Liquidity Trap and the Paradox of Thrift

We are caught between these two views:

1. Economic activity is a function of production and consumption. But debt has risen perilously so anyone making a profit in these times will not expand their business or take on new workers. This has led to a "liquidity trap" where any new cash goes not for production or consumption but rather to pay down debt. Therefore the only option is to stimulate the consumption side by giving noninvestors money to spend. Therefore we should tax those who have money but will not spend it and give it to those who have no money and will spend what they are given. This will stimulate production and lead to growth.

2. Economic activity is a function of production and consumption. But the government's interference in the economy has led to flooding the country with money thus threatening inflation, constraining investment with micromanaging regulations and shunting money from areas of production to areas of ideological preference. This has led to a "liquidity trap" where available money does not go in to investment but fearfully stays in cash. Therefore the only option is to stimulate production by decreasing the size and scope of government, decrease their regulations and taxes and allow the private sector to develop. This will stimulate production and lead to growth.

So there is a lot of money available that going either to pay debt or to the mattress. The solution of one group is to add more money to potential consumers so there is a group to produce for and the other group is to decrease taxes and regulations so businesses can appear, grow, expand, etc. so that the working base grows and can increase consumption.

There is a charming coffee house logic to all of this. Both sides seem sensible. Both seem concerned and sympathetic. Both sides despise each other so fortunately we can eliminate brotherly love as a deciding factor here. But despite the protests of both sides, these two alternatives are not benign choices for the benefit of "the consumer" or "the worker" or "the businessman." Someone will also be damaged by the increase or the contraction of government money. Let's also look at the other consequence of their respective unprovable dogmas.

Who will suffer the most and is it deserved?