Originally Posted by
palmerq
Good posting Kirkland, thanks for taking the time to try to explain it. So debt isn't ideal but as long as debt to gdp(I watched some beginner economics videos, so I I mostly know what that is :S) ratio isnt getting out of hand and gdp keeps growing everything is probably alright? So in the current environment/recession a smaller deficit or maybe even a balanced budget could make things worse because gdp could fall or grow slower so the debt to gsp ratio could get even worse or something along those lines? I assume that's what trudeau meant with his famous the budget will balance itself quote.
My pea brain doesn't quite understand the inflation bit, I'm probably missing something very obvious so feel free to make fun of me.
"If the government borrows a hundred dollars from you on January first this year and agrees to pay you one percent interest. Inflation runs at two percent over the year so government revenues increase by two percent without the government doing anything due to inflation. They then pay you a hundred and one dollars leaving them a dollar up and you a dollar down in real terms over the year but you're a dollar up in nominal terms."....
Why are government incomes up, I would still be paid the same and paying the same income tax so they still get the same amount of money that way, maybe I've got what inflation is all wrong, isn't it just the cost of things going up? Where do they the get the extra quid from? VaT maybe?
Imagine the debt clock but then imagine a GDP clock next to it. If they're both going up at the same rate you don't have a problem. Balanced budgets would absolutely make things worse in recessions.
The classic line you get from some politicians and businesspeople is that anybody who runs a household knows that when times get tough you have to cut your spending so that you don't lose your house or whatever. This would make sense if the economy was like a household. But the economy is millions of households. In our economy your spending is my income and vice versa. If we all stop spending at once you get a recession. This is where governments step in and increase spending to ameliorate the economic effects of the recession and to get the economy going in the right direction. The fancy term for this is countercyclical fiscal policy.
From the Great Depression onwards there is nearly a hundred years of evidence that this is the correct and effective thing to do and hundreds of years of data previous to the 1929 crash that show that cutting government spending in recessions makes things worse. So with any politician or business fucker spouting this stuff there are two options. Firstly they're idiots and shouldn't be in a position where they're affecting government policy in any way. Secondly they know they're full of shit but they're pushing their favoured agenda of lower taxes, less government and so on.
There are hundreds of years of evidence to show that you grow your way out of recessions and debt and zero evidence to show that cutting your way out can be successful.
The inflation bit. Imagine an economy where the GDP is $100 on January 1st. On December 31st, one year later there has been zero economic growth and the GDP is still $100. However there's been two percent inflation over the year so although the real GDP is unchanged the nominal GDP is now $102. The government collects 25% of the economy in taxes so in the previous year collected $25 but in the next zero growth/two percent inflation year collected $25.50. Luckily for the government their debt is in nominal dollars so their debt level has become two percent smaller and they have extra money to pay it off.
When you see an article stating that GDP in creased by 3.2 percent in the previous year that's in real terms, adjusted for inflation. If inflation ran at two percent over the course of that year then the nominal GDP increase, which is real GDP plus inflation, would have been 5.2 percent. They always express GDP in real terms in articles unless stated otherwise.
The fact debt is priced in nominal dollars means that governments can run deficits equal to economic growth plus inflation and not have their debt situation get any worse. If the US has three percent growth and two percent inflation that's a total of five percent growth in nomianl terms meaning they can run a deficit of five percent or, in a twenty plus trillion dollar economy, a one trillion plus deficit. This shouldn't be done during growth periods however. When the economy is growing the budget should be as close to balanced as possible unless you're making investments which will boost growth in the future. That gives you room to spend like a motherfucker when you hit a recession and also means your debt level in relation to your GDP melts away during growth periods. That's what I mean by growing your way out of debt.
And don't worry about not understanding this stuff either. Loads of billionaires and centimillionaires don't understand it at all. And my front office friend says you can't explain it to them either. In almost every case when he's dealing with clients if you tell them something they don't want to hear, that tax cuts for them don't grow the economy for instance, they get upset and move their business to some firm who will tell them what they want to hear which just perpetuates all the negative economic knowledge out there. There are tons of nine and ten figure guys and girls out there who have a massive negative level of economic and financial knowledge.
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