What’s the solution considering the following?
The IMF 2013 has recently demonstrated that fiscal multipliers are higher than previously estimated and, with austerity policies in place, this means, ceteris paribus, that the current contraction will be deeper than previously anticipated. De Grauwe and Ji 2013 have also fairly convincingly shown with simple cross-country comparisons that the stronger the austerity policies are, the greater is the related economic contraction. They also demonstrate that the stronger the austerity policies, the greater is the related increase in public debt burdens. These are important and compelling results.
Well, the solution Richard Wood, an Australian macroeconomist, and other suggest is to monetize the deficit. What does that mean? It means in the US for instance that rather than borrow money to create money, the government would not borrow anything but would rather simply create money and spend it directly to pay for as much in the way of governmental expenses (providing governmental services, etc.) as is now being covered via deficit spending and governmental borrowing. The government would not issue bonds to match money creation but would simply create the money debt-free. This would not add to the national debt. The interest on bonds for that money would not later need to be paid via taxes from taxpayers.
Would it be inflationary? Right now, inflation is running at historically low levels. If the economy were to pick up (and we’re confident it would) such that goods and services on supply would be purchased enough to match the increase in the money supply, it would balance out.
We can credit the brilliant Frederick Soddy with much previously unheralded forerunning on this. Irving Fisher is the most recent economist before the most recent interest in this issue post-Great Depression to have somewhat popularized the concept. However, even Thomas Edison (1847-1931) was quite familiar with it.
“Then you see no difference between currency and Government bonds?” Mr. Edison was asked.
“Yes, there is a difference, but it is neither the likeness nor the difference that will determine the matter; the attack will be directed against thinking of bonds and currency together and comparing them. If people ever get to thinking of bonds and bills at the same time, the game is up.”
“But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good also.” — Thomas Edison Article, Public Banking Institute