Periscope Depth

cash rules everything around me

So I was sitting on the roof of the Temple, cooling my heels and drinking an Ecto Cooler Hi-C, when the devil appeared behind me.

“Hey Satan,” I said.

“Hey Professor,” he said, sitting down next to me. He kicked his feet over the side.

“I guess you’ve heard that shit’s pretty bad, what with the collapse of subprime mortgages … banks writing off tens of billions in revenue … people losing their homes …”

“But I’m guessing you have a plan, right?”

“Hear me out,” he said, gesturing animatedly. “First, we lower the Fed funds rate by 1.5% – half at an emergency meeting, half during a scheduled meeting. This’ll encourage people to take out loans and buy more stuff, because interest rates will be lower.”

“It’ll also discourage people from saving,” I said, “because, like you said, interest rates will be lower.”

“But that’s the beauty of it!” He smacked me on the shoulder with a rolled-up copy of Variety. “The Fed funds rate is also the rate at which banks can lend money to each other. So if a bank wants to write a loan but doesn’t have the cash available, they can borrow money from another bank!”

I sighed and bit my lip. “Is there a second part?”

“Are you ready?”

I nodded and put on my best expectant look.

The devil stood up, spreading his hands dramatically. “We’re going to give every American taxpayer … three hundred dollars!” He waited for my applause.

“And?” I asked.

He snorted. “It’s like you never even studied economics, man! Increased consumer spending will jumpstart the economy!”


“You know … give it a jolt.” He could see I wasn’t buying it and his face fell.

“What exactly is wrong with the economy currently?” I asked.

He didn’t have an answer, so I told him: “Let’s say you’re playing blackjack with a seven-deck shoe. You’re counting cards and you’re pretty good at it, so you think that the dealer’s all out of face low* cards. You start putting more and more money on the table. With me so far?”

“Sure,” said Lucifer. “I love Vegas.”

“But maybe your count was off, or you were misinformed and there’s actually eight or nine decks in play. So there are more face low* cards than you expected. You start losing money.”

“I don’t like this story.”

“And now other players are walking away from the table, meaning all the bad cards are coming to you now. You start busting on every hand. You keep doubling your bet, because you heard from some guy that that was a good way to stay ahead, but that just means you’re hemorrhaging money that much faster.

“Now,” I concluded, “instead of face low* cards, it’s ‘housing prices.’ Instead of hands of blackjack, it’s ‘investment in mortgage-based securities.’ And the players at the table are the largest financial institutions in the country – Wachovia, Merrill Lynch, Bank of America, etc.”

“No, no, it’s not that simple.”

“No, it’s exactly that simple. Investors gambled that mortgage-based securities would keep paying off. This was a speculation based on the notion that housing prices would keep rising. They didn’t. Investors kept shoveling money into subprime funds in the hopes that they’d rebound, or that they could sell them to someone else. They couldn’t.

“And what part of this whole exchange,” I concluded, “would be improved by consumers getting the equivalent of an additional paycheck?”

“But … but … consumer spending …” the devil whined.

“The money’s coming in the form of additional tax refunds,” I said. “Meaning it’s being transferred from the federal government to citizens. What would the feds have done with that money if they kept it?”

“Spent it.”

“What are they hoping citizens will do with it?”

“Spend it.”

“So either the feds spend one hundred billion dollars,” I continued, doing some quick math in my head, “on highways and dams and bomber jets and bridges that don’t go anywhere, or consumers spend one hundred billion dollars on food and clothing and cars and the Nintendo Wii. Where’s the ‘jumpstart’ here? Where’s the kick in the pants?”

“Yeah, but, c’mon!” The devil smiled, laughing weakly and dismissing my objections with a wave. “We’re putting money back into people’s hands, rather than letting the government spend it. I thought you were a libertarian! You know: ‘taxation is theft’ and all that.

“That’s a question of what level of taxation is moral,” I said. “That’s irrelevant. This is a question of what’s actually going to happen. It’s like … it’s like debating whether or not to kill someone by dropping a weight on their head, vs. debating whether or not gravity is real.”

“So you’re telling me the economic stimulus won’t have any effect on net?”

“I didn’t say that. The federal government is now one hundred billion dollars out of pocket. Do you really think Congress will cut the U.S. government’s budget by one hundred billion dollars? Or any significant fraction of that?”

“So the U.S. government goes another hundred billion into debt,” Satan said.

“Which means inflation,” I said.

“And lower interest rates mean easier credit and more loans.”

“Which means inflation.”

“I don’t suppose inflation’s good for the economy, is it?”

“Inflation encourages borrowing and penalizes saving,” I said. “What’s the point of putting money in a 401(k) that earns 7% if prices inflate 8% every year? Better to just buy a car, or a house, or something I can actually wrap my hands around and enjoy. Better to go into debt; the money I put toward interest payments will be worth less and less each year.”

“But everyone’s buying stuff!” Satan said, making one last-ditch effort. “And that stimulates demand, so people will start producing more …”

“So if I’m the Gap, and I see people spending their refund checks on my sweaters, I order up a thousand more sweaters than expected. Then what? People already spent their refund. I’ve got all these sweaters I intended to sell at $40, which I now have to mark down to $30 in order to sell. And since the thirty dollars a new customer pays for a sweater don’t go as far, thanks to inflation, I’m now worse off than before.”

The devil pouted, tracing doodles in the dust on the rooftop with his finger. Then he stood up. “Well, I tried.”

“No, definitely. Yeoman’s effort.”

“Same time next week?”

“I’ll be here.”

“Could you bring me an Ecto-Cooler Hi-C next time?”

Apage, satanas,” I scowled.

He laughed. “I get that a lot.”

* * *

“Consumer spending” is a popular target for federal efforts because it ties directly to GDP, one of the most commonly cited statistics. More people spend money, businesses presume that there’s an increased demand for their products, and they start to produce more.

However, consumer spending is only part of the picture. The opposite side is consumer saving – individuals sinking money into savings accounts, money market accounts, the stock market and retirement funds. Investment also gets businesses to produce more.

The moral of this story: the economy is not a thermostat – it’s a thermometer. What we call “the economy” is an agglomeration of several favored statistics – the Dow Jones Industrial Average, the strength of the dollar, GDP per capita, inflation, unemployment, etc. If “the economy is doing well,” that means those numbers are high. If “the economy is doing poorly,” those numbers are low. But those are all statistics. They’re numbers that measure the performance of people and firms in the real world. I can’t just dial up one statistic without affecting everyone in the real world, anymore than I could crank up the thermostat without also increasing the amount of oil I consume.

Those are numbers on paper. This is the real world. And unless you see a pronounced change in the real world, there’s no reason to think changing the numbers will make a difference.
* pointed out that I had this exactly backward in the original draft – high cards in the deck favor the player, not the dealer.