America's administration has been practising spending into budget deficits in order to stimulate the economy. Some people call it Keynesian economics, whatever the term is is not important. This stimulation is phoney and not from genuine private demand. Keynesian ideas are very noble, but political pressure will prevent the withdraw of stimulus during the artificial boom and hence result in an ever-increasing deficit. And yes, now it is "boom" in US. Without the trillions of dollars pumped in, it will descend into depression, but it would have recovered by now. Stimulus will zombiefy the economy like what happened to Japan in the 1990s.
Budget deficit spending and low interest rates come hand in hand. You can't have budget deficit spending without low interest rates. The government borrows money and obviously wants to keep interest rates low to minimise its expense. Even at 0% interest rate, the America government is spending $383,656,592,545.78 in interest payments. To put things into context, that's about 14.3% of the Federal Tax Revenue in 2007 when the economy was not at the lowest point yet. And this is interest, the public debt itself is about 70% of the GDP (well, Google says 60.8%, some other sources say 90%...), so China and Japan know they won't be getting their money back.
Can you imagine what happens when you have rates back at historical levels, say 5%? If this kind of spending continues, Zimbabwe-effect is in order. Everyone will be a trillionaire in terms of USD.
The Federal Reserve will not act responsibly and raise interest rates soon. This affects globally due to carry trade. Only the state has the power to cause damage of such epic scale, no private entity is capable of such great feat.
America's administration has been practising spending into budget deficits in order to stimulate the economy. Some people call it Keynesian economics, whatever the term is is not important. This stimulation is phoney and not from genuine private demand. Keynesian ideas are very noble, but political pressure will prevent the withdraw of stimulus during the artificial boom and hence result in an ever-increasing deficit. And yes, now it is "boom" in US. Without the trillions of dollars pumped in, it will descend into depression, but it would have recovered by now. Stimulus will zombiefy the economy like what happened to Japan in the 1990s.
ReplyDeleteBudget deficit spending and low interest rates come hand in hand. You can't have budget deficit spending without low interest rates. The government borrows money and obviously wants to keep interest rates low to minimise its expense. Even at 0% interest rate, the America government is spending $383,656,592,545.78 in interest payments. To put things into context, that's about 14.3% of the Federal Tax Revenue in 2007 when the economy was not at the lowest point yet. And this is interest, the public debt itself is about 70% of the GDP (well, Google says 60.8%, some other sources say 90%...), so China and Japan know they won't be getting their money back.
Can you imagine what happens when you have rates back at historical levels, say 5%? If this kind of spending continues, Zimbabwe-effect is in order. Everyone will be a trillionaire in terms of USD.
The Federal Reserve will not act responsibly and raise interest rates soon. This affects globally due to carry trade. Only the state has the power to cause damage of such epic scale, no private entity is capable of such great feat.
To wjsim,
ReplyDeleteAgree. Well written and explained.