to this though. The Federal Reserve is authorized to create new money. In fact the Federal Reserve Act states that the Federal Reserve exists “to create an elastic currency”. In other words the Federal Reserve was created to address just what the US economy is facing today. When money is lost from our economy the Federal Reserve is supposed to replace the lost money and keep our currency elastic. When money is lost from an economy the currency becomes inelastic.

So to make a stimulus package that will work Congress should force the Federal Reserve to pay for it or to buy all the securities the Treasury Department will issue for the stimulus package. In this way new money to replace the lost money will start flowing into the economy and the gain in value our money has experienced can be diminished or eliminated. Once the gain in money’s value is gone people will start spending money again at normal levels, asset prices will stop declining and start rising again, wholesale prices will stop falling and people and businesses will start borrowing money again. All of which will cause our economy to start growing again and cause unemployment levels to decline.

The key to making any stimulus package work under the current economic conditions our country currently faces is to address the fundamental problem facing our economy – the loss of money causing money to rise in value. Tax cuts and forcing the Federal Reserve to pay for the stimulus package both address this key problem.