We need to spend to save the economy

[carlsbadworker]

[quote=pri_dk]
I’m surprised that people make these arguments so often without thinking it through.

Capital (savings) goes to a company, the company is in the business of selling stuff.

Somebody has gotta buy that stuff for the cycle to work.

Lots of companies have plenty of cash right now. The economy needs capital, but it also needs demand.

I’d buy something but there’s really nothing that interests me. Flu’s camera suggestion was good, but I’m gonna pass. Too much money for just an upgrade.[/quote]

You are making comments against your own arguments. The blank Keynesian argument that demand needs to be stimulated in recession is not entirely valid. I believe demand needs to be stimulated only when there is panic in the market. It does not need to be stimulated if the product mix is out of whack comparing to a sustainable consumption need. Take housing for example, we need to stimulate demand when there is panic against owning a house. But we don’t need to stimulate demand for 2006-2007 era pricing because it is not what people need.

I would argue that at the moment we don’t need to stimulate the short-term demand because consumer is not in panic mood and the companies who got the capital with demand stimulus are in China, and the capital is recycled back in the US treasury. We need to stimulate the long-term demand which means less debts for the consumer and more savings. But Bernanke are punishing savers and encouraging debts right now to have shorter gains at the cost of long term pains.

[Anonymous]

[quote=carlsbadworker]But Bernanke are punishing savers and encouraging debts right now to have shorter gains at the cost of long term pains.[/quote]

“punishing?”

It’s not personal.

There is no rule that says savers should be rewarded. The economy is a system without values. Thrift may be a virtue, but the economy doesn’t care.

“Panic” is a subjective term. How ’bout we use “malaise” – which is probably pretty descriptive of the current situation? There is also plenty of “uncertainty,” which is causing consumers (and businesses) to delay purchases (and investments.)

Look at the cash balances of big corporations. MSFT has about 1/4 of their market cap in cash. More savings going to their balance sheets won’t change much at all.

If the wheels aren’t turning now, what will cause them to start later?

[briansd1]

[quote=pri_dk]
“punishing?”

It’s not personal.

There is no rule that says savers should be rewarded. The economy is a system without values. Thrift may be a virtue, but the economy doesn’t care.
[/quote]

I like it how you put it.

[sdduuuude]

I think Keynsian economics does work. Creating credit out of thin-air helps stimulate and kick-start things. It accellerates the economy and allows it to grow more quickly. People buy stuff and the economy grows. Makes sense.

I believe, however, there is an optimal level of debt. Not enough is bad. Too much is also bad. And, once you are past the point of optimality, piling it on gets you farther from optimality.

We are well past that point and whomever writes articles like this doesn’t realize it.

It is analagous to priming an engine with gasoline. If you put just enough fuel in there, the engine starts, but if you flood it, adding more gasoline isn’t going to start the engine, even though we all know that engines run on gasoline.

[Ash Housewares]

[quote=sdduuuude]I believe, however, there is an optimal level of debt. Not enough is bad. Too much is also bad. And, once you are past the point of optimality, piling it on gets you farther from optimality.

We are well past that point and whomever writes articles like this doesn’t realize it.[/quote]

Agree. You can’t stimulate the economy every time we hit a bump in the road. But to maintain this optimal level of debt, you need to have budget surpluses when the economy isn’t in a slump, so that the surplus can be spent to stimulate when a slump comes without piling on more debt. Just like rainy day savings.

The problem is that every time we get a budget surplus we spend it, mostly by cutting taxes but also increased spending on other things. Then when the slump comes there’s no money, so we go deeper in debt to stimulate.

The balanced budget amendment proposal is stupid for this reason. Budgets should be balanced over the business cycle, not arbitrary dates.

[Anonymous]

The absolute amount of total debt really doesn’t matter so much.

It comes down to basic finance: If you can borrow at a cheaper rate than the return you can get on the funds, then it makes sense to borrow more

(e.g. see the “refinance” thread)

We know the rate the government pays to borrow – pretty low, actually.

The hard part is figuring out what ROI the government gets for its “investments.”

Build a road, secure the border, prevent poverty, eliminate crime, …

All these things come at a cost, all of them provide some benefit. Are we getting our money’s worth? Is it worth it to borrow and pay interest costs to have these things?

It’s extremely hard to measure ROI on government spending/investment. That’s why we have the debates we have.

But either way, the total debt is actually not much a measure of anything – all that maters is whether you are getting more out of the funds than they cost to borrow. The question to borrow more comes down to the marginal net ROI on the amount borrowed.

[Arraya]

Tons of human need in the world but not enough money demand to keep the economy from springing a gasket and going into a tailspin. Something’s wrong with that picture?

All that debt in the world is predicated on consistent “growth” to pay back. Economists like 3% a year to avoid problems. We are at the point where there is too much debt in the system, while, paradoxically, more is needed to expand the money supply and service existing debt. Juxtaposed with an energy situation that restricts growth as well, doesn’t paint a nice picture. And top it off with increasing global unrest and a blossoming anti-consumerist counter-culture in the imperial center.

It’s not looking good for our old friend growth to save the day…. And boy is this going to drive us crazy! Something that needs never ending growth to sustain is a ponzi-scheme. Not to mention the ideology of cancer.

Yeah and mass saving is not good for our economy. A sudden streak of frugality could be devastating.

Cheers!

[Anonymous]

The Ponzi scheme analogy is worthless.

All long-term economic plans assume perpetual growth.

All of them.

Ok…there are some that don’t. You’ll find them in the bookstore under “apocalyptic fiction.”

