Quote from Ghost of Cutten:
So, what's to be done? A few things spring to mind:
1) there must be a 'hard' peacetime cap on total government debt ratios
2) budget deficits, at least during periods of economic growth, should have strict limits or even be outlawed altogether (balanced budget amendment). Greece's disaster would have been prevented by this alone.
3) there must be a regulatory mechanism to address the problem of credit bubbles, and the inherent put/public backstop to the financial system. The current regulations are clearly inadequate. The Austrian liquidation approach is clearly politically unfeasible, no serving politician will let a 1932 moment happen willingly, and the occasional Ron Paul naive enough to try will be ejected from office faster than PASOK or Fianna Fail were. To avoid excessive stagnation via burdensome regulation, perhaps there could be two classes of bank, with only the more regulated and conseratively run banks getting any deposit insurance and implicit government backstop.
4) public sector pay must be linked to tax revenues and/or GDP, again by a systematic formula so politicians don't succumb to short-term pressures to grab votes at the expense of the system and the greater good. When the private sector has been crushed, maintaining let alone increasing public pay is irrational and harmful.
That's all well and good, except it misstates the fundamental nature of the problem. Our monetary system doesn't lack regulation. It lacks the will to use it. Regulators are corrupted by the very industry they're charged to regulate. That's why Ron Paul's solution - complete deregulation - is anything but naive or simplistic. It's genius. Remove the honey pot in the form of fiat money, a central bank, and voluminous regulations, and corporate leverage over the economy, finance and welfare evaporates overnight. This is a good thing. All your ideas are great. Except even if they were passed, they'd be changed, tinkered, twisted, and eventually perverted into something that looks nothing like what you wrote above. The only solution is to remove the regulatory authority from Government, and let the free market police itself, which it does quite nicely. Save that, only a constitutional amendment that includes exhaustive and strict GDP, CPI, M3, and other economic definitions and the required actions to remedy in such and such a case, would suffice. That won't happen. Constitutionally, the Federal Government has no authority to regulate all this crap anyway, so perhaps we ought to start there?
I would also add that the primary reason we have economic stagnation is the massive overhang of bad debt in the system. The carrying cost on the debt is like a gigantic parasite attached to the economy's neck that siphons precious capital off every year, in the form of interest payments, that would otherwise be used towards productive endeavors like investment and consumption. This is the natural course of things. Credit excesses are purged through default, restructuring, deflating prices, which allows the redistribution of assets from weak hands to strong hands, at cheap prices, who make better and more productive use of capital assets. This is the way it's always worked. And it's the way it will always continue to work. Economics is an old science, and it's fixed. There is no financial alchemy here. It's impossible. When we get down to brass tax, total US credit market debt is 60 trillion dollars. At an average IR of ~3%, that's 1.8 Trillion dollars a year (12% GDP) that goes to service debt interest (public, private, corporate). That's a lot. That number needs to come down substantially, and in doing so, yes, hard asset prices will depreciate, and states and munis will go bankrupt. This needs to happen, too. Bankruptcies and recessions force restructuring, and the economy needs to undergo that, however painful. The alternative is to print money endlessly to postpone the day of reckoning, until we get a run on the dollar. The idea here is that somehow we can live beyond our means, with no consideration of reality, forever. The result would be far worse than any Depression we face in the near term. And the Great D red herring is just that. The Great Depression was prolonged by about 10 years because the Fed refused to lend out it's massive gold reserves to commercial banks to reflate the money supply. Bernacke admitted as much. We would endure a Depression, but it would last only around 2 years. Possibly a ~20% contraction tho... hehe. What can we do? We're between a rock and a hard place, here. Save some revolutionary, breakthrough technology, like free energy, teleportation, or something of that nature, the jobs are gone. The economy is structurally deficient and is propped up by a debt mirage. Sure, we can wait until household balance sheets are net positive again, but that might much longer than America can borrow?
