Cut Taxes and Expand the Budget Deficit Now
Is the US flirting with a deflationary spiral? Probably not, but this is no time to take chances. At this
juncture, things aren’t dire
. Loose monetary policy has accomplished the most important goal
avoiding a prolonged contraction in the money supply (see Chart 1), which played a central role inturning a deep recession into the Great Depression of the 1930s. But
the “shrink the deficit” focus out
of Washington is wrong-headed and worrisome. Instead of applying the fiscal brakes, we should bepressing the gas. The nonpartisan Congressional Budget Office expects US debt/GDP to come in ataround 73% this year, and the budget deficit abou
t, 7.6%. These are large figures, but the markets’
concern over US financial risk, as reflected in the continuing drop in the 10-year Treasury yield (Chart 2),is virtually nonexistent (although clearly the drop in yield also reflects a flight to quality and otherfactors, discussed later).
Source: Federal Reserve. MZM is the broadest gauge of money stock. See Appendix for definitions of various measures of money.