Greenspan: Deficits are OK

[Velociryx]

The problem tho, Ned, is that you're not comparing apples to apples.

Deficits can be bad, even if they grow at rates less than GDP....depends on what the money we borrow is used for. Yes, if it's used for things that actively stimulate demand, you're quite right....if it's used to fund a variety of entitlement programs of dubious value....no. That gets us nowhere but deeper in the hole.

Further, deficits are absolute and predictable in their nature. The government issues exactly X number of T-Bills and Bonds at a given time, and they find buyers for them all.

On the other hand, the rate of GDP growth is a *projection*. Maybe it's right on the money, maybe it's low.

If it's lower than anticipated, and we've already increased the nation's debt load by a known quantity X, then we just shot ourselves in the foot.

The good thing is, our economy is so monsterously strong, we can afford to guess wrong and not have it be fatal, but that debt's still on the books, and multiple wrong guesses over time can have a cumulative effect that noses our debt/GDP value higher.

Further, there's the question of how many US debt instruments the rest of the world is willing to buy up. As has been mentioned, there's a threshold out there, at which point increasing interest rates on the instruments will be the only way to continue financing the circus....which leads to ever-increasing amounts of money needing to be spent on debt-maintenance, which in turn, begins to have exactly the opposite effect as was hoped.

Further still, there's the very real issue that economic growth *could be* financed by corporate bond issuance, and this would speak directly to growth of GDP (whereas not all government financed debt has that effect), except that those don't get as much play, because the US Government is the world's single largest player in that market, and so, squeezes out much of the competiton in that market.

-=Vel=-

[Vanguard]

Entitlement programs actively stimulate demand.

[Velociryx]

Entitlement programs actively stimulate demand.......for more entitlements?

The problem is that the dollars spent on many (not all, but many) of those programs are like funneling dollars into a big black hole from which few, if any, emerge to be recycled through the economy.

There are lots and lots of fat cats who capture that wealth and squirrel it away, creating their own private little empires.

Some entitlements *do* stimulate demand, yes....demand which could be stimulated in more market-driven ways.

-=Vel=-

[Vanguard]

Well, I guess it depends on how you finance the programs and who benefits. And what your exact definition of "demand" is.

But basically taking money from the rich and giving it to the poor increases sales of mass market goods.

Which is pretty much what we mean when we say "entitlement programs" and "demand".

Note however that I won't go so far as to say increasing demand is a desirable goal. Sometimes it is, sometimes it isn't.

EDIT: Yeah, okay. My previous post was pointless. Forget I said anything.

[Velociryx]

Oh, you're right....there are some entitlements that fit this description, and there are hordes and tons that don't.

The Kumquat Grant, for example. Farmers can get...I think it's....$200,000 for growing Kumquats. What *is* that, exactly? I've never seen one in the grocery store, to my knowledge. It's not exactly a big ticket item, so why the push to have them grown? What do we DO with all these Kumquats we're paying for, anyway? Sure, the folks that get this grant money spend a chunk of it, and those dollars go back into the economy as the recipients demand more sports cars, SUV's and the like, but I'm sorry to say that there are better uses for that money, and far better ways to stimulate demand than that.

And the same basic truth holds for many, MANY entitlement programs that the government has running. It's an amusing read, actually, to skim through and see what sorts of oddball programs the government sells debt instruments en masse to fund. Things that work against the very principles that debt-financing is supposed to engineer, and it is these things (as well as military increases, which don't do nearly as much for the economy as say, investment in infrastructure and direct corporate investment) that will eventually make the position untentable.

-=Vel=-

[Velociryx]

Ahhh, I almost forgot! There are also a whole host of farming programs that pay farmers NOT to grow their cash crop! This stimulates demand for finished goods and services, sure, by putting money in the hands of those who will surely spend a chunk of it on...whatever it is they spend it on....and it also takes perfectly usable land OUT of circulation, decreasing the supply of certain goods (milk and tobacco spring immediately to mind here as being reverse subsidy programs I've read about recently) that could be used for viable agricultural pursuits....but of course, the government makes it more lucrative to just....sit there with a hand out.

