Hows the economy doing?

[HappySqurriel]

SamuelRSmith said:

HappySqurriel said:

SamuelRSmith said:

TheRealMafoo said:

SamuelRSmith said:
but in the short run, which is what this recession is all about, having the debt is beneficiary.

Are you trying to say that being in debt during a recession is a good thing? If so, why?

Because it allows you to buy more things than you should actually be able to afford, which, in the short run, will lead to greater consumption and, therefore, demand. Greater demand increases investment and productivity, which is exactly what is needed to pull us out of recession. The side effects are that we have to pay back more during the good times - but that's easier to afford.

It's not just me saying this, btw, it's pretty much every single Government in the Western world.

Assuming you had no debt and you weren't running a deficit before the recession ...

If you have a moderate or large debt, and you have a moderate or large deficit, and you try to "Stimulate" the economy through larger deficits all that is going to happen is you're going to see higher inflation and higher interest rates which will have as large (or larger) of an negative impact on the economy as the positive impact from an increase in spending.

 

Whilst it is true that budget deficit can lead to higher inflation, that would only occur if there was full employment of resources (or near-full) within an economy to start with - it's only when increases in aggregate demand outstrip increases in aggregate supply that inflation occurs. If aggregate supply is able to increase inline (or roughly inline) with aggregate demand, then inflation will not occur.

Aggregate supply will be able to keep up with aggregate demand increases during a recession quite easily because a lot of the resources (of factors of production) have become unemployed during the recession. But I think this is going nowhere as it's simply going to turn into a keynesian vs monetarist debate.

I am interested in, however, your theory as to why both inflation and interest rates will increase. Higher interest rates tend to help reduce inflation, and vice versa.

That's only true if you follow a Keynesian model which was (essentially) proven wrong by the staflation in the 1970s ...

The economy is a system that naturally preserves homeostasis in multiple ways. When inflation is fairly high people who make investments that are measured in currency require a greater return on their investment in order to over-come the losses due to inflation, and since most of these investments are loans their natural tendancy is to increase the interest rate on the loan to a level that is (roughly) equal to:

risk assoicated with the loan + inflation + the return of a truely safe investment

Having noticed this relationship economist attempt to control inflation by manipulating the interest rate (though the manipulation of treasury bonds which are the only safe investment) to have the counter-pressure of higher interest rates happen before they're caused by inflation. The government only has so much control over the system, and as they increase the quantity of debt either the return on bond rates will rise or inflation will rise which results in (overall) higher interest rates.