Friday, October 2, 2009

On Budget Deficits and Stimulus Spending

The budget deficit has ballooned. I used to believe that ballooning deficits were the primary concern. Certainly, many financial pundits seem to think so. My opinion on this issue has been revised after reading Randall Wray's work , Understanding Modern Money.

The basic point of his analysis is that federal budgets are NOT the same as household budgets. Government deficits are necessary for private spending and do not in fact compete with private spending.

This view on money does not mean that governments should spend money without concern.

However, it does mean that a contraction of private money supply and spending must be met with government deficit spending.

To cut deficits when private spending is collapsing ensures deflation

Robert Reich today argues for the necessity for more government spending to assist those without work and to promote public works projects. His article is persuasive, especially when one loses the fear of deficits as the demolisher of civiliations

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