Monday, March 2, 2009

A few short words...

...on deficits. Anyone who's taken a class in economics knows that deficit spending has a "crowding out" effect. In other words, to pay for deficits requires the government to borrow more thus increasing interest rates and crowding out private borrowing. Deficits can also result in higher inflation as governments print money in addition to borrowing in order to close the budget gap. Any freshman in college knows this stuff.

And yet, when I think of the three largest budget deficits in U. S. history (World War II, the Reagan years, and the Bush years) none of those fears came to pass. In each, interest rates and inflation remained well under control. So I'm a little skeptical when I hear people talking about the inflation that is sure to follow the Obama deficits. Besides, in a world where everyone is enacting stimulus packages the dollar shouldn't lose its relative value. If anything, I think the dollar will continue to strengthen as it is seen more and more as the world's reserve currency. To put it politically incorrectly, the dollar is the world's tallest midget and should continue to be. After all, where would you rather put your money, Russia or the U. S.? Based on what we've seen in the past, the Obama deficits should not result in inflation or higher interest rates.

Now this isn't to say that deficits don't matter. At some point they surely must, but I don't think we've ever seen that point and I can't imagine what it must be.

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