deficit-spending Archives - the patient investor

March 8, 2023March 9, 2023

Warren Buffet: Fiscal Deficits and Runaway Inflation

“During the decade ending in 2021, the United States Treasury received about $32.3 trillion in taxes while it spent $43.9 trillion. Though economists, politicians and many of the public have opinions about the consequences of that huge imbalance, Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless…..Berkshire offers some modest protection from runaway inflation, but this attribute is far from perfect. Huge and entrenched fiscal deficits have consequences.”

~ Berkshire Hathaway Newsletter to Shareholders, 2022

Comments

There are three potential sources of funding for fiscal deficits of which two are inflationary:

The private sector. Deficits funded by the private sector have no impact on inflation. The rise in public spending is offset by a decline in private spending/increase in savings.
Commercial banks. Inflationary. The bank simply swaps one asset on their balance sheet for another: bank reserves at the Fed are exchanged for Treasury securities. Public spending rises but is not offset elsewhere.
Foreign investors (including banks). Inflationary. Public spending rises but there is no offset. The inflow on capital account is matched by an outflow on current account.

December 5, 2012

How cancelling central banks’ holdings of government debt could be a useful thing | FT Alphaville

FT’s Kate Mackenzie writes: Morgan Stanley cross-asset strategist Gerard Minack says the remarkable thing about developed economy deleveraging is how little of it has happened:

The credit super-cycle ended four years ago, but leverage has hardly fallen in major economies: debt-to-GDP ratios remain historically high.

Minack says the problem is some of that deleveraging (particularly for households) is being tackled by saving more, but that won’t solve the problem, or at least not very quickly. This is because of what the borrowings were used to finance: mostly pre-existing assets (that were forecast to rise in value) rather than expenditure.

There is a simple reason why deleveraging is taking so long: governments are borrowing money (deficit-spending) to offset private sector deleveraging and avert a deflationary spiral. So overall (non-financial) debt to GDP ratios, which include government debt, are almost unchanged.

That is not necessarily a bad thing — unless you would prefer a 1930s-style 50% drop in GDP after a deflationary spiral. What can be destructive is funding government deficits from offshore because you eventually have to pay the money back. Far better to borrow from yourself — in other words your “independent” central bank. That way you never have to pay it back.

As for canceling central bank holdings of government debt. Why bother? Interest payments made on the debt go right back to the Treasury as central bank profit distributions. And why set a precedent? I doubt many would believe government promises that this was a once-off and would never be repeated…….until next time.

via How cancelling central banks’ holdings of government debt could be a useful thing | FT Alphaville.

May 30, 2012

Conversations with Great Minds – Paul Krugman – End This Depression Now

Thom Hartmann is joined by Nobel Prize winning economist Dr. Paul Krugman, professor of economics and current affairs at Princeton University and columnist on the New York Times. His new book is titled: End This Depression Now. Europe is in crisis mode. The United States could be headed off a fiscal cliff at the end of the year.

Part 2:

Comment:~ Paul Krugman believes in big government and big unions and dismisses the alternative as “voodoo economics”. The issues are more complicated than this. John Maynard Keynes was right in some areas — austerity does not restore confidence in a shrinking economy — but over-simplistic in others. If governments do run deficits — I believe this is a necessary evil during a financial crisis — increasing government spending on welfare payments and non-productive assets simply carries the country to the next crisis — ballooning public debt. The only way to avoid this is to channel fiscal deficits into productive investment which will enhance GDP growth and help to repay the debt incurred.