Most all of the calls I’ve seen have been for the government to “do something”, like pass the jobs bill…but I think that’s unlikley to do anything useful…so I want to delve into the problem.
The problem, as I see it, is a flow problem. Small and medium businesses are the main apparatus that employs people. However, due to recent financial problems that were greatly exacerbated by a tight monetary policy, these companies are facing a situation where they are pressured by suppliers for prompt payments (<30 days), while their largest customers make payments in longer intervals (>90 days). This cashflow problem is where the financial sector comes in — or should be coming in — to provide bridge funding. Unfortunately even at the zero lower bound, these businesses are having trouble finding funding due to lack of demand (or monetary disequilibrium, a higher demand to hold cash), so the real interest rate remains stubbornly immobile (what Paul Krugman would call a liquidity trap…but not me!).
Since our monetary authority seems unwilling (not unable) to set a price level target in order to spur an increase in velocity, we’re forced to look into more creative solutions. One very interesting solution comes from the Social Trade Research Organization in the form of their Commerical Credit Circuit (C3). This is how it works:
- A participating businesses secure a invoice insurance up to a predetermined amount, based on creditworthiness and claims on third parties.
- Business A then opens a checking account with the clearing network (CCC) and electronically exchanges the invoice for clearing funds, and pays it’s supplier (business B) immediately through the CCC.
- Business B then only needs to open an account with the CCC. Then it faces two options; cash the claim in for legal tender (at the cost of paying the interest for the outstanding period, and banking fees), or pay it’s own suppliers which the obtained clearing funds (zero cost).
- At the time of maturity, the network gets paid the amount of the invoice in legal tender, either by business A, or the insurance company (in the event of bankruptcy). Whoever owns the claim at that point can then cash their CCC claim for legal tender without incurring interest costs.
This type of system not only provides businesses with liquidity (and thus, boosts demand for goods and services, thus decreases the demand to hold the medium of exchange — raising velocity), it works to stabilize macroeconomic output by operating in a counter-cyclical nature. As the velocity of legal tender declines, the velocity of CCC claims increases proportionately; smoothing out macroeconomic fluctuations, and providing a tool which businesses can use to remain solvent (provided they are not already a large credit risk!).
These types of solutions can be implemented immediately (as in, this minute; given the proper agreement), and do not require the vagaries of Congress. In a world where monetary disconnects have (and will continue to) become more frequently common, it is important to have a micro-stabilization tool in order to mitigate the macro-effects of monetary disequilibrium. Japan has already experienced this, and the Euro-zone looks to be heading in the same direction. The Fed is not nearly as conservative as the BOJ, but if *real* crises become more frequent (as some economists predict), and the Fed continues to rest on its hands (as they did in this current crisis), then it is definitely worth it to explore different options.