"For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don't. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).
"But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation."
There.
9 comments:
Roubini said:
"borrowing rates will go up sharply"
I have to wonder why this will matter as banks are barely lending as it is.
Todd, good point.
Although government stimulus spending will be more difficult to realize.
"'[B]orrowing rates will go up sharply'
"I have to wonder why this will matter as banks are barely lending as it is." -- Todd
"Good point" -- Thwap
Oh, my. My my my my. What a couple of knuckleheads. You must be solicialists of some stripe. I bet followers of Marx (pbuh).
When the government borrows excessively, lenders (us folks) demand higher rates of interest due to the increased demand for our money (supply-demand ... hello? Anybody home?), the expectation that the government will debauch the dollar to repay with cheaper dollarinos, and the increased risk of government default.
Did ya'll miss that day of Econ 101?
El Braino
Dipshit,
http://krugman.blogs.nytimes.com/2009/05/02/liquidity-preference-loanable-funds-and-niall-ferguson-wonkish/
The point is that if the government is the only borrower because the economy is flat on its back, the dangers of rising interest rates are remote.
Lenders (and don't kid yourself that ordinary people constitute this crowd) can't charge high prices for their dollars because there isn't any action anywhere else.
Todd's point (which went completely over your head) is that we don't have to worry about dear money resulting from excessive government borrowing because banks are taking the public's money and using it to improve their books rather than getting the economy going again.
We're having the same symptoms of tight money, but they're being caused by private banks.
You've presented a very shallow and superficial understanding of how actual economics functions.
El Brainless said:
"When the government borrows excessively"
Define "excessively"
"lenders (us folks)"
Actually, the wealthy, not "us folks".
"demand higher rates of interest due to the increased demand for our money (supply-demand ... hello? Anybody home?)"
And yet the BoC's (and the US Fed) lending rate has plummetted in the recent past below a full percentage point (BoC), supposedly to get that demand started and the economy, while starting to turn around in some tepid aspects, isn't going anywhere near the gang-busters you seem to believe it should be.
(Helloo? Read authorities on economics much?)
"the expectation that the government will debauch the dollar to repay with cheaper dollarinos, and the increased risk of government default."
You seem to believe that Canada or the US is on par with Zimbabwe or Mauritius if you believe there is increased risk of government default.
Why do you hate your country?
On further thought, it could also mean more sizable interest payments on outstanding debt (although I'm not sure if that's the case either as the banks, at least in Canada, haven't really budged their rates much while the BoC's rate went south; I imagine it'd pinch them more to have rates go up).
"The point is that if the government is the only borrower because the economy is flat on its back, the dangers of rising interest rates are remote."
That doesn't even make sense. What kind of economic argument is that? Why won't interest rate rise "if the government is the only borrower because the economy is flat on its back"?
Do you even understand what you read?
El Braino
El Braino,
"That doesn't even make sense. What kind of economic argument is that? Why won't interest rate rise 'if the government is the only borrower because the economy is flat on its back'?"
Why don't you read the Krugman link and see if you can figure it out?
Here's one of the important quotes:
"our current predicament can be thought of as a global excess of desired savings — which means that fiscal deficits won’t drive up interest rates unless they also expand the economy."
Post a Comment