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Monday, August 17, 2009

Bernanke: A Magic Formula to Right the Economic Ship

Paul McCully, Managing Director at Pimco, advocates some perscriptions for turning around the economy proposed by, to some excent, Paul Krugman in 1998/9, but mostly by Ben Bernanke in 2003 (in reference to Japan).

The idea is that a consumer and business spending spree, to boost GDP, should be initiated by a huge tax cut, funded by issuance of a lot of Treasuries, ie debt, sold not to the public but to the Fed. As a result, the Fed's balance sheet expands, but the national debt does not. As the economy kicks in, the debt (which stays the same) to GDP ratio goes down, and the economy is seen to be, and in fact is, healthier. The expansion of the Fed's balance sheet is inflationary. However, increased GDP results in increased tax revenue, which can be used in part to de-monitise the debt created to get the economy rolling. That is, trade a lot of deflation for for lesser inflation, which is easier to fix.

Sounds good to me.

Full article - an excellent read imo, is here

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