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Source link: http://archive.mises.org/4606/arent-deficits-another-name-for-saving-nope/

Aren’t Deficits Another Name for Saving? Nope.

January 27, 2006 by

Writing in National Review, Tom Nugent’s attempt to link government deficits to private savings and growth is not merely inaccurate; it is exactly backwards. When the government runs a deficit, it sucks savings out of the private sector and reduces private investment. Unless one believes that politicians spend money more wisely than investors, this practice only impoverishes the community. Notwithstanding sophistical arguments to the contrary, government deficits retard economic growth. FULL ARTICLE

{ 13 comments }

Don Beezley January 27, 2006 at 9:57 am

A great piece. I guess I need to run out to Best Buy this afternoon and spend a bunch of money I don’t have in order to be prosperous and retire. It’s so comforting to know that printing numbers on little pieces of paper creates value and no one ever has to think, work, save or do anything productive! Even with reality on our side, I wonder if we can ever out argue the psychological attraction of a promise of a free ride to prosperity.

Vince Daliessio January 27, 2006 at 11:52 am

“We are all Keynesians now” – Richard Nixon

J.C. Ernharth January 27, 2006 at 2:15 pm

Government deficits are as essential to private savings? Why, of course! And thank God (well, our Government god) for it.

And just think, aren’t we also lucky that those economic benefits are compounded by the fact that blowing up billions of $$ of things in war is so very central to economic growth.

We’re all gonna be rich!

It all works together so nicely.

Paul Edwards January 27, 2006 at 4:46 pm

Pathetic:

“This data indicates … that the federal deficit is too small for the U.S. domestic sector to save anything! Domestic savings are low because the budget deficit is too low. Low and unobtainable savings means low demand, excess capacity, and low levels of employment. In other words, to get adequate demand from a healthy economy, a much larger federal budget deficit is needed.”

More Pathetic:

Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. and chief investment officer for Victoria Capital Management, Inc.

Nugent’s article begins with “There’s a lot of confusion about tax-rate reductions and deficits.” There’s a lot of confusion? No wonder.

P.M.Lawrence January 28, 2006 at 7:07 am

Here are the main fallacies involved:-

- that none of the deficit is “funded” by increases of the money supply;

- that savings soaked up by government debt are as constructive as savings channelled into investment; and

- that the economy is sufficiently closed that government debt comes from domestic savers, who are the drivers of it.

In this scheme, it is people’s constructive desire of gain that fuels constructive government activity, which wouldn’t happen if savers didn’t think it would deliver a return. That might even be true in a government that didn’t tax but had to maintain and build a directly revenue yielding pool of resources (a “domain”). But that’s not what this is.

Alan Dunn January 28, 2006 at 7:52 pm

The article assumes a fixed exchange rate and endogenous interest rate.

I think the majority of Keynesians would agree with the article.

As for me, I am not a Keynesian – so I will leave it at that :0)

Cheers

Vanmind January 29, 2006 at 5:01 pm

I have a question: should I feel ashamed for investing in my own personal growth by ordering Economics And The Good Life instead of turning over an equivalent amount of my earnings to the government for their wise “investment” policies?

Caley McKibbin January 30, 2006 at 12:25 pm

I was laughing too hard to get past the first section. It makes me feel like bigger fish to know that people out there think this way.

Chris Lakumb January 31, 2006 at 5:48 pm

I have been wrangling with a question about “printing” money, or in these days, the electronic equivalent:

I am under the assumption that by printing money, all the Fed is doing is essentially crediting member banks with funds in their account at the Fed; which banks can then lend out to the general public. Am I missing something? I understand that the Fed’s primary tool is the tinkering of the money supply. I also know that this can be done through open market operations. I wasn’t sure how the “printing press” factored into the whole equation. Any feedback is appreciated…

Caley McKibbin February 1, 2006 at 11:21 am

I’m sure that we’re all missing something. The Fed can do whatever it wants. A printing press is one of many instruments of financial manipulation.

Paul Edwards February 1, 2006 at 5:12 pm

Chris,

When the fed conducts its open market operations it writes checks against itself to large private financial firms to buy treasury securities. These checks are not backed by money. When the private firms deposit these checks with commercial banks, there is now new check-book money introduced into the economy. This money is also called high-powered, and it represents an increase in banking reserves. With this new money, the banks can increase their own deposits with the fed and on that basis, they can expand credit further.

To this point no new federal reserve notes have been issued but new money has been created. However, if customers ask for notes in exchange for deposits, or if the banks need the notes, then the fed will print them up just as you’d expect.

Gary Anderson February 4, 2006 at 11:48 am

Maybe Nugent’s reasoning is what lead Dick Cheney to say that budget deficits didn’t matter anymore. I would say that in a depression, government spending could be helpful because no one else would want to produce or spend, but it seems that in a time of surging economy, it would be crazy to think government spending would do anything but put pressure on the monetary system. Maybe this guy Nugent has an agenda. Maybe he realizes that the consumer will be tapped out, that the corporations will not spend their cash, and that all that is left between us and deflation is government stimulous. He may be right, later on. He may be preparing for the downturn that comes with constantly higher interest rate hikes by the fed.

Chris Lakumb February 9, 2006 at 6:49 pm

Paul,

Thanks for the info on open market operations…

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