The New Great Depression by James Rickards

Author:James Rickards [Rickards, James]
Language: eng
Format: epub
Publisher: Penguin Publishing Group
Published: 2021-01-12T00:00:00+00:00

WHY FISCAL POLICY IS NOT STIMULUS

Congress authorized more deficit spending in 2020 than in the last eight years combined. Congress will add more to the national debt in 2020–21 than the cumulative debt of all presidents from George Washington to Bill Clinton. This spending saturnalia includes $26 billion for virus testing; $126 billion for administrative costs of programs; $217 billion in direct aid to state and local governments; $312 billion for public health; $513 billion in tax breaks for business; $532 billion to bail out major corporations; $784 billion in aid to individuals as unemployment benefits, paid leave, and direct cash payments; and $810 billion for small business under the Payroll Protection Program. This comes on top of a baseline budget deficit of $1 trillion. Combining the baseline deficit and approved spending brings the total deficit for 2020 to $4.3 trillion. That added debt will increase the U.S. debt-to-GDP ratio to 130 percent. That’s the highest in U.S. history and puts the United States in the same superdebtor’s league as Japan, Greece, Italy, and Lebanon.

There’s no doubt about the amount of deficit spending and its impact on critical debt ratios. There’s little debate about the necessity for this spending to keep the economy from spiraling into an even deeper depression than the one we are now witnessing. Yet spending is not “stimulus.” Congress is spending money as a temporary bridge until growth is revived, but such spending alone will not deliver growth. The reason lies in both classic economic analysis by John Maynard Keynes and recent analysis by economists Carmen Reinhart and Kenneth Rogoff that defines the limits of what a Keynesian approach can do.

The idea that deficit spending can stimulate an otherwise stalled economy dates to John Maynard Keynes and his classic work The General Theory of Employment, Interest, and Money (1936). Keynes’s idea was straightforward. He considered output a function of what he called aggregate demand. This is usually driven by business and consumer demand. At times, this demand was lacking because depressionary conditions or deflation drove consumers into a liquidity trap. In this condition, consumers preferred to save rather than spend, both because prices were falling and because the value of cash was going up. In those conditions, it’s smart to defer buying (since prices will be cheaper later) and increase savings (since the real value of cash is going up). Keynes’s solution to the liquidity trap was to have governments step in with government spending to replace individual spending. Deficits were a perfectly acceptable way to do this, in order to break the back of deflation and revive what Keynes called “animal spirits.”

Keynes went further and said that each dollar of government spending could produce more than one dollar of growth. When the government spent money (or gave it away), the recipient would spend it on goods or services. Those providers of goods and services would, in turn, pay their wholesalers and suppliers, which would increase the velocity of money. Depending on the exact economic conditions, it might be possible to generate $1.

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