I just came across a really different view of economics.

The Federal Reserve had the freedom to lower the Fed Funds rate all the way down to 1% in 2004, and while observers expected this would finally cause inflation, it still did not. Relatively few economists were particularly curious about why that might be, since the rate was still above zero, and the possibility of rates at zero did not seem realistic. Japan had lowered its own rate to zero, and still struggled with deflation. But since Japan has lower birth and immigration rates than the US, this explanation was deemed sufficient and Japan was not seen as an indicator of a broader phenomenon that could also emerge in the US.

As the economy strengthened, The Federal Reserve, expecting inflation, steadily increased the 1% Fed Funds rate all the way up to 5.5% by 2007, only to find that this was too high and that the housing market, and with it the entire economy, was weakening precipitously. The Fed reacted with a rapid reversal of rates all the way down to not just the 1% of 2003-04, but to nearly 0%. However, to the surprise of observers, even 0% was not enough to create inflation, so they began a form of monetary expansion known as ‘Quantitative Easing’ (QE). QE was designed to simulate the conditions of negative rates without deposits actually being docked an interest charge by banks. Some liken QE to ‘money-printing’, but that is not quite accurate, as the impact of each dollar can vary based on the method of QE.

Effectively, the Federal Reserve embarked on a campaign to expand the monetary supply via a process of asset purchases. They would buy bonds, and hold the bonds on the balance sheet, with the implied understanding that the bonds would be ‘sold’ into the open market at some future time. By purchasing bonds, the Federal Reserve lowers interest rates even for longer-term loans, which would make borrowing attractive for consumers and corporations. The Federal Reserve thought that the first program of QE would be the only one, but when equities could not sustain any gains after the conclusion of the easing program, economic indicators weakened. In response, the Fed had to embark on a second program, calling in QE2. When the conclusion of QE2 promptly led to yet another major equity correction, a third bout, QE3, was ramped up. As of early 2016, there is still an assumption that QE3 is the final round of expansion that the Federal Reserve will do, and that even the Fed Funds rate can be increased and kept above zero. This will most certainly not be the case.

Why? Rising rates of technological advance are causing deflation.

As a recent economics article put it: Is The Fed Helping Robots Find Jobs? Yes it is. And it is a good thing because it helps reduce the cost of a given amount of output. At an accelerating rate. We have already done this with farming. Industry is well on the way. So what is a feller to do? Become an entrepreneur. Design new products. Like my recent Flash-Light project.

And then we come to politics. Let us have a look at what is wrong with current politics?

Democrats talk about providing a greater safety net, a ‘living wage’, and greater ‘equality’, yet do not see the most effective path to these goals. They do not quantify a threshold that meets the standard of a ‘living wage’, after which success can be declared. Accordingly, they keep devising new ways of taxing the most productive people, thus reducing the total productivity of the economy. This strategy is well past the point of maximum tax revenue because tax complexity ensures that any tax increase falls more on upper-middle-class people than the ultra-wealthy and their many avenues of legal tax avoidance that confer immunity to any increases in ‘retail’ tax rates. A tax increase thus accomplishes little except build a moat around the ultra-wealthy, ensuring that members of the upper-middle-class cannot join their ranks. A cynic might conclude that this is deliberate protectionism for the ultra-wealthy, but I do not believe that was the original objective.

And Democrats are not the only problem.

Republicans are equally infected with outdated ideas. The GOP dithers about lower taxes and more favorable policies for small business, but is oblivious to easier methods to accomplish this. While some people are more talented and harder working than others and should not be penalized for their productivity, it is simultaneously true that money created by the Federal Reserve accumulates in very few hands, thus making it very different from wealth creation via entrepreneurship. Furthermore, tax complexity wastes as much as 20% of all tax revenue just in compliance and auditing. Yet Republicans are not pushing for tax simplification, even though that would effectively be a larger and deeper supply-side stimulus than the tax cuts they propose.

One faction of Republicans are against QE by the Federal Reserve under the belief that this will someday, somewhere cause inflation that has not yet appeared for several years and counting. While that would have been true in the 20th century, it is no longer true in the ATOM age, for reasons discussed earlier. There is still a vocal but shrinking clique of individuals who think hyperinflation is imminent, and a return to the gold standard is necessary. $16T of central bank action over seven years, with another $200B/month being added to that as of early 2016, has not vindicated this expectation. We can safely declare that the burden of proving that inflation is inevitable is now theirs to bear.

So what does that leave us with? Well I hate to say it because I hate Nixon with a purple passion. But his idea of a guaranteed minimum wage is the least distorting economic policy. In that regard it might also be a good idea to take away the control of the economy from the bankers. Their main interest (heh) is the banks. And banks throttle economies because they favor the INs over the OUTs. A very bad idea when we have accelerating exponential technological advances. Well we could have more of those advances if the bankers weren’t strangling the economy.

So the short version of all this? Accelerating technological advances are causing continuous deflation. And what did Milton Friedman teach us about deflation? You need to inject money into the economy to counter it. If the deflation is temporary and short term the monetary injection should be temporary and short term. If the deflation is continuous, accelerating and long term the monetary injections should be continuous, accelerating and long term. And that money injection could be debt free if governments instead of bankers did the injecting. Yes. There is a moral hazard. But bankers are a moral hazard too. And they collect interest on the privilege.