Monday, November 8, 2010

At Winterspeak


On a recent post at Winterspeak, Musgrave said:

There is an easy way to dramatically reduce the national debt:
1. QE a chunk of the debt.
2. That would be mildly stimulatory.
3. So counteract that with a deflationary method of debt reduction: get the money for debt reduction from increased taxes and/or spending cuts.
4. Assuming the stimulatory effect of the QE equals the deflationary effect of the extra tax, AD remains the same. The only net effects are that the debt declines and the monetary base rises.

Anyone see any snags?

To which Winterspeak responded:

MUSGRAVE: Why do you want to reduce the national debt? It's too small.

To which Musgrave replied:

About 90% of the population (politicians in particular) think the debt is too large, rather than, to use your words, “too small”. This makes the debt the big obstacle to more stimulus. So reduce it, or even keep it constant, and more stimulus might become politically easier.

Slow to react, I never responded 'til now.

First off, it doesn't matter what 90% of the people think. It doesn't matter what 100% of the people think. It only matters whether a plan can fix the problem or not. After that, it matters that people are convinced of it.

But yeah, Musgrave, I see some snags. Given your concern about the 90 percent, I have two objections to your plan:
1. 90% of the people are opposed to QE, and
2. 90% (or more) are opposed to tax increases.
So I don't see that your plan is what I would call "workable."

However, your summary statement captivates me: The net effects are that the debt declines and the monetary base rises. Like you, Musgrave, I am fixated on the goal of correcting the monetary imbalance -- of reducing debt while increasing the quantity of money. It is the only solution that addresses the fundamental problem.

And yet... Winterspeak asks, "Why do you want to reduce the national debt?" It is the right question. Yes, 90% of the people or more think public debt is the problem. But the problem, really, is private debt.

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