There has been a great deal of frustration with the failure of the economy to pick up momentum in the face of ultra-low interest rates and quantitative easing. I am going to suggest some measures that could be considered in the event growth continues to be sluggish or even negative. I anticipate substantial adverse reaction to some of these proposals but they are being floated because the danger of deflation and a self-reinforcing downward spiral in the economy is so serious that drastic therapy may be required to save the patient.
- Longer Term Treasury Bonds - At present, the longest term Treasury bond is 30 years. There is really nothing magic about this upper limit; other countries and some corporations issue bonds for much longer terms - in some cases, as long as 100 years. If the appetite for Treasury securities is so strong, it is likely that there would be a robust market for 50, 75 and 100 year Treasury bonds. Of course, this would involve an initial decision by the Treasury to issue such bonds coordinated with a Federal Reserve willingness to support the market for them, if necessary. The Federal Reserve could utilize a variant of Operation Twist to acquire such bonds and reduce the interest rate they bore. The long term nature of these securities could reduce some of the anxiety about "paying back the national debt" and could actually allow the Treasury to reduce the national debt in the future by buying back bonds in the open market at a discount in the event that interest rates increase.
- Consols - The next logical step after markets accept longer term bonds would be for the Treasury to issue consols - perpetual bonds with no maturity date. The British government successfully issued consols in the 19th century and they are described in the writings of Dickens and Galsworthy. A very small part of the value of a long term bond is the discounted present value of being paid off at maturity so that a consol is not really a big step from a 100 year bond. Again, concern about the national debt and having to "pay it back" might be alleviated. Again, the Treasury would have to decide to issue consols in the first instance. If the Federal Reserve owned consols issued by the Treasury, it would be fairly easy to demonstrate that repayment of the debt is not a pressing concern.
- Buying the Treasury Gold Reserves - The Federal Government has more than $250 billion worth of gold (sometimes described as the "gold in Fort Knox"). The Federal Reserve could make this amount of money available to the Treasury in exchange for the gold and the funds could be used to offset expenses without increasing the national debt and incurring issues associated with the "debt ceiling." The gold would not be moved; the Federal Reserve could pay the Treasury a storage fee and simply hold the gold in place. Essentially, all that would happen would be some paperwork in Washington and a large credit to the Treasury's account.
- Buying Precious Metals in the Open Market - One of the advantages of the gold standard is the ambiguity of deflation in a metallic currency environment. When there is price deflation under the gold standard, in a sense the price of gold has gone up relative to all other inputs (labor, equipment, land, etc.) and this creates an enormous incentive for gold exploration and mining thereby increasing at least one form of economic activity and providing a corrective mechanism to offset a deflationary downward spiral. This does not necessarily occur in a fiat money environment. Gold mining has increased since 2008 in response to higher gold prices and it appears that further increases in mining activity are in the works. On the other hand, Federal Reserve purchases of precious metals would simultaneously inject new dollars directly into the economy and create incentives for further development. While monetary conservatives may not be enthusiastic, the acquisition of precious metals by the Federal Reserve would tend to provide it with ammunition to defend the dollar in the event that became necessary in the distant future.
- Buying Strategic Minerals and Materials in the Open Market - World War II created a scramble for certain strategic materials - notably chromium, and the development of new and complex weapons systems creates a need for various rare or very expensive minerals. The Defense Logistics Agency maintains a stockpile of such materials. It would seem that a recession would be an ideal time to build up this stockpile with purchases financed by new money created by the Federal Reserve. Of course, much of the money would be spent on imports but it would likely get back into the economy and would, in any event, create downward pressure on the dollar in exchange markets. The stockpile could be maintained as a buffer against shortages in the future so that supplies could be released if shortages created bottlenecks in the economy or inflationary pressure.
There are a number of other measures that could be considered including the purchase of securities collateralized by credit card, automobile loan or student loan debt. I do not anticipate that this kind of activity would be without controversy. As always, the question should be "compared to what?" Current policy requires holding interest rates very, very low for an extended period of time. This policy produces some very big winners and unfortunately quite a few losers. If we could accelerate the timetable for recovery and return to a more "normal" interest rate environment more quickly, it might alleviate the paid suffered by some of the losers. These measures would tend to push things in that direction. At the worst, we would wind up holding a lot of gold, silver, and strategic minerals that could be sold at higher prices when the economy recovers and having long term Treasuries that could be bought back by the government at huge discounts automatically reducing the national debt. The market for dollars and Treasuries seems to be insatiable; it would be shortsighted not to take advantage of it.