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ARGeezer:

the importance of managing inflation expectations

But I believe that paying off the national debt would constitute a profound contraction of the money supply and thus deflationary. Federal stimulus would be what would be needed. Else Congress could behave sufficiently responsibly that they could be entrusted with a national debt in a time of historically low interest rates. Plus, it is about time some of these 'expectation' theories be put to the test.

I think one needs to break this down.

Today, the government creates money by paying, then borrows from banks that then borrow from central bank, resulting in a chain of debts going back to the central bank.

If coin(s) are minted and deposited with the central bank and then expenses are drawn from that, the thing that is removed is the chain of debts (and their associated interests). And that is only for the borrowing that otherwise would have been needed (current government bonds are not removed). Even if so many are deposited that their sum is larger then the current national debt all that means is that for the forseeable future there will be no new government bonds. This removes a subsidy to the banks in the same way as if the government borrowed directly from its central bank but has the added feature of removing the scary national debt.

This is deflationary in that expected government payout to banks over the next years will be lower, but only slightly so as the interest is very low and the banks are not very good at spending their money into the rest of the economy.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Fri Jan 11th, 2013 at 07:10:08 AM EST
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