Whenever the issue of fiscal stimulus comes up, you can count on someone chiming in to say, “Only a moron could believe that the answer to a problem created by too much debt is to create even more debt.” It sounds plausible — but it misses the key point: there’s a fallacy of composition here. When everyone tries to pay off debt at the same time, the result is contraction and deflation, which ends up making the debt problem worse even if nominal debt falls. On the other hand, a strong fiscal stimulus, by expanding the economy and creating moderate inflation, can actually help resolve debt problems.
There is nothing wrong with what Paul says. But I think it is incomplete, and that there is a better way of getting to the right conclusion.
The problem was created by too much risky debt and not enough safe debt. The result is that right now there is an excess demand for safe assets--like U.S. government securities.
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If our big problem were too much debt we would not be here, in depression. Too much debt generates inflation. The things that generate depression are shortages of financial assets, and excess demand for some class of financial assets then produces . . .
Both posts are worth reading. And what all of this casts into bold relief is the grotesque fiscal irresponsibility of the previous president, and the difficulty of cleaning up after his messes - further complicated by the fact that there are so many of them, in so many places. Also, the gutting of regulations since Reagan has allowed capitalism to morph into the robber-baronism and economic disparity that ultimately brought on the other Great Depression. Which is more or less why capitalism fails.
Alas, Obama lacks whatever it takes to get the country back on the right footing in the face of idiotic Repugnicant obstructionism. And the public seems to be in the grip of right-wing populism - possibly the single most destructive political force known to man.
We are so screwed.