Growth: Baker's proposals

Dean Baker's plan to achieve growth (see yesterday's post) is hollow, like the drum he beats. The only piece of it I might agree with is, well, here's the whole paragraph:

Finally, if the Fed opted to hold the bonds that it has purchased through its various quantitative easing programs, it could directly reduce the deficit. The reasoning here is that the interest paid on these bonds is paid to the Fed and then refunded to the Treasury. It therefore leads to no net interest burden to the government. If the Fed bought and held $3tn in government bonds, it would lead to interest savings of close to $1.8tn over the course of the next decade.

The middle part of that excerpt conveys an important concept: When the Fed holds government bonds, the interest paid on these bonds is paid to the Fed and then refunded to the Treasury. It therefore leads to no net interest burden to the government.

It is an important concept, but it is not a deficit-reduction strategy.

Still, I might agree with Baker's solution that the Fed should buy and hold $3 trillion in government bonds. Why? Because the plan could be used to increase M1, money in circulation, by $3 trillion. And that could be part of a plan to reduce the debt-per-dollar ratio.

Of course, Baker's plan to add $3 trillion to the money supply would be inflationary unless policies were put in place to reduce the growth of debt and credit-use. If we were to stick with the usual plan, $3 trillion of new money would be used to generate maybe a hundred trillion of new debt. That would be inflationary. We don't need that.

What we need is a strategy that replaces debt with money. Do that, and the plan generates no "extra" spending -- thus, no inflation. Do it, and we reduce the backlog of debt, and the cost of that debt, and the drag debt creates on the economy.

Replace debt with money. Reduce debt, and increase the quantity of money in circulation. That is my plan. Baker's plan is a good part of it.

But Baker seems to have no idea why his plan might be beneficial.