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Politics : The Castle -- Ignore unavailable to you. Want to Upgrade?

To: tejek who wrote (166)	11/9/2002 7:40:34 AM
From: Neocon	Read Replies (1) \| Respond to of 7936

Governments borrow for the same reason that businesses borrow: that it is the least harmful alternative among several. If taxes are raised, it has an immediate negative economic and political impact. It may not be politically feasible to make sufficient cuts to balance out new spending initiatives, and, in any case, a sudden, unexpected withdrawal of the government from the market may cause economic dislocation, as happened in the early '90s with contraction in defense and related industries, especially in California. Individual budgets may be positively affected by increased spending. For example, if one borrows to improve one's education, it may improve earnings. Beyond that, things that are true of the economy overall may not be true of a segment of the economy, so one must be careful in applying analogies. The monetary cause of recession is not inflation, but deflation. That is why a liquidity crisis is important. You are right, deflation may be produced by putting the brakes on inflation too hard, but the inflation per se does not cause the recession. The national government is not a monolithic entity, and does not necessarily coordinate fiscal and monetary policy. As far as I know, federal borrowing has never had a pronounced effect on liquidity, for two reasons: first, because a certain amount of money will normally be saved or invested, so decisions are mostly about the mix of instruments; and second, because the money comes out at the other end as purchases and payrolls. That is why Keynes recommended borrowing counter- cyclically to "prime the pump". What is desirable is a close coordination between growth in the money supply and growth in GDP. If monetary growth gets ahead of GDP, you get inflation and the undermining of long term financial calculations, plus over-speculation in the economy. If it gets behind GDP, you have deflation, and starve further economic growth through lack of funds. I do not know what the appropriate level of debt is. I has to do with the "comfort level" of debt service. I would say that when there we have sufficient assets to sell off that the level is always manageable, we are in pretty good shape, however, and that the current range, which is less than 20%, is not particularly alarming........