[Animal]

It's called deficit spending, in essence spending money that doesn't exist.

Keynesian economics tells us that running a deficit during times of a recession is actually a good thing. The problems of deficit spending out of a recession even out through two negative possibilities, inflation and crowding out. Inflation means there is more demand or money than there are goods this causes an increase in prices and drives down the worth of the dollar. This depreciation of the dollar counters the cost of the deficit but destroys the purchasing power of the dollar. A five dollar debt is still a five dollar debt even if the five dollars are only worth what used to be a five cent piece of bubblegum. Despite its dangers inflation is used to some extent to curb the debt. Crowding out is when the government is looking for the same capital that the business sector wants to invest. This causes fierce competition for funds to invest. The fierce competition causes an increase in interest rates and often business will decide against further investment and growth. The governments needs will “crowd out” business needs. This turns potential assets into waste.

However, there is a third option which would allow the government to run a deficit and avoid the negative aspects of inflation and crowding out. Borrowing from foreign sources is a tangible and recently very common practice. Attracted by high interest rates and stability, foreigners now buy huge amounts of U.S. national debt. Of course this cannot be the perfect solution otherwise no one would be concerned about the debt. The problem with borrowing from external sources is the lack of control the government has over foreign currency and debts. Internal debts can be paid with increased taxes, inflation, and other monetary controls the government has but external debts can extremely damaging to a country if it cannot buy enough of the foreign currency to pay the interest.

Running a deficit is apparently good for an economy that is operating inside its production possibilities curve but it can be damaging to an economy operating on the curve. A deficit managed properly has the effect of increasing demands. An economy inside its curve can increase supplies in reaction. An economy on the curve can increase demand but its supplies cannot increase causing prices to rise, or inflation. If there is no deficit and the curve shifts to the right then supplies will not increase and the country will no longer be operating on the curve. A deficit must be maintained to insure that the economy grows with its resources.

So is this good or bad? Well, the rebuilding of Iraq is more than likely going to create jobs for US companies, leading to an increase in disposable income for US citizens who undoubtedly will spend their hard earned money...you guessed it in the US. The trick is to know where to draw the line.

[ 08-12-2003, 06:50 PM: Message edited by: Animal ]