He now believes the new tax bill, which is pending in joint committee, will not increase growth but will cause stagflation to return. I agree with one of his points, i.e., that the decreased spending should occur first and then a tax cut later. Our national debt is far more dangerous that a GDP growth rate of “only” 3 percent.
But, he uses the Keynesian argument to reach his conclusion on inflation. Deficit spending increases the demand for goods & services, making buyers “bid up” the prices of those goods & services. The alternative argument is Monetarism, which believes that inflation is “everywhere and always a monetary phenomenon.” In other words, increasing the money supply causes inflation. They like to say that the available supply of goods & services will “soak up” all the available money. Inflation can be controlled by decreasing growth in the money supply.
While decreasing the balance sheet is not exactly the same as decreasing the growth of the money supply, it is certainly analogous, and that is what the Fed is currently doing.
I don’t think Mr. Greenspan is correct, but I hope he is. Moderate inflation cures many ills, at least for a short period. The Fed has been trying to increase inflation for years and failed. So, I’m not overly worried about inflation . . . for now!