Hi Snowshoe,
Mike Norman used it to support his thesis that paying down the national debt is bad...
The basic rule is the same for individuals and nations: If you don't borrow the money in the first place, you don't have to pay it back!
From my perspective, you have adequately encapsulated the viewpoint I have held for years; that there is little or no difference between government debt and consumer debt, and that all debt is basically bad economics.
But, the Levy paper very meticulously points out that there is a difference between government debt and personal/consumer debt.
The government is the creator of wealth. Individuals or corporations are merely accumulators of wealth. There is a difference.
The government can print as much money as it needs to satisfy obligations. The currency is no longer backed by a physical commodity, merely a good faith promise to make good on the face value.
As the government creates a larger supply of currency, the amount available to be accumulated as wealth elsewhere always (repeat: always) increases. Conversely, as the money supply decreases, the ability to create wealth also decreases by the same amount. In other words, the government debt (created via deficit spending, and financed via government bonds) always moves in lock step with the increases or decreases in aggregated accumulated wealth in the private/commercial sectors.
Hence, it becomes somewhat easy to extrapolate from that postulation that national or global recessions and depressions can be fairly accurately predicted by increases or decreases in the national debt, the level (if any) of deficit spending under the current budgets and the degree to which the Fed accommodates the economy via the short term interest rates and money supply.
This Levy paper was written in 1999, well before the current bear market began. Yet, by following the path, easily viewed by connecting the dots so carefully laid out in the paper, we can see that the groundwork for the 2001 recession was laid out during the Clinton administration via a very accommodating Republican-led Congress that was squarely intent upon reducing budget deficits, paying down the national debt and lowering the national tax rate while still maintaining (or increasing) the spending level of Federal programs. Quite simply, it couldn't be done without also creating a recession or a depression. (BTW, as viewed by historical standards, the USA is way overdue for a depression, not having seen one since the 1930's.)
So, turning again to events that have occurred since the paper was penned, but now down in history, we can easily see the surpluses built up in the government coffers (at the expense of private and corporate wealth) eventually led to the recession of 2001. Why was this time frame a recession rather than a depression? My guess would be that the events of 9/11 greatly hastened the rebuilding of debt and deficit spending, but that the deficit spending would have occurred anyway, simply to combat the downturn in the national economy to the betterment of upturns in the global economy elsewhere in the world, mainly in southeast Asia. And the return of debt and deficit spending is the event that moderated what could have been a depression into "merely" a middling recession.
Further, this scenario would seem to indicate the power of "goosing" the economy via massive tax cuts, refocusing of government spending (into Iraq, for example) and the accommodating Fed policies. And that leads me to believe that there is plenty of "wealth" floating around out in the money supply, which we as investors need only figure out how to accumulate it in our accounts rather than someone else's accounts.
But, then again, I could be all wrong. I don't think so though. Until the Fed starts tightening and until the government starts cutting back on deficits and debt, I think the economy continues to grow despite the obvious appearance of overvalued stocks (and markets) and a lack of perceived value anywhere in equities or debt.
KJC |
