Monday, February 1, 2010

Do Deficits Matter?

Conventional wisdom hold that deficits create future liabilities, which will hamper future growth.

Marshall Auerback disagrees. It is very interesting to read his account of deficts because it so clearly diverges from conventional wisdom. The logic informing his analysis is the idea that government finances (at the level of the nation) do not equate with household finances. He spells it out clearly in this post

I highly recommend reading Auerback's post. The upshot is this: "In basic national accounting terms, government deficits equal non-government savings surpluses"

The implication is that deficit spending is now necessary in order to compensate for a debt deflation trap. If you think about the argument it makes sense. If the US does not shore up the tattered budgets of cities, counties, and states in the US, then these same entities will begin purging employees.

The loss of demand posed by these newly unemployed reinforcs the debt deflation trap as tax earnings collapse, posing even more challenges for cities, counties, and states.

I really wonder whether conservatives are secretly aware of this trap and are encouraging it deliberately to "kill" government. Tragically, killing government will expedite the US path toward third world conditions....

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