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Geithner undercuts Bernanke's negative-interest rate plan
Howard Richman, 10/22/2010

At the moment, the Federal Reserve is increasing the money supply in order to increase the U.S. inflation rate from about 1% to about 2% while keeping short-term interest rates close to zero in nominal terms. This action is intended to drive real American short-term interest rates further into negative territory so that Americans spend their money (instead of saving it) and so that the dollar weakens (when private savers sell their dollars in order to earn higher interest rates elsewhere).

But Treasury Secretary Geithner just took the upside out of the Federal Reserve's plan, the weakening of the dollar. As a result, the inflation that the Federal Reserve is producing will increase American imports by increasing American demand for imports, and discourage American exports because the inflation will increase American producer costs. As a result of Geithner's action, Bernanke's plan will make the U.S. economic situation worse, not better.

Specifically, Geithner endorsed the Japanese Central Bank's recent decision to buy dollars and the upcoming decision by the European Central Bank to buy dollars. Here is a what Geithner told the Wall Street Journal:

On currencies, Mr. Geithner said, "We would like countries to move toward a set of norms on exchange-rate policy."...

Mr. Geithner divided world currencies into three groups....

In the third group, he put "the major currencies, which are roughly in alignment now," a suggestion that he sees no need for the dollar to sink more than it already has against the euro and yen. Mr. Geithner emphasized that the U.S. is not pursuing a deliberate policy of devaluing the dollar. Earlier this week, speaking in Palo Alto, Calif., he said that no country can "devalue its way to prosperity and competitiveness."

As a result of Geithner's action, Bernanke's inflationary policy will cause America's huge trade deficits to grow, instead of shrink. The United States will continue to experience the persistent depression caused by persistent trade deficits.

My father, son and I would solve the trade deficits by implementing a scaled tariff. Ralph Gomory would implement  import certificates.  But most economists will continue to oppose any any solutions that would work, because in their ivory towers (but not the real world) floating exchange rates balance trade.

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Comment by christian, 10/23/2010:

anyone who takes geithner at his word i.e " the us will not devalue the dollar"   is not worthy of respect concerning financial or economic advice.

Response to this comment by Howard Richman, 10/23/2010:
Geithner is giving the central banks of Japan and Europe his blessing for them to buy dollars. They will make sure that the dollar does not further weaken versus their currencies. They will do so in order to insure that they don't start running trade deficits.

Comment by Adriaan Koreman, 11/4/2010:

The New ‘Das Kapital’.

Too many people believe that FREE MARKET ECONOMY and CAPITALISM is one and the same thing, as opposed by COMMUNISM.

Communism is nothing more than a philosophy originating from a study of the poor living conditions of workers during the industrial revolution.

Capitalism is nothing more than a monetary system originating from the use of gold and later deposit slips for gold as a means of exchange.

But Free Market Economy is a natural way of bringing offer and demand in balance that already existed in the time of barter trade.

Capitalism exploits labour to create added value …. or so Karl Marx said.

But let’s face it ….. The only real existing value in this world is LABOUR! Nothing can be achieved without it. No raw materials can be extracted from the earth without labour …… No food can be produced …… No added value can be created….. No profits can be achieved …… Nothing! On the other hand …… CAPITAL has no real value at all. You can’t eat it. In Mugabe’s Zimbabwe, they burn CAPITAL (paper money) because it is cheaper than firewood!

Contrary to popular believe: Money is TIME! When you earn money, you have given your time in producing something … in rendering a service of some kind … in trading something ….. or whatever ….. and received money for that! This money allows you to buy TIME from somebody else. You can buy a product that someone created with his time … a service ….. you name it. It is always TIME that you buy! Part of the time that you can buy for your money has already been transferred into products. A car waiting to be sold ….. Food in the supermarket …… Tools of some kind …… A house…. But services still to be rendered ….. products not yet created …… are still in their basic form of available TIME! So when unemployment is skyrocketing we should be so happy! There is so much TIME available! What richness! What wealth for a nation! But are we happy with high unemployment?

TIME when it is not consumed loses it’s value. At a rate of 100 % per day. We are used to transfer the time that we are owed into CAPITAL in order to be able to transfer it back into TIME when we want to buy something or invest it. CAPITAL keeps, but TIME doesn’t!

In order to persuade someone to invest his capital he wants interest or profit of 4 % or more or he hangs on to his capital. In order to persuade someone to invest his time in a period of unemployment you can give that person less than what he needs to survive and he will still sell you his time. Something is better than nothing!

And that is how capitalism is able to exploit labour to create added value. By transferring time owed into CAPITAL and only buying time back when it can make a profit, allowing TIME or LABOUR to be completely lost when it is thought that no added value can be created with it. High unemployment, poverty and crises are the flaws of CAPITALISM. Not of the FREE MARKET! Without transferring the time that we are owed into CAPITAL and having to consume that time without too much delay we would still have a FREE MARKET ECONOMY, but we would not have CAPITALISM!

So how can we have a Free Market Economy without the flaws of Capitalism?

Barter trade? Of course not! We live in the 3rd millennium! Even though we still use a money system from the 1st or 2nd millennium! If CAPITAL or MONEY is to be a means of exchange for TIME, then it should have the same property as TIME! Meaning … it should lose value when it is not consumed within a certain period, just as TIME does! But how to achieve that?

Nothing is easier. Let’s look at one possibility: Substitute V(alue) A(dded) T(ax), which is a punishment for transferring labour into added value, by V(alue) D(iminished) T(ax) on money in possession as long as it is not used. A negative interest Tax on money. For that we would have to change cash money into digital money in our bank account. But hey! We pay with pin, credit card, chip, cheque, internet, mobile phone ….. We are in the 3rd millennium! Substituting VAT by VDT will certainly make us all a lot richer. As TIME or LABOUR is the only real value that exists we cannot accept a monetary system like CAPITALISM that allows it to go to waste.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]