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Comment by gahahaha | Hacker News Reader

Implicit in this "puzzle" is that the US budget should be balanced right now. It should not! Interest rates are EXTREMELY low right now, and due to high unemployment, investments by the government will give more bang for the buck than in a VERY long time. So what the situation tells us is that this would be a GREAT time for the government to start investing and spending money until private demand rises. We should spend now, and tax a little bit more in the future. That is what the markets are telling us.

Total spending in the economy = total savings in the economy. Consumers have overextended themselves and now have to save, to avoid a depression (when EVERYBODY saves at the same time and nothing gets done) the government (whom the market is clamoring to give money to) must spend.

It's simple, really. Why people have such a hard time understanding it is beyond me.

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Imagine you were investing in a company (instead of a country) that was taking this course of action: already in debt, stagnant sales, and had just doubled down on their debt to try and get out of it. Would you invest in that company?

Same analogy applies to individual people. Imagine a friend of yours who has a bunch of debt, is having trouble earning enough money, and just took on a bunch more debt for some new ventures which he hopes will pay it all back.

Most people would tell their friend the prudent thing to do is spend less money for a bit, pay down your debt until you get back on your feet. Not open up some new credit cards.

This is probably why people have trouble understanding the "go into more debt to get out of debt" approach.

That is probably correct. The thing is, no amount of experience meeting a payroll helps you understand issues that are critically affected by the way things add up at a macro level. Businesses are open systems; the world economy is a closed system, with feedback effects that are crucial but play no role in ordinary business experience. In particular, an individual businessman, no matter how brilliant, never has to worry about the fact that total income equals total spending, so that if some people spend less, either someone else must spend more, or aggregate income must fall.

This is why we have a field called macroeconomics. Unfortunately, the hard-won insights of macroeconomics are being rejected right now in favor of visceral feelings. And we’ll all pay the price.

I read the first paragraph and don't really understand your point. There are multiple countries competing in the world just as there are multiple companies. I'm not sure how it being open/closed makes any difference.

In any event, it's not really fair to claim all of macroeconomics is on your side here. Economists seem pretty divided on this one.

If I owned a company, now is exactly when I'd take on debt.

Now, "stuff" (advertising, equipment, factories, employees) is cheap.

Now, borrowing is cheap.

Now is the time for a business to spend.

The US government is more like a business than an individual. Both are interested in generating wealth rather than consuming it.

But in the case of "my friend"...if he were looking to borrow in order to generate wealth, say buy a house for rental income, I would completely support him.

The thing is... The US government isn't my broke friend or a company to invest in. If my broke friend were to make lifestyle changes, it wouldn't affect thousands of jobs. Nor is it in danger of going out of business like a company that's in this state would be. That's not to say that a growing debt is a good thing. It's just that the worst recession since the great depression isn't the appropriate time to make cutbacks.

There's a simpler way to look at the problem, which also demonstrates why your analogy doesn't work.

If we went with your analogy, the best thing for everyone is for that company to fail and fail fast because it is a burden on the economy. I would assume neither you nor anyone in the world is willing to accept this scenario. Therefore, you have no choice but to try to save the company. The only question is how.

The fact is that due to the housing bubble $8 trillion is gone from the economy. You can either choose to tighten the belt, save money and wait for the Americans that still have jobs to re-earn the cash, or you could try to borrow in order to invest and grow your way out of this. The reason I favor the latter approach is that the human cost of not spending money is too high in my opinion.

I'd agree with you in theory, it's pretty standard demand management, that the public sector picks up the slack when private sector demand is low.

the problem with a lot of governments, including the US, appears to be the other half of the equation, which is that when the private sector is doing well, the public sector should contract, in order to mitigate the effects of inflation.

What seemed to me to have happened in the last decade is that government costs expanded in the "good times" causing a deficit, and meaning that when the bad times came with the financial crash it's a lot more difficult for them to expand spending.

The other problem (although it doesn't apply as much to the US as other countries) is sovereign debt risk. Countries like the republic of Ireland absolutely have to cut expenditure as otherwise the bond markets see them as a real default risk and hike up the cost of their borrowing, so they have no real choice but to decrease government spending.

The unfunded wars in Iraq and Afghanistan and the unfunded Bush tax cuts put us in a much worse fiscal situation leading into this crisis, but the US has unlimited credit lines now. It should use them. Ireland and Greece is fucked. Germany and China only think about themselves.

American economic historian Charles Kindleberger used to argue that ultimately the Great Depression happened because of this failure of economic leadership on the world stage. He believed that a well-functioning global economy required one country to act as the leader, in effect to do more than its fair share of keeping the global economy moving, fully recognizing that smaller countries will freeload off of its efforts. If we are at a similar transition point in world leadership, if the United States has indeed been knocked off its pedestal in much the same way as was Britain in the early twentieth century, it does not bode well for the ability of the global economy to navigate its next storm.

Through much of the nineteenth century Britain was the linchpin of the world financial system. It was the capital supplier of last resort during crises and acted countercyclically as the economic locomotive for the world. But, almost bankrupted by the First World War, it was no longer able to fulfill that function after 1919. The mantle of leadership should have passed to the United States. But American leaders were too parochial and insular to seize the opportunity. Thus, during the 1920s and 1930s, the United States was unwilling to lead and Britain unable.

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