Wednesday, October 26, 2016

The Fiscal Doom Loop

As monetary policy is failing to achieve its goals the calls for increased deficit spending are getting frequent and loud.

With deficit spending, savings that is available for spending, investing, or lending, is now able to flee to the safety of Treasury bonds simply by the Treasuries being available.  This is just a transfer.  No new credit money is created and the concomitant creation of some real permanent money, profits, from it.  It is a transfer then a loop back.

The money is spent into the economy by the Federal government and ends up as profits, which are savings, less any household savings along the way.  So the money is back into savings.  Just other people’s savings.  And these other people will have to use their new savings, or income, to pay taxes to pay the off the debt that created their savings in the first place.  Along with interest.  So really, that is a negative to the people who ended up with the money from the original saver who lent it to the Federal government.

When the bond matures and the taxes paid, the money is returned to the original saver.  It has looped back to the original saver.

Of course it doesn’t actually work this way for the system as a whole.  When bonds mature, new bonds are issued and the system doesn’t on net pay anything back.  The system builds up the negatives though.  Can you imagine taxing the recipients, and the non-recipients of Federal money and pay back the Federal debt?  There goes their savings.  Poof, back to the original savers.

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