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Ken Rogoff suggests that our policy response to our current economic problems are partially semantic. We currently have a balance sheet recession that is called the Great Recession. He believes that it should be called the Great Contraction. His point is that the acceleration of the deleveraging that is taking place would shorten the period of the contraction. He suggests some ways to speed up the deleveraging, and he argues that a bit of inflation would also help debtors at the expense of creditors.
He also claims that fiscal policy has been the wrong way to deal with a balance sheet recession. My feeling is that both fiscal policy and monetary policy are necessary. Businesses and households have increased savings at the expense of spending. If government also deleverages and cuts spending, the economy will shrink further and lower tax revenues will increase government deficits.
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