Now that I’ve got Ducati sorted out with the linking I can get back to addressing his response to my The US is not the next ZimbabweÂ post.
Duc does a good job bringing up the why’s and wherefor’s of debt issuance, who’s doing the lending to the government, fiscal and monetary policy, etc. At the end he asks the question “The question is where will the money flow and determine the initial winners?” This is something I actually was thinking a bit about when I was writing the original post.
You see, when the government does deficit spending it is creating private sector savings. If Uncle Sam writes you a check you are going to do one of two things with the money. You’re either going to spend it or you’re going to save it (keeping in mind that paying down debt is the same thing as putting the money in a savings account from the perspective of your net worth). If you spend the money, the next person in line makes the same decision, and so on until at some point the money is all in savings.
Now, if the government taxes that money back in then there’s no net increase in savings because the payment to the IRS will wipe it out. If, however, the Treasury issues debt to cover that spending, then the saving is kept in the economy – albeit in the form of Treasury debt somewhere along the way. This is the answer to the Where Is The Money We’re Borrowing Going To Come From? question from Henry Blodget at the Business Insider – it’s coming from the gov’t who’s spending the money and borrowing it back.
Of course in the current economic situation debt repayment is at the top of the list for many citizens. That’s been the big issue with some of the stimulus programs, like tax rebates. They aren’t getting spent, but used to reduce credit card balances. That means the government money is flowing into the banks as debt is being payed down. This, of course, is helping the bank balance sheets, but since lending standards are tighter and loan demand is reduced, that money isn’t flow throughÂ the economy as readily as it would were the money spent on construction projects or other “purchase” programs. The money would still end up in the banks for the same reasons as noted above, but it would pass through more hands along the way, having a greater impact.
Either way, what we’re seeing happen here is the government taking on the debt of the private sector. That’s not a good thing, of course, and it’s going to have repurcussions for some time to come, most likely in the form of reduced growth potential as the government withdraws moneyÂ from the economy through taxation and/or reduced spending to repay its debts.