Why a reduction in gov't spending won't do any good

[madfranks]

I've been mulling the following thought in my mind for a few days:

In a free economy, the interest rate on borrowing money is set by how much savings there are and how much demand there is for borrowing. When the gov't increases it's demand for money and runs deficits, the interest rate will increase as an effect of this increased demand for a limited supply of savings. Following this example, when the gov't finally reduces it's spending, the interest rate will then go down, as a result of the reduction in demand. The lower interest rate will then encourage private investment and borrowing to take it's place.

So instinct tells us that if the gov't borrowed less, the private sector would appropriately increase it's activity because more money would be available. But, while the instinct is correct, this is not the economy we have! The interest rate is not set by the amount of capital/savings in reserve, it is set by the decree of the fiat money makers! Private investment and spending is already maxed out because of the manipulation of the interest rate to basically zero, so even if the gov't spent/borrowed less, there would be no reduction in the interest rate and no increase in private demand for investment and borrowing! Which leads me to the conclusion that if the gov't reduces it's spending at a time like this, the economy will crash, because removing $1.4 trillion dollars of activity from the economy with nothing to counter it would cause the economy to dramatically slow down, back to depression levels!

Thoughts?

[horseshoe3]

You're right, but what if the government freed the market at the same time as it stopped spending? At these levels of saving vs. borrowing the real interest rate should be 20% or more. If the government was removed from both supply and demand, the interest rate would go sky high for a while and then regulate at around 7% which is the historical average in a free market. This is also the average P/E ratio of a reasonably good stock.

The short term results would be horrific. Basically, we would pop the bubble that has been built over the last 100 years and accelerated over the last 65 years. The economy would come back to reality. An when you have been living in a fantasy world based on fake prosperity, reality doesn't seem very good.

[undgrd]

If .gov wanted to payoff their debt, borrow less, and balance the budget, they would. How much money was created to save the "Too big to fail" crowd? Trillions?

They could have paid off EVERY mortgage in America for less. That would have freed up (IMO minimum) close to $1000 per month per household IMMEDIATELY. That would have been a hell of a shot in the economies arm! Agree?

Their goal doesn't seem to be fixing anything that will help you though.

[solid]

They could have paid off EVERY mortgage in America for less. That would have freed up (IMO minimum) close to $1000 per month per household IMMEDIATELY. That would have been a hell of a shot in the economies arm! Agree?

Their goal doesn't seem to be fixing anything that will help you though.

Their goal is control, and they don't want to give it up. Either with the economy or with folk's mortgages. Remember, a mortgage makes the owner a slave to the banks. The banks don't want to give that up, and .gov doesn't either. They want folks to work, pay mortgage, pay taxes, then go home and watch the brainwashing on TV. The best way to do that, it give them a loan, make them debt slaves for the next 30 years, and then call it the American dream.

[horseshoe3]

They could have paid off EVERY mortgage in America for less. That would have freed up (IMO minimum) close to $1000 per month per household IMMEDIATELY. That would have been a hell of a shot in the economies arm! Agree?

They couldn't have paid off my mortgage. I paid it off in six years by living like a pauper. Other people were buying frivolous crap and acting like debt doesn't matter. Then they hit some bump in the road and beg the government for help. And then we have people on this site advocating that the government should have printed more money to buy a freaking house for everyone EXCEPT those who are responsible enough to not have a mortgage, because it would have been a shot in the arm. I'm pissed enough that I'm paying to "help" these irresponsible people with their debts. A wholesale payoff would have put me over the limit.

So, in short, I disagree.

[madfranks]

If .gov wanted to payoff their debt, borrow less, and balance the budget, they would. How much money was created to save the "Too big to fail" crowd? Trillions?

They could have paid off EVERY mortgage in America for less. That would have freed up (IMO minimum) close to $1000 per month per household IMMEDIATELY. That would have been a hell of a shot in the economies arm! Agree?

Their goal doesn't seem to be fixing anything that will help you though.

