This is not a wild, untested idea. Borrowing interest-free from its central bank was done by Canada from 1939 to 1974, by France from 1946 to 1973, and by Australia and New Zealand in the first half of the 20th century, to excellent effect and without creating price inflation.
5. Decommission some portion of the military. When past costs are factored in, nearly half the federal budget goes to the military. The data speaks for itself. I wrote about it here.
6. Debt forgiveness. Economists Michael Hudson and Steve Keen maintain that the only way out of debt deflation is debt forgiveness. That could be achieved by the Fed by buying up $2 trillion in student debt and other asset-back securities and either ripping them up or refinancing the debts interest-free or at very low interest. If the banks can borrow at 0.25%, why not the people?
7. Publicly-owned state and local banks. Municipal governments are facing cliffs of their own. Ann Larson, writing in Dissent Magazine, blames predatory Wall Street lending practices, which have inflicted deep and growing suffering on communities across the country.
Predatory Wall Street practices can be avoided by establishing publicly-owned state and local banks, which leverage the public's funds for the benefit of the public. The profits are returned as dividends to the local government. German researcher Margrit Kennedy calculates that a whopping 40% of the cost of public projects, on average, goes to interest. Publicly-owned banks slash borrowing costs by returning this interest to the government, along with many other advantages, detailed here.
Unshackle the Hostages and Let the Good Times Roll
The fiscal cliff has been said to be holding Congress hostage to conservative demands, but the real hostages are the debt slaves of our financial system. The demand for "fiscal responsibility" has been used as an excuse to impose radical austerity measures on the people, measures that benefit the 1% while locking the 99% in debt.
The government did not demand fiscal responsibility of the failed financial sector. Rather, Congress lavished hundreds of billions of dollars on it, and the Fed lavished trillions more. No evident harm from these measures befell the economy, which has fared better than the austerity-strapped EU countries. Another couple of trillion dollars poured directly into the real, productive economy could give it a serious boost.
According to the Fed's figures, as of July 2010, the money supply was actually $4 trillion LESS than in 2008 . ( The shrinkage was in the shadow banking system formerly reported as M3.) That means $4 trillion could be added back into the money supply before general price inflation would be a problem.
The self-induced austerity crisis is a diversion from the real crises, including unemployment, the housing crisis, a bloated military, and unrepayable debt. Slashing services, selling off public assets, and raising taxes won't cure these ills. To maintain a sustainable and productive economy requires a visionary leap into the new. A new economy needs new methods of public financing.
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