Saturday, August 15, 2009

The Perils of Running Surpluses: The Video!

My latest video talks about Randy Wray's article on surpluses. Enjoy!


Unknown said...

I’m really trying to get my hands around your comments and analysis.

Yes, I can see that a government surplus event has the tax revenue (tax payer) adding greater sums than is being spent by government, however running a government deficit has a REAL COST that you and your buddy, I believe, are not factoring in here.

If the government spends more than it has - which creates a deficit - the deficit dollars have a cost in interest expense and transaction fees due. At some point this deficit is a real force or mass, it’s not just thin paper or an accounting notation with no consequence. (As you say in your video, look at it, “deficits”, as a balance sheet analysis where everything has to balance out). At some point down the road the other side of the governments spending becomes a burden trying to balance (pay) ever increasing interest expense.

What you are saying really is, ‘it’s great for the government to bring demand forward ….all the time and I guess at all cost….. RUN A DEFICIT… because as a nation we get richer, but hey not a measly trillion, why not seven trillion or why not 500 trillion’? …….. Where’s the limit, and why is that the limit? Your rational means - spend, spend, spend….. recycle the dollars back into the economy and you can only grow, “Scott free”.

Now somewhere, deficit spending is flexing or stress testing some part of the system. At some point the lender of the ever accumulating deficits says, “rates are going up, payment is due on interest at a minimum and probably principal due too. But if more dollars are re-cycled into the people’s hands, tax revenues increase as wealth is PUSHED into the hands of the people allowing them to pay more taxes. But soon, well at least at some point the friction of interest payments and transaction cost out strip the ability to create wealth and the whole thing implodes on itself……similar to the current financial crisis we are experiencing.

Bringing demand forward will at some point outstrip actual demand and then - who all are left standing when the music stops? When enough are left standing and don’t pay their bills…….Kaboom! Now, our kids get stuck with the mess OR, we wipe the debt clean and someone (the lenders) gets stuck with the defaulted debt. My guess is they will not lend to us again.

I think your argument doesn’t hold water over time because it doesn’t account for the friction of business (costs) and artificially bringing demand forward does just what it sounds like, accelerated demand (consumption) beyond what is sustainable and then someone gets caught holding the bag as the gluttonous demand wanes and people become cautious as “who’s the bigger fool” theory becomes evident.

A practical example would be if I go and get a HELOC (Home Equity Line of Credit) loan and bring home $100,000.00, am I richer? I’ve got cash to spend and invest. Am I richer? NO, I’m actually poorer because now I pay interest on the equity I had in my house. But you say, “you can put it to work and earn more money on it”. Well for some period of time that might be true but as we have all just witnessed, it doesn’t always work out that way. When to much demand is brought forward and then the who in the “who’s the bigger fool” gets identified and stuck – the snow ball begins to roll as confidence disappears and take many casualties with it.

mike norman said...

Did deficit spending during WWII bring demand forward and did it stop there? Aren't we still enjoying the product of that spending and investment in the form of critical infrastructure and even the incomes that added to wealth of the prior generation? (Which gets passed along.) Do our dead forbears now have to "give us back that demand?"

Deficit spending can be said to be detrimental when the nation is already using all its productive capital (both physical and human). Pushing beyond that point is bad.

However, when a nation is not using all its productive capital because the private sector, for whatever reason, does not have the resources or capacity to engage it all, then the added demand that comes from government is a good thing.

If we live at a level where our productive capital is not being fully utilized we are living below our means by definition. That is the same as saying we accept a lower standard of living than what we could have. We allow ourselves to be some degree poorer for no good reason.

Yes, gov't pays interest, but that interest equates to income to the non-governmental sector. Higher income equates to greater output and wealth.

The only other REAL COST is the possibility that deficit spending results in a reduced foreign exchange value of the currency. However, that it not something thay you can necessarily ascribe to deficit spending. It might have that effect and it might not. Actually, to the extent that deficit spending boosts output and employment in an otherwise weak economy, it's hard to make a case for a weaker currency. Why should the currency necessarily be weak if the outcome is more people working and more product being produced? (More wealth being created.)

See what I mean?

Matt Franko said...


I would just add a few points that have enabled myself to reach a better understanding of this issue via Mike's reporting:

1.Dont think of Treasury sales as a financing.
2.The Central Bank can set all Gov't (ie risk free) interest rates.
3.If the Treasury redeems a T-bond all that happens is the previous owner of the bond now has reserve balance at the Fed.

Try to understand/visualize the consequences of these facts. If you have any questions post here.


googleheim said...

this scenario is not realistic.

stimulus should have a multiplicative effect, especially on things like medicaid.

we are not in an inflation spiral we are in a deflation spiral.

rates don't just go up, they are set by people when they feel like it

all this "friction" is of the type witnessed over the past 5 years under Bush stimulus ( tax rebate checks , war, deregulation, false speculation )

we are in a deflation spiral, and with reigning in of speculative deregulation, then we'll not have a problem with "friction"
which hosed everyone to the point of no return

also - bernanke can mop up inflation and take the excessive money out of the system via the Fed Tsy tools.