Wednesday, December 2, 2009
The case for government deficits and debt jubilees
QE won't work. That's not how money and credit work. Loans create deposits and not vice-versa. Bank lending is not constrained by lack of reserves. As for expansion of central-bank balance sheets, the debate as to whether this is inflationary (bad) or credit-creating (good) is not what it's about. In the US the Fed has simply brought the wholesale money market onto its balance sheet in order to restore a destructive status quo ante. Budget deficits are the way forward. The private sector is deleveraging (and private debt is much bigger than public debt) and this cannot happen without gov't deficit spending) and/or (unlikely) a trade surplus. (And budget surpluses are not good.) Debts that can't be paid won't be, and bailing out debtors is much better for the economy than bailing out banks.