From: jwh@citi.umich.edu (Jim Howe)
Subject: Re: All deficits are not created equal.
Date: Wed, 14 Oct 92 16:08:46 EDT
Organization: IFS Project, University of Michigan
Reply-To: jwh@citi.umich.edu

In article <1992Oct14.175031.17215@oakhill.sps.mot.com>, dong@oakhill.sps.mot.com (Don M. Gibson) writes:
|> In article b@engin.umich.edu, jwh@citi.umich.edu (Jim Howe) writes:
|> >In article <1992Oct9.174531.7539@oakhill.sps.mot.com>, dong@oakhill.sps.mot.com (Don M. Gibson) writes:
|> |> 
|> >|> all deficits/debts are monetized, because we will always have some
|> >|> inflation.  but, govt. can increase the spending velocity.  This 
|> >|> swirls the pot instead of really adding more soup.  
|> >|> 
|> >
|> >I don't agree that all deficits/debts are monetized.  Borrowing money
|> >from people does not increase the supply of money any more than taking
|> >the money in the form of taxation increases the supply of money.
|> >If I run a deficit of $100 billion, and the $100 comes from investors,
|> >this means that the investors have given the government $100 billion.
|> >To eliminate the deficit, taxes would have to be raised $100 billion.
|> >This would mean that taxpayers have given the government $100 billion.
|> >How does one increase the money supply but not the other?
|> 
|> by monetized i mean eroded by inflation.  we just pay interest and 
|> not principle.  thus we keep an infinite length mortgate and just let
|> inflation erode that principle down to nothing.  

Monetization means that the debt was financed by printing more money,
not by receiving investment dollars from individuals.  Monetization
increases the money supply, leading to inflation, the other does not.
It is misleading to say that we only pay principle.  Anyone who has
purchased a bond gets paid back interest *and* principle.  Of course,
new debt is created so the effect to the treasury is as if only
principle were being paid but thats not the same thing as saying
we don't pay principle.

|> >
|> >The point is that interest rates (long and short term) are dropping
|> >not rising, even though our deficits are increasing.  If deficits have
|> >such a detrimental effect on interest rates, why are they dropping?
|> >
|> 
|> lower demand for capital because of the economy.  classic supply
|> and demand for money.

I don't buy it.  From what I've read, many businesses (particularly
small businesses) are having a very tough time getting loans.  This
isn't due to lack of capital, its due to paranoia brought on by the
S&L debacle.  Federal regulators have run amok, creating fear and
panic in the banking system such that banks won't lend money to
'risky' ventures.  Of course most job creation occurs through
small business growth and when you choke that off, you choke off
the economy.  Also all during the Reagan boom (growth by 1/3),
interest rates were falling while deficits were increasing.  This
was during a period of high economic activity and growth.  By
your reasoning, interest rates should have gone up, but they didn't.
Why not?


James W. Howe                  internet: jwh@citi.umich.edu
University of Michigan             uucp: uunet!mailrus!citi.umich.edu!jwh
Ann Arbor, MI   48103-4943         
Newsgroups: talk.politics.misc