Article;
http://krugman.blogs.nytimes.com/2011/07/25/default-in-a-liquidity-trap-very-wonkish/
Comment;
I agree that the effects of default and inflationary expectations due to quantitative easing would be different. A default would decrease money supply in reversing and new loans could not be generated and the whole system would be in a contractionary mode whereas generating inflationary expectation through quantitative easing would be expansionary. A default would undermine all the calculations made in order to keep the economy healthy and would necessitate big changes in the system. I can remember Krugman’s suggestion given earlier about an effective default regarding the people’s loans made during the housing bubble and now this time we are considering a default on the part of the US government to payback its debt. It is like we are back in the same situation again and the whole discussion has turned to the same point of a contracting economy because of default of the debt generated during the past. The threat of default will obviously be contractionary and would increase interest rate because the supply of loan-able funds will be inhibited since government is unable to repay its loans and new loans can not be generated without printing more money.
http://krugman.blogs.nytimes.com/2011/07/25/default-in-a-liquidity-trap-very-wonkish/
Comment;
I agree that the effects of default and inflationary expectations due to quantitative easing would be different. A default would decrease money supply in reversing and new loans could not be generated and the whole system would be in a contractionary mode whereas generating inflationary expectation through quantitative easing would be expansionary. A default would undermine all the calculations made in order to keep the economy healthy and would necessitate big changes in the system. I can remember Krugman’s suggestion given earlier about an effective default regarding the people’s loans made during the housing bubble and now this time we are considering a default on the part of the US government to payback its debt. It is like we are back in the same situation again and the whole discussion has turned to the same point of a contracting economy because of default of the debt generated during the past. The threat of default will obviously be contractionary and would increase interest rate because the supply of loan-able funds will be inhibited since government is unable to repay its loans and new loans can not be generated without printing more money.
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