About the so-called "debt" being the monetary base, don't you think that having too much of them would create prblems such as credit bubbles or inflation ?
If economic activity is sustained chiefly by expanding money base to increase consumer spending, that makes me worried.
"About the so-called "debt" being the monetary base, don't you think that having too much of them would create prblems such as credit bubbles or inflation ? If economic activity is sustained chiefly by expanding money base to increase consumer spending, that makes me worried."
Sure. But that is the flip side of the issue--and you have to analyze what happens as a result of that act on the basis of the resulting conditions.
If you run a deficit and the fed does not print the money (create credits) to buy the debt instruments resulting from spending in excess of revenue, then you have deflation and a bad kind of deflation because it also hits the capital markets (takes avalable capital away from productive enterprises) and runs up interest rates.
If you run a deficit, thus, the fed usually will adopt a policy of printing the money to buy the resulting excess debt which policy is usually inflationary and I view it as bad because it makes existing money units (dollars) worth less.
Credit bubbles are a little different condition. When the fed lowers the interbank (fed funds) interest rates, it makes shorter term credit cheaper. As Doug Noland points out, creation of excess credit money is no longer the exclusive province of the fed--all kinds of institutions create additional credits in exchange for security or contract types of instruments that put additional liquidity into circulation at interest. Lots of times that credit is supported ultimately by a short term fed funds borrowing by a member bank and ultimately lent longer term at a higher rate by the bank or someone the bank finances with the intervening term credits supported by some kind of derivative instrument.
I know that is a little complicated--point is that credit bubbles are not really related to deficits or deficit spending by the federal government. Federal government may have something to do with this--easier for Fannie Mae to create credits because people loan Fannie Mae money because they believe the federal government will pay if Fannie can't--again, point is nothing to do with deficits or federal government borrowing.
Your intuitive feeling about suporting consumer spending with expanding monetary base is also correct. Not the result of deficint spending; no borrowing by the federal government involved; but the result of fed policy making bank reserves cheap and easy to get.
All a tour of bad monetary policy originating with your Federal Reserve System. I suspect that if the fed raised the fed funds rate to 8% next Wednesday, the economy would begin to recover rapidly. (Note incidentally that is what Paul Volker did in 1979 with exactly that result although it will be argued here that the circumstances were sufficiently different so as to make for a different result.) I can give you a sound monetary analysis why it would work that way but it would also be complicated and chew up band width.