But paying off every mortgage in America would have the disastrous side effect of destroying the economy. Remember, our money is debt/credit based. How do FRNs come into being? By being borrowed. If you pay off the debt, the money disappears. If all the mortgages in America were paid off, instantly trillions of dollars of money disappears from the economy, and we go into a depression. The only way to keep the game going is to increase credit, any reduction in credit will bust the economy.

"a credit-expansion boom must unavoidably lead to a process which everyday speech calls the depression" - Ludwig von Mises

[horseshoe3]

And don't give me any nonesense about the banks and government forced people into this situation. They were propagandized, but not forced. Nobody put a gun to their head and made them sign loan papers for a house they couldn't afford. Nobody forced them to buy disposable gadgets and other toys instead of paying ahead on their mortgage or putting something in savings. They did it on their own because they prioritized fun ahead of success. And besides, they knew they could always get Horseshoe3 to bail them out. Look, he owns his home free and clear (relatively), that lucky bastard. He should have to pay for his good fortune.

[solid]

But paying off every mortgage in America would have the disastrous side effect of destroying the economy. Remember, our money is debt/credit based. How do FRNs come into being? By being borrowed. If you pay off the debt, the money disappears. If all the mortgages in America were paid off, instantly trillions of dollars of money disappears from the economy, and we go into a depression. The only way to keep the game going is to increase credit, any reduction in credit will bust the economy.

"a credit-expansion boom must unavoidably lead to a process which everyday speech calls the depression" - Ludwig von Mises

That's a good point, but, I don't think paying off all the mortgages would lead to a depression. I think it would lead to hyperinflation. Complete loss in faith in the currency. People would instantly just go on a massive spending spree, driving up the prices for everything. Our culture is not one to save, but to spend. Without the burden of a mortgage, people would just create more debt by financing vacation homes, motorcycles, boats, all the toys and gadgets they could get their greedy hands on.

Internationally, all the other countries would start dumping the dollar immediately. While everyones in line spending, crash...hyperinflation. Folks wouldn't know what hit them.

[Sparky]

I think it's widely understood that a reduction in government spending creates a recession that is proportional to the amount of reduction. It's why there's no real short term solution. A reduction in spending is a long term solution.

Long term solutions are rejected because their cost is short term pain. And it is short term pain, not long term pain, that ruins political careers.

[Hatha Sunahara]

As long as the government can borrow money, there will be no depression. If you pay off your mortgage, and 'extinguish' that loan (and the money created from it), the government will be able to borrow that much money to keep the economy going. Hyperinflation happens when the government borrows and spends too much. The problem with the government borrowing massive amounts of money is that it accumulates a massive national debt, and we are collectively responsible for it through taxation. If we keep going down this road of the government borrowing and spending ad infinitum, our taxes will be 100% or more of our income. At this point we will wake up and discover that we are living in a communist country, but the money power will deny it and act as if nothing has changed.


Hatha

[madfranks]

"Won't do any good" the thread title says. How many foreign (and American) lives need be saved, and environment not destroyed and not DU'd up until one could see some good in the preservation? Or perhaps saving some depleting resources for future generations, rather than consuming them to make things to then destroy things.

Such OP reasoning is valid in a base hypothetical case of two dimensional short term economic thinking with no humans, externalities and without exponential fiat money problems.

I agree with you that if the gov't stopped spending so much money there would be some good; people not dying, wars not fought, etc. I should have clarified the thread title, "reduction in gov't spending won't do any good to restore the economy". What made me think about all of this is hearing some opinions that the government is crowding out the private sector, and if the gov't spent less, there'd be more for the private sector to invest. The OP was based on that assumption being incorrect. And while there would be some good with the gov't ending it's trillion dollar deficits, like horseshoe said:


The short term results would be horrific. Basically, we would pop the bubble that has been built over the last 100 years and accelerated over the last 65 years. The economy would come back to reality.

[Libertytree]

Of course the short term results are going to painful, there's just no around it but to continue down the path we're on is also a recipe for a lengthier and deeper catastrophe. One way or another it's gotta be faced and dealt with, by going the voluntary route and easing the air out of the bubble has to be better than to just continue inflating it until it bursts.