Maybe it’s more like the fear of heights, but the big trillion
numbers that the government is spending beyond what it is bringing in
and the debt it is producing is causing concern. But should it?
Basic macro economics tells us that high government debt is not a
problem until the private sector is crowded out of the bond market with
high interest rates caused by the government’s high demand for debt.
And that is truly not happening yet.
Far from it - interest rates are at historic lows. But debt, the
most effective and efficient wealth creator is not readily available, so
is this having the same effect as crowding out? It does indeed, but
the cause is not the demand for federal debt.
The cause is the banking crisis. Banks are reluctant to write
business loans due to new regulations, a slow economy, being burned by
foreclosures, and the fact that they are still making money by being
more selective and taking advantage of low government rates.
Government pressure on the banks to write risky loans to allow
universal participation in the American Dream of owning a house created
lucrative opportunities for bankers to dump these loans by bundling them
with good loans and selling them over and over again as investments. A
dip in the housing prices, a few foreclosures and the bottom dropped
out.
The government just has no idea how enabling it can be with its agenda ridden meddling in the private sector.
Deficit spending by the government is stimulative. Balancing the
budget sounds like it makes sense, but doesn’t. But wait a minute - we
have to balance our budgets at home, and businesses must have strong
financials to survive, why doesn’t the government?
Families and businesses have finite lives and therefore a finite flow
of income. Families and businesses must pay off debts or face
foreclosure, declare bankruptcy, face repossession. The government
doesn’t. The future flow of government income can be almost considered
infinite, up to a point. And the U.S. doesn’t default, they just borrow
more. We can’t do that.
It’s that “up to a point” that is being argued at the worse possible
time. Have we reached the point that government borrowing affects the
cost of money crowding out the private sector from being able to afford
the loans needed to create wealth? I would think that indications to
that effect would be gradual and easy to predict. Loans are affordable,
artificially so, but affordable when they can be obtained.
One side questions the timing of tax increases, while the other side
says cuts will harm people, in the fight to decrease the deficit, and
they both have it wrong. The deficits should be dealt with, but not
during an anemic, jobless, teetering recovery that never made it to
expansion.
Tax cuts are distasteful for the left, vote-driven spending by the
government riles the right, but however misdirected some may think they
are, they have an economic stimulative effect.
The deficit should take a back seat to recovery. Raising taxes and
cutting government spending goes counter to both sides of economic
equation.
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