Wednesday, October 14, 2009

How To End the Recession: Print Money

Four of the US currency bills, courtesy of the U.S. TreasuryThe recession is retreating, but most analysts suggest that lingering unemployment and other results of the downturn will take years to work their way out as the economy rebounds. I have a simple, one-step solution to this problem: print new money. (more...)

Printing money in order to get out of a financial hardship is a fairly well-understood mistake. Typically, it harms the economy by devaluing the currency because it's not tied to any actual increase in the financial output of the country. If printing new money could somehow be attached to an uptick in consumer spending, then it would actually improve the state of the economy. In order to make such a connection, you would have to print money that practically screamed "spend me!" But as analysts of previous financial stimulus efforts have found, people catch on fast, and just invest the money that they get. Plus, there's the ill will that stems from previous stimulus plans being taxed on the back-end.

This idea suffers from none of those problems. Simply print up new money and people will spend more of it. Why? Well, there's an apocryphal story of the person who convinced a major toothpaste brand to give him a cut of the windfall if he could devise a simple strategy to double profits. Disbelieving, the company agreed and the person suggested doubling the size of the tube opening, which of course, resulted in people using the tube up twice as fast, and did double profits. The story appears to be one of those fiction-mixed-with-historical fact items, but it illustrates an important fact: consumers are often gated from spending by physical limitations. Remove those limitations and spending will increase.

So, how do we increase the nozzle size of the US economy? Well, let's look at the bills we produce. Right now, we print a $1, $2, $5, $10, $20, $50 and $100 bill (I'm ignoring anything larger for now). Now, it's been said before that the $1 is outdated, and that the $2 or $5 bills should be our smallest currency. That's not something I think is needed, but it brings up the question of what happens to these bills as prices increase. When I was a child, the $10 bill was the currency most often exchanged for day-to-day services. Over time, that has become the $20 bill. In fact, today you would be hard pressed to find a bank machine that produces anything but $20 bills.

But is the $20 bill the right unit? Today, I'd say no. I think we've passed the point where $20 fits well with the goods and services that one uses paper money for on a routine basis. So, where should it go? Certainly doubling the size of the bill to $40 would spur spending, but it's not terribly practical to go from $10 to $40 to $50. I also think that such a large bill would present problems to vendors and a strong incentive to counterfeiters (who don't make $50 bills for the most part, because they're not accepted widely enough, and are subjected to more scrutiny where they are accepted).

The $25 bill
No, I think the right thing to do is to look to coinage. The 1, 5, 10, 25 and 50 cent pieces work well together, and no one gets confused when presented with a quarter. So, what would a $25 note do for our currency and economy? Well, certainly the change is subtle. $5 difference isn't a lot, but then that's part of why it would be a powerful change. Going from $20 to $25 doesn't leave one with the sense that they're carrying around much more money, and yet it immediately makes $21-$25 purchases seem much smaller. Will it increase spending by 25%? Probably not, but we could hope that it will give a moderate boost to spending that will help to accelerate economic recovery.

Some notable side effects would be the need to change a number of electronic devices that provide or accept $20 bills. This alone would employ thousands of people, much the way the Y2K scare required thousands of programmers to be hired to re-tool software in the nations largest companies.

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