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HappySqurriel on 04 July 2010
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axt113 said:
HappySqurriel said:
axt113 said:

The key problem is that companies will not hire until they see consumers return to spending en masse, without the need for big discounts, right now that isn't there, spending has increased, but consumers are still being careful with their expenditures and demanding big discounts for their business, for businesses, this means that they are going to be hesitant to invest, or hire, and any money they get through tax breaks, etc. will just go into shoring up their financials, can't really blame them, because they want to make sure that if the economy slides again, they can weather the storm, but if they don't hire, then people are going to remain hesitant with their spending, kind of a catch 22 type deal, which is why government expenditure is needed until companies start hiring and people get back to spending.


That’s one perspective ...

China (in many ways) acts sort-of like a crack dealer because their currency manipulation saps the health of the American economy while giving Americans the short-term high of low interest rates, low inflation, and deficit financed government spending. The damage to the health of the American economy can be seen in the (repeated) creation of asset bubbles, and the steady loss of jobs to developing nations. The Americans have two choices in front of them, they can "Go to rehab" and get their spending under control and work towards rebuilding their economy, or they can follow the Keynesian approach and "take another hit" to ease the withdrawal symptoms; the long and difficult "rehab" path will lead to the return to a healthy economy, while the Keynesian approach will eventually kill the economy.

Or to put it another way, how much longer can the US continue building debt at its current rate before it looks like Greece or the Weimar Republic?


You're worried about hyperinflation, when the problem is actually deflation happy, your way right now would have us looking like we did in the 1930's, you don't do it in a recession, you do it when you are in a period of growth, Bush and the GOP squandered that chance during the last expansion with Tax cuts and wars and other spending along with low interest rates.

Right now if people pull spending, there won't be any rebuilding of the economy, let me explain it to you, companies if they can't sell their goods and services, won't hire, wont invest and won't buy from other companies, in fact they'll cut more jobs and trim back production, those people out of work won't buy and companies will further trim back, you'll get a vicious cycle downwards.

I’m not really cautioning against inflation or deflation, I’m arguing against a massive debt-drive economic crisis (or collapse). The debt-to-gdp ratio of the United States is (roughly) 90% right now, the deficit is (roughly) 10% of GDP, and there is little reason to believe that the deficit is under control (or could be reduced in the near future if anyone wanted to reduce it). With how ineffectual stimulus spending has been, it is highly likely that the US debt to GDP ratio will hit 200% before the deficit is addressed at the current pace. If investors actually start expecting their return on bonds to cover the risk the high debt levels of the US will create an awful feedback loop because every 1% increase in interest rates will translate into a 1% to 2% increase in the debt-to-gdp ratio; and the only options the United States would have are extreme spending cuts or monetizing of debt.