Monday, February 16, 2009

University of Chicago: Standard Last-Resort Prescription to Avoid a General Deflation a Fallacy Likely to Unleash Massive Economic "Dislocations"

Excellent paper on the stimulus plan and implications by John Cochrane of the University of Chicago. Here's an excerpt:
Sooner or later banks will figure out that borrowing deposits at 4% and holding reserves that pay 0.75% is not a good long-term business model. If the resources are not there to unwind our current operations, to quickly retire at least two trillion dollars of newly created debt, a large inflation will result as people dump government debt. If history is any guide, this outcome will unleash economic dislocations on a scale to make our current troubles look like a pleasant memory.
Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?

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