Winding Down Debt

via Kevin Drum, personal debt in the US:

One of the problems with the stimulus, in my mind, is that it was aimed at interrupting this process.

  • will

    Suppose the government takes out a loan and gives the money to people. Those people are very likely to use that money to pay down debt.

    The way Keynesian theory works is that people who get money spend some of it and use the rest to save and pay down debt. The money they spend goes to other people who spend some of it and use the rest to save and pay down debt. Yes, Keynesians think the spending is a good thing, but the spending still ultimately produces savings.

    Yes, it increases government debt. But government debt is not personal debt. In particular, it is really, really easy for the government to borrow money. It does not have to worry about liquidity.

  • Don

    You know, the thing that originally set off alarm bells for me (although I wasn't awake enough to pay attention at the time) was when GWB said that he wanted people to take out equity loans on their paid homes to pump up the economy after 9/11. My instinctive thought was, "so they're gonna risk their homes for a big screen TV?"

    Wish I'd've paid attention to my gut, rather than participating in the stupidity and spending a bunch of money I didn't have.

    Yes, I've seen stupid up close and in person. And I STILL cuss him every time I look in the mirror :^).

  • Methinks

    Yes, it increases government debt. But government debt is not personal debt. In particular, it is really, really easy for the government to borrow money. It does not have to worry about liquidity

    So, there are no costs to government borrowing and you believe in the myth of the multiplier.

    In that case, let government spend a gazillion dollars! Every country that has done that should be among the most prosperous countries on earth, instead they are PIGS.

  • Ted Rado

    What happens when the entire USG revenue goes for debt service?

    The USG (Fed) has lowered interest rates to almost nothing. My retirement income from securities is shot. I am fortunate to have a pension. What about those who are dependent on investment income? By running up the debt, and then lowering the interest rate, the USG is stealing our money.

  • will

    @Methinks: I never said that there were no costs to government borrowing. But there are no costs to the marginal dollar of government borrowing. If we borrow, say, 10 trillion more dollars, then that will change.

    That's a basic free market economics principle. Decisions are made on the margin. If the marginal price of something is low, buying it is probably a good idea. But if you keep buying it, the marginal price will not stay low.

    (As for the PIGS claim, my understanding was that all of the PIGS but Greece had low deficits before the crisis. Then the recession came, which cause tax revenue to fall and social insurance spending to rise, creating massive deficits. If I'm wrong, please show me evidence to correct me.)

    @Ted Rado: The Fed lowers the interest rate by buying debt from people and giving them money in return. If you don't want to hold debt any more, you can sell it to, for instance, the Fed. The US government controls the price of US government debt entirely through market mechanisms - voluntary buying and selling.

  • jj

    Kevin Drum draws the best trend-lines.