Fighting Deflation By Printing More Money

Investors in Treasury bills today did the equivalent of betting on the thoroughbred running at even money in every race.

The interest rate in T-bills fell to -.01 percent and the government came away with a no-interest $30 billion loan.

Aaron Pressman at BusinessWeek says that T-bills, regardless of their worth, are still the safest bet in these chaotic financial times, yet the reason for the seemingly poor investments is the padding of year-end quarterly reports.

It implies that investors are so worried about the safety and possible decline in value of most investments that they’re willing to lend merely on the assurance of getting their principal back intact. While some analysts fear runaway inflation from all the government bailouts and borrowing, the T-bill market at least is giving a pretty clear signal that’s not what is on big investors’ minds. They’re worried about the opposite, widespread deflation from the ongoing credit crisis, like the falling prices that occurred during the Great Depression.

The specter of deflation, the reduction of the money supply and credit, is forcing some to urge the U.S. Treasury to alter its monetary policies to deliberately jolt the prices, namely by simply printing more money.

Michael Kinsley, who spoke tonight at The Commonwealth Club of California, espouses this idea in the current issue of Time, though it rests on former Fed chair and Obama adviser Paul Volcker reversing course on the idea of tamping down inflation.

It would seem one of the problems with merely stoking the economy with new money in addition to a robust stimulus package is the issue of timing, along with pinpointing how much is enough. As many economists believe, adding too much money just as the economy begins to heal could lead to inflation when the economic caffeine of the stimulus finally kicks in. Conversely, not enough of a stimulus could further prolong the doldrums.

Conservative voices on the issue understandably believe in a more hands-off way of fixing the economy. John McManus at the New American faults Obama for choosing Tim Geithner and Lawrence Summers for this economic team, writing, "Each strongly supports another stimulus package that will have government print or borrow some more money to dispense to the American people. Each will seek to manage the economy when what is clearly needed is for government to get out of the way."

Thomas Mayer, writing in the notoriously conservative opinion pages of the Wall Street Journal, is denying that deflation is around the corner but says little to assuage feelings that a deep recession is likely.

Economics is a tricky, multi-headed Hydra where the monster could easily be slain by one method at one time, while utterly invincible later to the same plan. If that's true, some critics may worry that so many of our economic leaders are wedded to the textbook response to fighting deflation that they may overlooking something better.