The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Not More Debt . . . Again?

09/27/2019

Larry Summers is a former Secretary of the Treasury and a former President of Harvard.  Republicans don’t like him, even though he agrees with President Trump that current interest rates are too high.  Democrats don’t like him, because he is as arrogant as the President.

But, he has been discussing an interesting new concept – a monetary black hole.  The idea is that very low interest rates for too long creates a black hole that can suck the whole economy into it.  Of course, black holes are difficult to escape.  He thinks Europe and Japan are already in this monetary black hole, with negative interest rates.  While the U.S. missed the last black hole, we are approaching it again, with our falling rates.  He still advocates cutting rates but very carefully.  As he says, “we are only one recession away from ‘Japanification.'”

He doesn’t foresee a recession until late next year, but how do we avoid the gravitational pull of the monetary black hole?  According to Summers “Any thought of deficit reduction has to deal with how we’ll maintain adequate demand and levels of employment.  And we have to be mindful of our huge public-investment portfolio.”  Sounds pure Keynesian to me, and Republicans will argue we just need another big tax cut . . .

Austrian economists believe in balancing the government budget every year and can be heard crying “here we go again!”

I would endorse another round of big budget deficits ONLY if future control of the budget is taken away from politicians.  It is just too important for elected politicians to handle.

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