Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Neocon who wrote (176)	11/9/2002 5:00:40 PM
From: tejek	Read Replies (2) \| 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. I disagree that borrowing is the "least harmful alternative". The reason it looks to be the least harmful is because full results of borrowing are not felt until usually much later. The example you cite, California, is very typical. For years, CA was fed a rich diet of defense expenditures/military bases. Much of it was pork barrel and paid through borrowing........and much of it was unnecessary. When it got cut off, like with most addictions, CA went through a painful withdrawal. 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. Yes, that's true but much of what the US borrows is not the gov't equivalent of higher education. Much of it is to satisfy the pork barrel requirements of legislators, and to maintain our questionable position as policeman to the world. I consider spending the money on research projects, or providing the incubation for meaningful research the equivalent of paying for higher education. Unfortunately, its usually research monies that are hit first when cutbacks are in order. 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. True.......the relationship between inflation and recessions is more indirect. Inflation overheats the economy, causing the Feds to raise rates. Most times the raising of rates throws the economy into 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". From what I understand, there is X amount money in the economy. If the gov't steps in and does some significant borrowing and effectively absorbs a great deal of the liquidity, then the cost of borrowing the remaining monies goes up and becomes inflationary. One of the reasons cited for the longest peacetime expansion under Clinton was because the gov't reduced its deficits and in turn, its borrowing of monies in the open markets and that help keep inflation at bay. 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........ I guess I have to ask.......what's wrong with living within one's means? One of the entering requirements of the EU was that national debt was to be limited to a specified percentage of GDP. Obviously, that requirement was put in place to insure that the more fragile EU economies did not upset the stronger ones. However, I think in the longer term, the limiting of debt may prove to make the EU's economy stronger than the US's. As an aside, the funny aspect of the EU formation was that Germany, who initially made the requirement that debt be a percentage of GDP, almost failed to make the cut. ;~)) ted