The Daily Cow

The dollar is appreciating relative to other major world currencies; the Federal Reserve lowered interest rates to 1%; the government coffers are full--of debt notes; and a looming recession is calling out the name of Deflation. So what do we do?

Print more money. The lost decade in Japan had several symptoms that became causes in an intense negative-feedback loop--deflation, lack of credit, for example. Let's not let America suffer the same fate: as people become more weary of spending money, a single dollar moves through fewer people per year (smaller money velocity). That puts a severe downward pressure on price level, which decreases confidence and discourages investment.

So, to our federal government, let's try something completely against intuition: print money--500 billion dollars this year, mostly to buy up Mortgage Backed Securities and banks; and 500 billion dollars a year until inflation is projected to be back at the normal 2-3%/year rate. And as higher inflation is projected, collect and burn cash. A flexible money supply is what we need.

With more money to go around, there will be more investment and credit to spread around. As the increased supply of Dollars pushes down its value relative to other major world currencies, American exports will be cheaper abroad, stimulating that sector of our economy.