[Arraya]

[quote=pri_dk]The Ponzi scheme analogy is worthless.[/quote]

Until it collapses – which admittedly could be a several decade process – in the case of old empires, was centuries.

[quote=pri_dk]
All long-term economic plans assume perpetual growth.

All of them.

[/quote]

Well, no. You mean All market based economics. There has been plenty of work done on the idea of steady state economics for 100 years (it really ramped up in the 30s and 70s)- in many different forms – because rationality dictates it will be a multi-faceted problem if you get past market mythology with all it’s false assumptions and blindnesses. It’s built on false assumptions, overly simplistic ideas on human behavior and an inherent blindness to the earth.

Every empire in the past operated like a ponzi-scheme. Which is why they all collapse. There is plenty of academic work on this as well. Capitalism just took the ponzi-dynamic of empire and made it global. Economic competition is just war by other means.

[swave]

[quote=pri_dk]The Ponzi scheme analogy is worthless.

All long-term economic plans assume perpetual growth.

All of them.

Ok…there are some that don’t. You’ll find them in the bookstore under “apocalyptic fiction.”[/quote]

Do you really think the economy can grow exponentially forever? Exponential growth is pretty scary. Eventually, the growth will end. I hope it is not in my lifetime. If we transition to a steady state economy, it will be much easier than if it collapses like a bubble.
We seem to be having more and more bubbles in the economy. It is possible that we might be very close to the peak.

[Anonymous]

Exponential growth simply requires that every year we find ways to do and have the things we want cheaper/better/faster/whatever.

0.001% growth every year is still “exponential.”

Most people don’t know understand what the word means.

Do you really think that we will ever run out of ways to do things better?

Is human ambition and resourcefulness just going to halt one day?

Why do so many present the question as a (false) choice: exponential growth or collapse?

Exponential growth isn’t that hard, and it isn’t that outrageous.

In fact, it’s all we have ever known.

[briansd1]

[quote=Arraya]
Every empire in the past operated like a ponzi-scheme. Which is why they all collapse. There is plenty of academic work on this as well. Capitalism just took the ponzi-dynamic of empire and made it global.
[/quote]

Arraya, since you said that money is just a human construct that is not needed, then why does it matter if we have too much debt?

Surely, something other than money would cause a collapse.

Isn’t it a good thing that we can use money (an idea that people believe in) to encourage economic activity?

[quote=Arraya]
Economic competition is just war by other means.[/quote]

It doesn’t have to be economic competition. We can all grow ever wealthier and better off.

[swave]

[quote=pri_dk]Exponential growth simply requires that every year we find ways to do and have the things we want cheaper/better/faster/whatever.

0.001% growth every year is still “exponential.”

Most people don’t know understand what the word means.

Do you really think that we will ever run out of ways to do things better?

Is human ambition and resourcefulness just going to halt one day?

Why do so many present the question as a (false) choice: exponential growth or collapse?

Exponential growth isn’t that hard, and it isn’t that outrageous.

In fact, it’s all we have ever known.[/quote]

Growth requires that the total amount of money that we spend increases.
Yes, we will continue to do things cheaper/better/faster. But when things get cheaper, growth goes down. Better and faster do not necessarily translate into economic growth. Most electronics have become cheaper over the last 30 years. Also, information will continue to be cheaper. Especially when the copyright/patent expires. The goods that become more expensive are primarily resources that are not unlimited. Land, oil, metals, food.
A more complete proof is explained in this link:
http://physics.ucsd.edu/do-the-math/2011/07/galactic-scale-energy/

[Anonymous]

You are arguing that the computer and electronics industries are counter examples of economic growth?

You might want to think about that one a bit more.

Yeah, available energy could be a limiting factor, and ultimately has limits. But we haven’t even scratched the surface on some of the most potent energy sources, and economic growth doesn’t have to correlate with energy usage.

Metals and everything else can be recycled. Food is just energy. Population can be managed.

I’m using LED Christmas lights this year.

[swave]

[quote=pri_dk]You are arguing that the computer and electronics industries are counter examples of economic growth?[/quote]

Yes, almost everyone in this country now has a tv, a cell phone, and a computer. These new product categories add to economic growth. The electronic parts of the computer get cheaper. The resource based parts remain expensive. The industry is growing as large parts of the world move out of poverty.

[quote=pri_dk]Yeah, available energy could be a limiting factor, and ultimately has limits. But we haven’t even scratched the surface on some of the most potent energy sources, and economic growth doesn’t have to correlate with energy usage.[/quote]
Within a couple of hundred years, we will be reaching the limits of energy production no matter which sources you use. With current technologies, it will be much sooner than that.

[quote=pri_dk]Metals and everything else can be recycled. Food is just energy. Population can be managed.

I’m using LED Christmas lights this year.[/quote]

I did not say that innovation would stop, or that your well being would not continue to increase. Only that economic growth would eventually reach a limit.

In the near future, we will probably all be wearing glasses that will display virtual reality or any other information that we desire. They will start off very expensive, then the cost will fall until they are not much more expensive than a cheap pair of glasses. Sales of most other electronics will be obsolete.
The cost of entertainment is going up now. As the cost of electronics drops, more and more people are creating their own content and distributing it for free on YouTube or Facebook. It will become increasingly difficult for movie makers and tv studios to charge large premiums for their productions.
I am pessimistic in suggesting that this might occur in our lifetimes. Many of us here including me thought that housing prices would hit a peak in the early 2000s. But it is inevitable that the economy will reach a peak within a couple of hundred years.

[Author]

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