Wednesday, January 9, 2013

Enough with the Belt-Tightening Already

When times are tough, everyone needs to tighten their belts. It's a cliché but everyone agrees with it, right?

"Small businesses and families are tightening their belts. Their government should, too." Who said it? That would be President Barack Obama.

"It's time for government to tighten their belts and show the American people that we 'get' it." Who said it? That would be Speaker of the House John Boehner.

After the jump, what I wish President Obama and Speaker Boehner and every other American would learn.

President Obama and Speaker Boehner are politicians, not economists. They are playing to American voters, very few of whom are economists, either. All of them could learn something from a real economist, one who literally wrote the textbook on economics (and won a Nobel Prize, to boot). Paul Krugman has been making this point since the onset of the Great Recession over four years ago, but policy makers just don't seem to have learned anything.
[A]n economy is not like a household. A family can decide to spend less and try to earn more. But in the economy as a whole, spending and earning go together: my spending is your income; your spending is my income. If everyone tries to slash spending at the same time, incomes will fall -- and unemployment will soar.
Source: Paul Krugman.
Get that? An economy is not like a household. The next time some politician says that the rest of us are tightening our belts so government should too, be very afraid. He doesn't know what he's talking about.


Sassy Texan said...

What in the world are you talking about? A balance sheet is a balance sheet and an income statement is an income statement. So if you spend more than you bring in, eventually you don't have a balance sheet.

Cheri Duncan-Hubert

Mark Steger said...

A longer explanation of what I'm talking about can be found here: "Sam, Janet, and Fiscal Policy."

Sassy Texan said...

I am not sure whether you are being flippant or not, but I will say there is a ravaging flaw.

And it is in this comment of that article: Oh, and just to go back for a moment to my point about debt not being all the same: yes, inflation erodes the assets of the Janets at the same time, and by the same amount, as it erodes the debt of the Sams.

So if inflation destroys the assets AND the debt, who wins? Key word is "destroys'.

A monetized debt based fiat currency is solely dependent on expansion (inflation) to exist. And the government cannot continue to overspend indefinitely if there is no expansion. That is the Fed's biggest concern. Per, the Federal Reserve we sit in deflationary times of about $50b a month in the first half of 2012.

The 4th qtr report should be out in the near term, but I would guess that amount has increased to $75-80b based on the influx of additional printing (aka stimulus) of about $85b a month. And where does that $50-85b go? The answer is Wall Street, not Main Street.

Just like in Monopoly, as long as there is free parking, the game can go on forever. Well not forever, maybe til one owns it all, then the game is over! What a game!!

So just keep on believing in the "Full faith and Credit of the Federal Government". It is unfortunate we will get to see it fail.

Cheri Duncan-Hubert