If we attempt to look at the question morally, no one should. We can take the attitude that those that are hurt by the ongoing economic collapse deserve it. In reality, if the collapse is not averted we will all be hurt. Unemployment will rise, foreclosures will rise, production will fall and the logical end is a total halt to the economic machine of the United States and eventually the world (or vice versa) and then a long slow recovery.

The government has, as its first response, chosen to bail out the investment industry. They hope that this will help to un-paralyze the credit market. The idea is that once the credit markets are operating, companies will be able to continue operation, production will go up and everything will be hunky-dorey.

Unfortunately history tells us differently. When the market collapsed in 1929 the government’s response was the same as it has been across the past several weeks: Inject capital to save the banks, unfreeze the credit and allow production to continue. It was finally realized in the 1930s (but too late in the game to avert a complete meltdown) that the problem was not production based but rather consumption based. By injecting capital into the banking system the government did keep production going for a while, but since the problem was actually that consumers no longer had enough capital to continue consuming, it ended up being a very short term fix. When consumers no longer consume, either by choice or necessity, it does not matter how much product is on the market, eventually we will be in an overproduction mode and the market will again go stagnant.

In order to get the economy back on its feet and avert a total economic shutdown, a consumer bail out is necessary.

How big should the bail out be?

I do not have an idea as to what the total bail out package should look like but somewhere in the back of my head an old card-playing saying comes to mind, “go high or stay at home”. In other words, if you are going to do it, go all the way.

We currently have an outstanding debt of approximately 10.5 trillion dollars. I have read that the total consumer debt in the United States was 10.5 trillion dollars at the end of 2007. Based on those numbers, I assume that the vast majority of the total debt is actually consumer debt, so let’s put the total consumer debt, for working purposes, at 11 trillion dollars. So how much of that debt do we provide relief for?

As I said earlier, go high or stay at home. So I will pick 100%. That’s right, the whole ball of wax, the whole nine yards, the whole shebang. Please pick whichever metaphor suits your current state of mind. The government should go in and pay off every bit of consumer debt that exists. Every house, car, boat, motorcycle, television set, every credit card should be paid off completely. Any consumer credit account that exists within the United States, owed by a citizen of the United States, should be paid off in full.

What would the result of such a huge bail out be?

The immediate result would be that consumers would have money in their pocket. The middle class of the United States would have control of 11 trillion dollars of instant equity. It would mean more economic freedom for all the members of the middle class. They would be able to spend on product, they would be able to save and invest, they would be able to breathe, they would be able to make decisions without the burden of the accumulated debt that they have amassed weighing upon their back each and every second of each and every day.

The middle class is the consumer class of the United States. If they are freed of their current debt they will spend money and will also start saving and investing money. It is very difficult to save money or participate in investments when you are also trying to pay down debt. If the middle class is freed from their current debt then it becomes much easier for them to start putting money away in savings and investments while continuing to use their purchasing power as they always have.

Since the preponderance of consumer debt in the United States is firmly on the back of the working middle class, this would be a true middle class bail out. Most poor people do not own much and do not have much credit so they receive nothing directly from this bail out. Most rich people do not have that much outstanding consumer debt because they have always had the wherewithal to pay cash along the way so they receive nothing directly from this bail out. Both the rich and poor populations of the country would however share in many indirect benefits of the bail out.

The spending and investing by the middle class benefits the rich population of the country in that the upper class of the United States controls the production machine and the financial institutions. Their profits, and the strength of their institutions, would increase.

When the middle class has money to spare they become more generous. This benefits the lower class population in that there is less objection to providing a helping hand either directly from citizen to citizen or through government largesse.

The immediate effect of this is on the financial markets is that the current investment bank problem is solved.

The primary issue in the current crisis is the sub-prime mortgage market. If all the sub-prime mortgages are paid off then that issue disappears. In the long term more people will participate in investment opportunities and thus will help to sustain a healthy investment market for the foreseeable future.

The immediate effect on industry, the production part of the economic machine, is that consumers will continue to buy products. The factories and farms that produce the product, and the wholesalers and retailers that distribute the product, will be able to thrive into the foreseeable future.

Since part of the debt involved is actually owned by the various foreign governments, they are paid off. We would no longer owe the Saudis or Chinese anything and the national paranoia caused by having so much of our economy in debt to countries that are not necessarily our allies is relieved. The United States ends up beholden to no foreign countries.

What about the huge debt we end up with?

The national debt would, after implementing this bail out, still be a total of around 11 trillion dollars. Previously, we had a 10.5 trillion debt held by the consumers. The government gave the consumers 11 trillion dollars to pay off the debts that comprised the 11 trillion dollars - thus we have simply moved the 11 trillion dollars off of the consumer’s shoulders and have moved it to the government’s shoulders. The government is after all “We the people” so we have really not changed anything in the total of the numbers, we have merely moved them around. The burden of the debt is no longer on just the middle class but is shared equally across all sectors of the population.

So, we still have an 11 trillion dollar debt to contend with and are really in no different position money wise. There has been no new capital created, there has been no capital removed from the system. There has been 11 trillion dollars worth of wealth created within the middle class without creating any new capital.

When we are done implementing the bail out we would then forgive the debt, wipe the slate clean and start over. This in effect then removes 11 trillion dollars of capital from the economy without removing the wealth. It tightens the money supply to a more realistic quantity. Since we paid off the foreign countries, we do not have to worry about the effect of the debt forgiveness on a global scale.

We owed the money to ourselves and we can forgive our own debts as easily as we have historically forgiven debts owed to us.

So, that is the way I see it. I give this idea freely to the people of the United States, my personal gift to you. The only thing I ask is that if we are going to do this then please do it quickly, my mortgage payment is due on the first.

Sincerely,

Farley “I am not an economist” Higgins