How Do Governments Pay off Debt?
The world is indeed struggling economically, and there are signs of lack of demand and of economic malaise. No doubt there are many bumps in the road ahead, and much pain to be endured. However, whether one agrees with the policy or not, government spending money that we don’t have in order to stimulate economic activity, sooner or later, creates a situation that this money has to be repaid. Repayment comes only in a few ways.
• Raise taxes to get more money out of the population. This reduces economic activity as there is less money in the hands of taxpayers.
• Create inflation to enable easier repayment by using lesser value dollars. The dangers here are real and too obvious to be discussed in this short writing.
• Stop spending and keep current debt levels in the hope that increasing economic activity will make the problem diminish in scope over time. This is how Canada dealt with its problem in the 1980’s and why Canada is now regarded as a model financial system to be followed by the rest of the world.
• (An interesting discussion for the future would be how a government (Canada) can do nothing to reduce debt and yet be highly regarded as a result).
None of these solutions is ideal. But the saving grace is that history will repeat itself again (a quote from Yogi Berra). If governments simply learn a bit of restraint in their spending, the simple expansion of economic activity, will (over the longer term) make the problem go away. The next big economic wave will make the current government debt appear far less significant – example is Canada.
Are We Entering Into A Double Dip Recession? Statistics Are Misleading.
Following our last blog, the question remains as to whether we are indeed entering into a double dip recession. The facts speak for themselves when one ignores the misleading statistics published daily. Firstly, statistics over any short period of time can usually be used to support either side of an argument or discussion. Car sales were strong, then weak. Some auto makers are increasing sales and others are losing market share, and so on. We simply cannot use the latest statistics in isolation to prove anything.
When one surveys the dramatic fall in the stock market over the last 2 years, and then the remarkable recovery that for no apparent reason, gave rise to a dramatic recovery that measured between 40% and 100% depending on what stock or sector, it is a real possibility that the recovery was false, or a dead cat bounce.
Does The Stock Market Really Foretell What Will Happen In The Real World?
The other side of the story is that writers always pontificate that the market, for unknown reasons, always foretells what will happen in the real world. Therefore based on the recovery in the market, our economic troubles are being deal with and put aside. Given the levels of debt in the world, the fall in the value of real estate in the US, the changing pattern of the stubborn unemployment numbers and so many other factors, we do not believe that our troubles are behind us. The stock market cannot swing in the dramatic wave it has over the last two years and still b e regarded as an accurate foreteller of future events. The stock markets move more on the emotion of the moment than on anything else.
The Real Effect of Short Periods of Time.
Yet it wasn’t so long ago that the USA has a surplus in their budget. It wasn’t so long ago that Canada’s debt made Canada a supposed financial basket case. It wasn’t so long ago that the Canadian dollar was worth $0.63 US, or the Euro was worth so much more than the US $. Remember when a cup of coffee in Japan cost $10 US? Today it is hard to believe how much these values have changed and in such a short time.
The point is that things change, sometimes quite rapidly, and for unforeseen reasons. Again, hindsight is a wondrous thing. The only surety is that people have come to expect a certain standard of living, and will strive to reach that level again as soon as possible. What appears to be an economic fact today, can be the opposite of tomorrow’s truth.
The New Prosperity – Feeling Secure as the new wave takes shape.
Economic activity, and following an increase thereof – prosperity – comes from having excess money to spend or to improve your living standard. Then the next requirement is a belief that it is safe or wise to spend the money. If stable economic activity ensues, that is the first essential. You can base your conclusion on whether to spend or not on a belief that you know what is coming. Lastly, there has to be a combination of your desire to spend the money because of a desire to acquire the good or service combined with a belief that your financial circumstances will allow the expenditure.
The so-called Double Dip is really a Misnomer. What we really are talking about is how to understand what is happening. It is just the start of a new economic cycle, with new inventions, new procedures, new applications, new communications leading the way and making a new wealthy middle class.
To Be Continued in Part III
