THE INNOVATION INITIATIVE

* This post was written in 2011 before Mr. Roche founded Monetary Realism, which was formed due to several disagreements Mr. Roche and many other former MMT proponents had with the school of thought.  For more info on the difference in views please see here.  For more on MR’s views please see here.

 

In a story on his blog today Mark Cuban discussed an idea to get the economy going. Mr. Cuban cites the fact that the US government is essentially borrowing money for free today. Now, we know that an autonomous nation with endless supply of currency in a floating exchange rate system never needs to borrow money to “fund” itself, but the implications of negative borrowing rates are important from a political/logical perspective. It highlights the fact that the USA should essentially be trying to benefit from this odd environment by leveraging itself up on free money. Cuban says the US government should offer loans to corporations willing to hire. This is pretty similar to the MMT jobs guarantee except that it uses the private sector to leverage the government’s resources. I think we should go even further.

America became great for one simple reason. We combined a democratic government with a capitalist economic environment that unleashed creativity, innovation and an unmatched entrepreneurial spirit. We are known for our great innovators. The combination of democracy, freedom and capitalism created an environment where outside the box thinking is rewarded like no other place on earth. What is missing in all of this though is an understanding of how our monetary system could be used to leverage this great system.

The recent market turmoil and extremely low borrowing rates on government bonds only prove one of the basic tenets of MMT – that an autonomous nation with endless supply of currency in a floating exchange rate system never needs to borrow money to “fund” itself, but we have fooled ourselves into believing that we are bankrupt due to the flawed monetary system of Europe or due to misconceptions that lead households to believe that a government balance sheet is somehow analogous to our own. And in believing these destructive myths, we are not actually bankrupting our own government, but we are bankrupting our society by neglecting it of one of its most powerful resources – the government that was created by us for us.

As an autonomous nation with limitless supply of currency in a floating exchange rate system there is no such thing as the USA “running out of money”. But I am not going to convince everyone in the USA of this overnight. And that’s where Cuban’s idea comes into play. This political environment where rates are negative might just be the right environment to convince people that we should be doing more to help this great nation of ours by taking advantage of the fact that we are essentially being paid to lend money to ourselves. It makes perfectly logical sense. Any sensible businessman would agree with the idea that, when people pay you to borrow money from them, you should leverage that loan up.

While Cuban is right that we need more jobs in this country, I think he is missing the key component in the jobs story. We are suffering from a cyclical economic problem that is a balance sheet recession. That can only be fixed by reducing private sector debt levels and getting aggregate demand back to normal levels. And that’s what most businesses are seeing today – a lack of domestic demand. So they’re protecting their margins in an uncertain environment and not leveraging up. Even those corporations who have been taking on extra debt at super low rates have not been turning around to invest because the demand just isn’t there. So, I don’t see why the government lending money to corporations would change any of this to any large degree. We need to get out of the balance sheet recession first.

What I would propose to the US Congress is an Innovation Initiative. As I’ve said before, the structural problem in the US economy isn’t JUST that we’re shipping our jobs overseas. The other side of the coin is that there aren’t more Apple Corps. Let’s create more Apples. And let’s use one of our most powerful resources to do so – the US government.

I believe the Federal Government should allocate ~$50B per year from the Federal budget into what would essentially become the world’s largest private equity firm. While it would be government funded, it could be entirely managed by the private sector. And its focus would be entirely based on increasing private sector output and productivity. I would propose that we hire 10-20 private equity firms to manage the program on behalf of the government. In return, they would get an equity slice in any of the companies that are approved for the Initiative.

I would break the program down into several sectors – energy, environmental, infrastructure, technology, defense, healthcare, etc and allocate a specific amount of funding to each sector via monthly awards ceremonies. We would reward private sector entrepreneurs, start-ups or existing corporations with funding to go out and create new companies, new jobs and capitalize on their vision. I would promote the program vigorously. The key here is to get the creative juices flowing. I want college students sitting in their dorm rooms dreaming of winning this month’s contract. Or boardrooms at major corporations bouncing ideas around about how they’re going to obtain this month’s ~$500MM energy contract. The key here is that we are creating a specific entity funded by the government, run by the private with one sole purpose – to unleash a whirlwind of innovation on the world.

I am sure that much of the money would be “wasted” (at least we’re paying people to do real work as opposed to collecting a paycheck sitting on their couch), but for all the failures we might just look back and say, “wow, that program helped put a man on Mars and helped contribute to solving the energy crisis”. Besides, most new businesses fail. We can’t expect all of these to be winners. Call me crazy, but I see this making an incredible lasting impact on the country despite what ideologues would likely describe as another big government failure….

The USA might be suffering a short-term balance sheet recession, but the problem facing our economy today is much larger. We are suffering from a shortage of Apple Corporations. And we have the resources, talent and entrepreneurial spirit to fix it. We’re just not utilizing the resources and organizing our efforts in a way to benefit from it all because we choose to let politics and ignorance of our monetary system stand in our way….It’s like we’re sitting on a winning lottery ticket and we just refuse to cash it in….

I’d love to hear some thoughts about how insane this idea is or how it could be improved upon….

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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