Wednesday, September 08, 2010

An important upside from cutting government spending is no longer available

When interest rates were high, economists used to say that reducing the Federal deficit would lower interest rates and increase available capital for private lending so private enterprise could create more jobs.

Well, that mechanism no longer applies now that interest rates are at rock bottom in spite of record deficits.

The downside of cutting government spending still applies; reducing the size of government and it's employees as consumers in the market.

With less government spending, consumer demand drops since a lot of that demand is government purchases and the spending of public employees.

Does private enterprise have anything to fill the hole blown into consumer demand if government cuts back?

The old argument of lower interest rates no longer applies as far as I can tell. How can interest rates get lower?

What else is there to bolster consumer spending?

Maybe cutting government would have one long term benefit. When it brings a deeper recession, rampant deflation is also likely. Yes, deflation meaning prices coming down. Deflating the obese American economy, that is now on the life support of government spending. Deflating property values still farther, for instance.

This would be painful, but as things come crashing down, there might be an upside. If America was cheaper, our products and services would be less expensive on world markets.

Another way to cheapen America, without creating the social chaos that huge cuts in government would most likely bring, is to devalue the American dollar. Devalue the dollar by just printing more money.

If Federal Reserve prints lots of money to prop up government spending, a "soft landing" could possibly be engineered. A soft landing would basically be lower valued US dollars which would make imports to the US more expensive and exports from the US less expensive.

In the long run, maybe the US would be consuming less and producing more.

A leaner US indeed.

2 comments:

Larry said...

A soft landing may be what they would like to see, but it's ruinous for those of us that have sacrificed, saved, invested, and otherwise been responsible participants in the American economy. I don't think printing dollars is the "right thing to do". But, I'm sure that's what they will try since nobody seems to want to make any sacrifices these days.

Robert said...

Good to hear from you. Too bad that so many people depend on federal spending and aren't hardly willing to give an inch. Veterans, the military, Medicare, highways, disaster relief, interest on previous debt. Just about the entire budget is entitlements.