The (lack of) sales phenomenon, however, is only a "leading indicator" of what's coming. Given the way U.S. companies have been pouring money into Wall Street instead of investing in new and replacement agricultural, industrial, and commercial capital, we can expect the price level to start rising in response to this increase in demand-pull inflation. Contrary to Mr. Bernanke's assertions and beliefs, we already have inflation, but it is in the failure of consumer prices to fall as a result of inflation rather than in a rise in prices that we see the effect. Without the excessive government spending, we would be seeing a rapid decline in the price level. Instead,
1. The last three weeks have seen reports that U.S. companies have an estimated $1 trillion in cash that they plan on using to "go private," i.e., purchasing their own shares on the secondary market. This will drive up the prices of those shares, and tend to pull other share values along with them.The misdirection of the supply of loanable funds — a virtual dogma dictated by the reliance of the three mainstream schools of economics on the disproved tenets of the Currency School of finance — means that new and replacement capital will not be financed. This will decrease supply by reducing production of marketable goods and services, of which food is primary — "The farmer is the one who feeds them all." The general price level will rise in response.
2. Financial institutions have been using "excess reserves" not to make new loans to business for new or replacement capital, but to invest in secondary securities, thereby driving up the price level on Wall Street. Incidentally, this was similar to what caused the "Panic of 1907" and contributed to the 1929 Crash: the combination of commercial and investment banking, the separation of which was tossed aside with the full repeal of Glass-Steagall.
3. The federal government and the Federal Reserve have announced that they plan on pumping $600 billion into the economy as a stimulus. Per 1 & 2 above, this will not be used to create jobs by investing in new and replacement capital, but — as was the case in 1928/29, will be put into the stock market since a greater ROI is expected from speculation as opposed to investment.
Further, a rise in the price level in one area, notably the secondary market for debt and equity instruments, raises expectations that the price level in other areas, e.g., food, will increase. As Costantino Bresciani-Turroni noted in his study of the hyperinflation in Germany 1919-1923 (The Economics of Inflation: A Study of Currency Depreciation in Post-War Germany, 1931), this can — and frequently does — result in rapid rises in the price level, exacerbated by producers raising prices faster than the currency can be inflated out of anticipation. This generates enormous profits for financial institutions and producers with supplies on hand, to the detriment of consumers whose money will not buy as much as formerly. These profits can be multiplied by speculation in foreign exchange when the domestic currency is fluctuating in value relative to other currencies, as well as by taking advantage of the rising stock market. (pp. 286-333.)
Fortunately, there is a simple solution, although one could hardly call it easy. The primary reform that must be accomplished is to return the commercial and central banking system to its proper function of providing the private sector with sufficient liquidity in the form of an "elastic" and stable currency sufficient to meet the needs of agriculture, commerce, and industry, and cut the government off from the ability to raise money except through taxation or by borrowing out of existing accumulations of savings.
This was the orientation of Dr. Harold G. Moulton, president of the Brookings Institution from 1916 to 1952, with specifics detailed in his 1935 "contra-New Deal" study, The Formation of Capital — the third volume in a series investigating the causes of and possible remedies for the Great Depression (the others being America's Capacity to Produce, 1934, America's Capacity to Consume, 1934, and Income and Economic Progress, 1935).
Louis O. Kelso and Mortimer J. Adler refined Moulton's analysis in the two books they co-authored, The Capitalist Manifesto (1958) and The New Capitalists (1961). The subtitle of the latter is significant, embodying the chief point in Moulton's analysis of the U.S. financial system: "A Proposal to Free Economic Growth from the Slavery of [Past] Savings."
What Kelso and Adler added was the proviso that the financing for new capital formation must not only come from the expansion of commercial bank credit and not from reductions in consumption (Moulton's point), but should be broadly and directly owned by people who will use the income generated by the new capital first to repay the acquisition loan and later as a "second income" to meet consumption needs, not reinvestment in additional new capital. This would keep consumer prices (e.g., food) low, even decrease them, but without harming the profitability of the new capital or starve the private sector of the supply of loanable funds. The economy would experience not deflation of the currency — insufficient money and credit — but appreciation: each unit of currency would buy more because more is produced and the currency is not artificially inflated.
The Center for Economic and Social Justice ("CESJ") has developed a proposed application of Kelso and Adler's ideas called "Capital Homesteading," a national program to empower each individual to acquire capital on credit without risking existing savings or cutting consumption. We estimate that a child born under Capital Homesteading could accumulate an estimated $500 thousand of capital from birth to age 65, and enjoy $1.6 million in dividend income after debt service during that period. Recommended tax reforms would result in a "typical" family of four paying no income taxes until aggregate income exceeded $100,000.