I RECENTLY read the Letter to the Editor "Reader takes Karolle to task" (Variety, 10.4.2012) with some concern. There appear to be a number of misconceptions about economic history and facts, which I believe should be addressed.

It seems that the central argument is that neither printing money nor increasing government spending can be the solution to a recession or depression. That is clearly wrong, as the history of the Great Depression should teach us. Industrial production, employment and Gross National Product plunged until the point in 1933 when Franklin Roosevelt devalued the dollar relative to gold. In the context of that society, that's like "printing money" because it means there will be more dollars for each unit of gold. Also, the government ran consistent, if small, deficits. From that point, the economy was on a path to recovery until the Federal Reserve raised interest rates and the federal government cut the deficit in 1937. A return to easy monetary policy and higher government deficits brought the recovery.

Many of the deficits were the result of a military buildup prior to World War II. Consider also that Sweden pretty much avoided the Great Depression by undertaking large public works like building hospitals and public housing projects.

Another point made by the letter is that the United States will not be able to pay back the federal government debt by printing more money. That is not completely true. Both the national income and government debt are nominal. The federal government debt is generally a fixed dollar amount, so if the national income and thereby federal government revenues were to be increased by inflation, it would make the federal government better able to pay down its debt. That is why people sometimes refer to the "inflation tax." But right now it does not seem that the amount of new money is sufficient to make this a problem. Investors reveal the level of inflation that they expect by the difference in interest rates between federal bonds and inflation-indexed federal bonds. By that standard, inflation is expected to continue to be roughly what it was between 2004 and 2008.

There was a modest increase in expected inflation from before QE3 was announced and now, but nothing that would indicate that investors expect the type of inflation that would make dollars more valuable as tinder rather than legal tender.

Very few economists actually take the position that neither money creation nor government spending can affect the level of economic activity and there is a reason: Both history and the facts indicate otherwise.

Julian Janssen,
Master’s candidate in economics
Tumon