Monetary policy is the management of the amount of available credit in the economy through a pricing mechanism called the overnight federal funds rate. There are two ways of managing the price of money. By fiat as when the Fed raises rates as policy, and by supply and demand, as through Quantitative Easing, by, basically, printing money. Which puts more money in the system which lowers its price in both the short term especially. For example, for years, 30 Day LIBOR, where corporations raise operating capital, was around or below 25 basis points (.25%) for several years. Even now, 1 Year LIBOR, the rate at which banks borrow on the open market is less than 2%.
One way to get a large infusion of money into the market would be to legalize drug money. It's a nasty business, but it must be done. There is too much violence and corruption in the world to continue this shameful waste of money – the so-called war on drugs. If the global economy could get the caches of illegal drug money into legitimate financial institutions the price of money would go down and stay down for a long time. It could be that this money will fuel a global economic investment boom (even though I've written about the speculative and arbitrage nature of excessive capital concentration).
Just taxing it will fill the coffers of most of the governments in the world. There will still be a black-market because any good that is taxed can be sold cheaper on the black-market and there will always be people who choose to make their living in that way. A concomitant issue is violence. I would not expect this is go away over-night. People have become inured to this. Even the Israelites had to spend a generation in the desert before they could enter the promised land. It's just a good metaphor for the way social psychology works. Just think of it.
Mexico should be able to raise enough taxes to pay their police adequately enough to eradicate most corruption. Because, like I said, there'll always be those people who'd rather do it the easy way, people who take short-cuts. People like Trump, for example. Colorado is reaping a tax windfall with few repercussions or social consequences to legalizing the private use of marijuana.
This will bring with it some social dislocation. For example, if we release current felons convicted on drug charges into society it's possible that unexpected consequences can be expected along the lines of increased social violence. Some accommodations would have to be made to allow these people to find work and be reintegrated into society, both its political and economic institutions. On the other hand, there'll be a lot more jobs in drug production, distribution and sales. There'll be jobs in all different sectors of the economy, from agriculture to finance. There'll be companies who go public; hedge fund investors, banks, drivers, etc. A virtual boom in taxable income which goes untaxed now because it is illegal.
Legalizing these types of social drugs will probably be followed by increased usage and addiction. We could take all the money we currently expend prosecuting drug organizations and put it toward drug treatment processes, we wouldn't spend more money and have a much more effective social program. But, again, after a while this reaction will diminish. In the long run, perhaps not long enough for us to be dead, new social programs and private investment of these shadow funds will bring prosperity and reduce violence and corruption. (Well, a guy can dream.)
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