While Tim “Kemosabe” Geithner has been in the headlines this past week stating that the sovereign debt crisis in Europe is contained and won’t spillover into the US, his sidekick Larry “Tonto” Summers stated this week that spiraling public debt is dangerous. “Ultimately failure begets failure in fiscal policy as the logic of compound interest does its worst.

“However, Mr. Summers said it would be “pennywise and pound foolish” to skimp just as the kindling wood of recovery starts to catch fire. He said fiscal policy comes into its own at a time when the economy “faces a liquidity trap” and the Fed is constrained by zero interest rates.”

Tim Congdon, from the International Monetary Research, argues that “fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantitative easing.”

Congdon and others are watching the M3 money supply in the US contracting at an accelerating rate. They cite that the contraction in M3 has already reached the Depression era levels, and given its acceleration is virtually certain to contract further.

The worry is that the contraction in M3 and other measures of money supply will lead to deflation, given that the inflation rate is already quite low and interest rates are already at zero, the margin for error in avoiding a classic Irving Fisher style “debt-deflation” spiral is incredibly small. Because rates are already at zero, we have no debt-deflation “firebreak” that Greenspan argued is so necessary to maintain back in 2003.

For more from John Bougearel, visit Structural Logic