Tuesday, August 18, 2009

Answers: Why Interest Rates Won't Go to the Moon,

US Treasuries won't go to zero and the federal budget deficits will be managed. This is the best explanation yet of how Keynesian stimulus is absorbed into a deflationary economy.

Short version: Deflation leads to increased savings. Increased savings leads to more purchases of US Treasuries by citizens. Increased purchases of US Treasuries leads to lower interest rates. Lower interest rates leads to lower borrowing costs for the US government. Voila! large deficits are manageable.

And as the economy grows (eventually), the deficits will be paid back by increased tax revenues from increased productivity and GDP--- NOT increased tax rates.

Not that any Town Hall screamers or Teabagging troglodytes will ever understand it, heaven forbid they turn off Jon and Kate long enough to read a fucking book. And we'll have to continue to endure all the bleating from the pants-wetters over "gummint spending" just like FDR did... 10 years straight of constant screeching... and then he saved the free world... and then he died (probably exacerbated from all the goddam screeching.)

While I've never agreed with Dick Cheney before, he was correct (sort of) on this issue: if the economy grows, deficits are manageble. The caveat I would add is that it does matter what that borrowed capital is used for, and providing health care and green energy is more judicious than turning over Iraqi sand and killing brown people.

(Disclosure: I am long US Treasuries and US dollar)


Kris said...

"if the economy grows, deficits are manageable"

What happens if the economy doesn't grow? With consumer spending down, consumer income down and unemployment at 9.5% isn't an immediate economic recovery hard to visualize?

Tony said...

Well, if the economy doesn't grow (eventually), then it doesn't really matter if you are running deficits or surpluses... we're screwed either way.

The point is that we don't really need an "immediate" economic recovery. 90% of the workforce is employed even now in the depths of a recession. We can limp along here for several quarters without a structural hit to our debt obligations.

Think of it like your household finances: if your income stops growing, you don't die immediately. If you have a large bill to pay, you can take out a loan and pay it back later. If you use that money to pay for college tuition, it may even help your income to grow. If you use that money to buy bricks to throw through your neighbor's window, not so much.