Again....there are other, better ways of expanding demand (and thereby increasing production and supply) than this....made even worse by the fact that these programs are financed by debt instruments to begin with!

-=Vel=-

[Kidlicious]

Re: Greenspan: Deficits are OK

Originally posted by Ned
Mr. Greenspan's thesis, which is not accepted by all traditional economists, is that increases in personal wealth and the growing sophistication of financial markets have allowed Americans — individually and as a nation — to borrow much more today than might have seemed manageable 20 years ago.

I've decided not to agree with Greenspan. I do however agree that increased wealth has allowed consumers to take on more debt. That doesn't transfer to the federal govt.

The funding for the deficit comes from people's income, not their wealth. People's wealth is not just sitting around waiting for the govt to borrow money. It's already invested. There's the possibility that investors will prefer govt bonds more and then reallocate some wealth into govt bonds, but that's not Greenspan's theory.

[Imran Siddiqui]

For example, trying to balance the budget or running a surplus during a recession as did Hoover can trigger a depression.

This is the strangest rationale for the Great Depression I've ever seen! FDR was criticizing Hoover for running a deficit and spending too much on programs during the campaign (how quickly he reversed himself). And, it is generally accepted that adopting a tight money supply during the recession was what really took us over the edge, that and the trade wars.

Further, there's the question of how many US debt instruments the rest of the world is willing to buy up. As has been mentioned, there's a threshold out there, at which point increasing interest rates on the instruments will be the only way to continue financing the circus

And that's the BIG point! Threshold is bound to come soon, especially now that there are economies which are growing exponentially which could be just as good for investment. When will the world decide the US just isn't worth the investment based on our debt load?

[Drake Tungsten]

Ned 1 - Imran 0

[Kidlicious]

Hoover did try to keep the budget balanced. He clearly should have done the opposite.

[Colon™]

Originally posted by Kidicious
Hoover did try to keep the budget balanced. He clearly should have done the opposite.

IIRC Roosevelt also kept balanced budgets. The difference was that the size of federal budget grew, not the deficit.

[Ned]

Originally posted by Lawrence of Arabia
no, the depression was caused by banks failing and the central bank failing to increase the money supply.

Lawrence, again when the money supply is collapsing, the Federal Gov't. had to go into major deficit spending to head it off. Hoover did the opposite.

When FDR got into office, he did begin spending and the economy recovered somewhat.

[Imran Siddiqui]

Hoover did try to keep the budget balanced.

But failed in it... he did run a deficit. A lot of it from the new programs he introduced.

When FDR got into office, he did begin spending and the economy recovered somewhat.

And as Colon said, FDR attempted to keep balanced budgets until WW2. Remember he dramatically increased income taxes.

[Imran Siddiqui]

Some interesting other points of view:

http://news.bbc.co.uk/2/hi/business/3430565.stm

Benjamin Friedman, professor of economics at Harvard University, says that "what is at stake in all this is America's economic growth".

He argues that large budget deficits take a substantial proportion of America's savings, preventing it being put to more productive use in the private sector who should be buying new equipment, developing new technologies, and retraining the workforce.

And he points to the Reagan years of high budget deficits, when net investment fell to historic lows and the standard of living and real wages of the typical American family stagnated.

Mr Rubin, who is now chairman of Citigroup, argues that the adverse consequences of running large budget deficits may "be far larger and occur more suddenly than traditional analysis suggests".

In a paper for the Brookings Institution, he argues that "substantial deficits projected far into the future can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad".

This could lead to a run on the dollar (which is already suffering serious weakness), and a sharp rise in the interest rates demanded on Federal debt, which in turn could hurt the stock market, weaken banks and reduce private sector spending.

The Bush administration is doing its best to ward off such an eventuality by constantly telling the financial markets that it is committed to reducing the deficit, and arguing that it is "manageable" as a proportion of the economy.

[Tingkai]

Originally posted by Drake Tungsten
Ned 1 - Imran 0

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