Monetized Government Spending Instead of Elimination of Toxic Assets Can Solve Current Economic Problems
9 Pages Posted: 12 Mar 2009 Last revised: 17 Mar 2009
Date Written: March 15, 2009
While most commentators seem pessimistic about solving current economic problems exhibiting gloom and doom, I argue that concerted monetized government spending (without any debt or taxes to match) by Euro-zone, US and Japan can quickly help reduce many of the current imbalances in the world macro economy. Apart from fraud and some abuses by the financial executives, the reasons for the current malaise include excess supply of savings on the world market (mostly by Asians leading to what Keynes called "the paradox of thrift"), and the bursting of asset price bubbles. My solution has a clear-cut objective of artificially creating an inflation in the US of about 5% in the overall price level for the next few years. I show that it is politically easy to sell and is low cost, due to market-based efficiencies. I explain the sense in which it is easy to turn off almost overnight when market expectations respond with appropriate confidence, and hence as temporary as the policy makers wish it to be. I show how Obama's stimulus package can be modified to be consistent with our proposal. A dose of inflation can make many of the 'toxic assets' become benign and allow markets to determine the price of assets, instead of 'stress testers' appointed by the Fed.
Keywords: free fall, world economic problems, inflation, unemployment
JEL Classification: E60, E30, E20
Suggested Citation: Suggested Citation