Bush's deficits and the coming crunch.

[Dinner]

That's good for America's finances but let's see how much additional debt Bush can lard on with his reindeer games in Iraq and Afghanistan.

[Ted Striker]

Originally posted by Kidicious
Ted Striker


No one will borrow money in a depression LoA. The problem is not shortage of money. The problem is that no one will spend the money that they have.

Yep, that's why money supply solutions/interest rates didn't have the same effect as they normally would.

[DanS]

That's good for America's finances but let's see how much additional debt Bush can lard on with his reindeer games in Iraq and Afghanistan.

They've been spending money at a good clip the first 4 months of this fiscal year through January. Don't confuse appropriations with actual spending. The Iraq and Afghanistan appropriations are on an irregular schedule, but the spending is pretty steady.

[Lawrence of Arabia]

No one will borrow money in a depression LoA. The problem is not shortage of money. The problem is that no one will spend the money that they have.

they will if interest rates are low enough.

[Kidlicious]

If your banking system is functioning interest rates will bottom out anyway. You can pay people to borrow money, but you can't make them spend it. They will just turn around and put it in their savings account, or in the case of a banking crisis, put it under their matress.

[Dinner]

Originally posted by Lawrence of Arabia
research shows that if the federal bank had dropped the interest rates or increased the money supply, the whole depression could have been avoided/ cut short. i dont remember if they were still using gold at the time as a standard, but if they were, that woulda made it harder to decrease the value of money.

They were using the gold standard and interest rates did drop to near zero. It didn't help largely because the banks were so unhealthy plus the continuing rate of bankruptcies harmed all efforts at recovery.

[Kidlicious]

xp

[Lawrence of Arabia]

If your banking system is functioning interest rates will bottom out anyway. You can pay people to borrow money, but you can't make them spend it. They will just turn around and put it in their savings account, or in the case of a banking crisis, put it under their matress.

yeah, but people have different MPCs. People with high MPCs will consume the lower the interest rates are, leading to growth.

They were using the gold standard and interest rates did drop to near zero. It didn't help largely because the banks were so unhealthy plus the continuing rate of bankruptcies harmed all efforts at recovery.

but did they increase the money supply? no they didnt.

[Kidlicious]

Originally posted by Lawrence of Arabia
yeah, but people have different MPCs. People with high MPCs will consume the lower the interest rates are, leading to growth.

They didn't have jobs or money. Of course they spent every dollar, but banks don't give money to people without jobs.

but did they increase the money supply? no they didnt.

The theory is that they central bank could inject money into the economy by purchasing assets directly, but we don't know if that will work. I don't think it would, because people will just hoard cash. You can't change people's expectations that way. The only way to change people's expectations is for the govt to start creating jobs and profit directly.

[Ned]

Originally posted by Lawrence of Arabia
the problem with keynes is that G can only go so far, and there are very few ways to get G high enough to move the economy forward.

the more G, the more crowding out of the private sector, and the more you need to spend to cover that crowd out.

and then theres trade, which goes to hell since no one can afford your exports anymore, so everyone in the export sector gets fired.

research shows that if the federal bank had dropped the interest rates or increased the money supply, the whole depression could have been avoided/ cut short. i dont remember if they were still using gold at the time as a standard, but if they were, that woulda made it harder to decrease the value of money.

all the classic reasons for the great depression that you hear in classrooms across america are usually from the persepective of someone who hasnt studied economics. 'oversupply' 'stock market drop led to failure of banks.'

as all those banks closed and as less money was avaiable to the public, the government simply had to increase the supply in other banks to counteract this effect.

problem solved.

Spot on.

van Buren did the same thing to turn a downturn into a great depression. He tried to balance the budget! Tight money in a deflationary environment was his policy.

Hoover did the same thing.

The problem with Roosevelt was that he too tried to balance the budget. When he did, the economy tanked.

[Ned]

Originally posted by Lawrence of Arabia


and thats the problem - the economy didnt take off with G. FDR wasnt able to wean the country off of it after a couple of years. he needed a war which completely restrucuted the economy. all the unemployed went into the army, thus reducing unemployment and driving wages for those who stayed behind (women, older people) and massive orders in military supplies. in normal times you cant expect this to happen.

and i dont think that FDRs new deal lead to 70 years of prosperity. there is no way it had that effect.

Come on. The problem was caused by the balance budget. FDR caused the problem, which indicates that he share with his Republican colleagues a complete ignorance of economics.

[Ned]

Originally posted by Oerdin


They were using the gold standard and interest rates did drop to near zero. It didn't help largely because the banks were so unhealthy plus the continuing rate of bankruptcies harmed all efforts at recovery.

Precisely why monetary policy has limited utility in a large downturn.

The big engine for economic stimulus is fiscal policy.

[Lawrence of Arabia]

They didn't have jobs or money. Of course they spent every dollar, but banks don't give money to people without jobs.

not that type of lending - it also allows for consumer products to have lower interst rates, so people pay lower rates and are more likely to buy, leading to increase in C and increase in GDP.

The theory is that they central bank could inject money into the economy by purchasing assets directly, but we don't know if that will work. I don't think it would, because people will just hoard cash. You can't change people's expectations that way. The only way to change people's expectations is for the govt to start creating jobs and profit directly.

the government doesnt profit from increased spending. if they did, then you would see marginal tax revenues = marginal govt spending. furthermore, the govt could simply print more money, or change the discount rate, or decrease the reserve requirement.

[Dinner]

Originally posted by Ned
Come on. The problem was caused by the balance budget. FDR caused the problem, which indicates that he share with his Republican colleagues a complete ignorance of economics.

Ned, FDR kept saying the government should spend more to "prime the pump" it was conservative Republican controlled Congress that kept insisting on balancing the budget. Deficit spending in the form of public works, the CCC, the Tennessee Valley Water Authority, etc.. was part of FDR's plan but the conservative Republican controlled Congress kept insisting on Hoover like Balanced Budgets.

[Ned]

Originally posted by Oerdin


Ned, FDR kept saying the government should spend more to "prime the pump" it was conservative Republican controlled Congress that kept insisting on balancing the budget.

Thanks for setting the record straight.

It is good that the Republicans were a minority for a good while. When Ike took over, he too tried to balance the budget and threw the economy into a deep recession. In a way, the Republicans did it again in 2000 by forcing a balanced budget on Clinton and wrecking the boom of the '90s.

The first Republican to "really" get it is Dick Cheney. However, the party still seems dominated by "balanced-budget" types, at least in rhetoric.