Examining the Fiscal Deficit Argument !!!!

Let us establish the validity of the statement- "Fiscal Deficit causes inflation and higher interest rates".

ARGUMENT - 1: The argument goes something like this- Government spends a lot of money. Hence, there is a lot of money floating around. Since, a lot of money chases too few goods, prices rise, i.e. inflation happens. 

ARGUMENT - 2: Government borrows money to spend, i.e. fiscal deficit happens. Since, the quantum of money available is fixed, if the government borrows more there is little left for the private sector to borrow. Hence, there is competition to get loans hence, interest rates rise.

Now, if you believe in Argument - 1, i.e. there is too much money chasing too few goods, interest rates can not rise because you believe that there is too much money. Hence, if there is excess supply of money, the price of money i.e. interest rates can not rise

If you believe in Argument - 2, i.e. that too much government borrowing causing high interest rate (crowding out), there can not be inflation. People borrow less and deposit money in banks and hence spend less. Therefore no inflation can happen (At least from the demand side)

Now now now, that is some food for thought. Or may be just some thought.

* The usual disclaimer applies