“Little more than a decade after consumers binged on inexpensive mortgages that helped bring on a global financial crisis, a new debt surge — this time by major corporations — threatens to unleash fresh turmoil.
The root cause of the debt boom is the decision by the Federal Reserve and other key central banks to cut interest rates to zero in the wake of the financial crisis and to hold them at historic lows for years.“
Observe that while fulfilling the role of the medium of savings, money is not savings. An increase in money will not result in more savings. An increase in savings requires the increase in the production of consumer goods all other things being equal. Through money, people channel real savings, which provide support to economic activity.
Once real savings are exchanged for money it is of no consequence what the holder of money does with the money. Whether he uses it immediately in exchange for other goods or puts it under the mattress, it will not alter the fact that his real savings are already employed towards the expansion of real wealth.
In a free unhampered market economy there will be a harmonious and sustained change in the pattern of consumption with a rise in consumers’ real wealth. With an increase in real wealth, individuals are likely to strive to acquire various less essential goods and more goods that are luxurious. This harmony however, tends to be disrupted whenever the central bank pumps money.
Inflation is widely misunderstood by the public. Even economists tend to have a hard time coming to a general agreement to the true definition of inflation. When you ask the person on the street what inflation is they usually respond by saying the “price of things going up” which is more of a
Back in 2010, then-House Speaker Nancy Pelosi actually claimed that paying people not to work would be good for the economy. Wow, that’s almost as bizarre as Paul Krugman’s assertion that war is good for growth. Professor Dorfman of the University of Georgia remembers Pelosi’s surreal moment and cites it in his column in Forbes, […]
I don’t like deficit and debt, to be sure, but government borrowing should be seen as the symptom. The real problem is excessive government spending.
This is one of the reasons I’m not a fan of a balanced budget amendment, Based on the experiences of American states and European countries, I fear politicians in Washington would use any deficit-limiting requirement as an excuse to raise taxes.
I much prefer spending caps, such as those found in Hong Kong, Switzerland, and Colorado. If you cure the disease of excessive government, you automatically ameliorate the symptom of too much borrowing.
That being said, the fiscal chaos plaguing European welfare states is proof that there is a point when a spending problem can also become a debt problem. Simply stated, the people and institutions that buy government bonds at some point will decide that they no longer trust a government’s ability to repay because the public sector is too big and the economy is too weak.
If you want a 12 minute economic eye-opener about what our economy is really built on and what we need to do about it, please listen to this. All the complex mechanistic mumbo-jumbo from the Fed about treasury yield curves and productivity are distractions… full of circular logic and designed to keep the bubbles inflated for a while longer. Will there be short-term pain if we do the right thing??? You bet there will be…and it will be worth it long term.
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