Author Topic: What's the Best Policy for a "Balance Sheet" Recession?  (Read 9334 times)

Packer16

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Re: What's the Best Policy for a "Balance Sheet" Recession?
« Reply #40 on: June 27, 2010, 12:02:43 PM »
You are correct but the US was able to grow because there were no competitors standing after the war.  The US relied on both growth and inflation.  The UK is an example of an inflation only situation (which is where I think most of the developing world is). 

I have no doubt the gov't creates jobs but at what cost?  I think the best way to think about debt financed growth is borrowing growth from the future to get it today.  (This is Grantham's idea not mine) The only problem is that as debt increases, the effectiveness declines. There is a great chart in the current Economist which shows the declining effects of a $ increase in debt on economic growth.  In addition, I think looking at how the market prices your debt cannot be used to measure how much debt is too much as the debt spirals start out small and rise in a non-linear fashion.  Also, in the Economist there is a chart that shows all the world's debt situation.  It shows the the US and UK are not to far behind the PIGS.  Historically, what has happened in the situation is the bondholders (who in most cases are foreigners) get hosed by restructuring of the debt.   


txlaw

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Re: What's the Best Policy for a "Balance Sheet" Recession?
« Reply #41 on: June 28, 2010, 08:09:41 PM »
Packer, I don't know what Koo would say, but I think the answer to your question is a combination of reduced government spending, higher taxes, and debt monetization.   

But not yet, as Augustine would say.  That should occur over the long run. 

I'm a big fan of Jeremy Grantham, but I would disagree with the notion that government spending is always  borrowing growth from the future.  If the money borrowed is used to set up the economy so that future generations have good economic prospects, you are getting a good return by borrowing and spending today.  I think Jeremy Grantham has actually advocated something along these lines at one point, specifically in the context of an energy policy.