If the economy is in a recession because of a lack of effective demand for what can be produced, a bigger federal debt may be useful. The greater wealth it causes in the form of Treasury notes, bills, or bonds gives people less reason to save and, therefore, induces them to consume more. Businesses, which may also feel wealthier with their holdings of Treasury securities, may be expected to produce more to meet the consumer demand and also to invest more in the capacity to meet that demand.
When a person gets into financial difficulty, its rare if ever I hear someone recommend that they spend their way out of their difficulties. I believe its the same for gov'ts as well. Furthermore, the cause of most recessions is not a drop off in demand but rather inflation has become a problem and the federal reserve entity is prompted to raise interest rates to curb expansion. The curbing of expansion ultimately leads to recession and a loss of jobs which, in turn,results in a "lack of effective demand" for goods and services.
Frequently, the reason for inflation can be a lack of liquidity in the marketplace caused by the national gov't borrowing monies to pay budget deficits. In other words, we are asking the entity that may have caused the recession inadvertently by spending too much to spend even more to help the economy get over the recession. That seems pretty reckless and not a great replacement for sound fiscal policy.
Besides, reducing interest rates has been,until this recession, effective enough in stimulating the economy out of recession. It may not be effective this time because of the unusual geopolitical conditions existing in the market place.
If, however, the economy is already at full employment, with few unused resources, consumers' attempts to spend more as a consequence of their greater financial wealth can only generate higher prices. And there's the rub! Too high a federal debt, or a deficit that increases the debt and, consequently, causes aggregate demand to rise faster than production can be increased to meet that demand, brings on inflation. Then, possibly even worse, actions by the Federal Reserve to combat the inflation will raise interest rates, thus choking off investment in new housing, new factories, and new machinery.
Of course, my contention is that the above condition is in play even if the economy is not at full employment. Besides what's too much debt? Why not spend within your means?
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