Deficit financing

[Jerry J. Fortin]

If folks think it is bad now, they will be a little surprised at what is about to happen. Things are going to get a lot worst. House values will decline another 20-35% in some areas, and job losses will begin to accelerate. Government spending will increase and social program expenditures by the provinces will force most into deficit.

By this time next year some folks will start looking into all of those hundreds of thousands of created jobs over the last few decades, and how much they paid. They will compare those burger flipping baby sitting jobs to the hundreds of thousands of jobs lost in the auto sector and all of those other union jobs in manufacturing and wonder what it was that lead them to believe that NAFTA was such a great idea.

We are about to enter into a generational debt burden the likes of which we have never seen before. Not so much here as in the USA, but it will impact us just the same way to only a smaller degree. They are our largest trading partner, so when they stop buying we stop selling. We need to think about that. While there are indeed other markets for our goods and services, they may or may not be acceptable to the USA. That will cause some rather large issues in the political landscape department.

We are about to slip into a deflation cycle, where much accumulated wealth will contract to the point of failure for many Canadians. As it stands there are far too many citizens burdened with debts. Our mindset has been the accumulation of leveraged assets. Buying houses with little or no money down, then borrowing the equity to purchase consumable goods and services. Everybody is using the credit available to finance purchases, now when the credit disappears and their assets start shrinking what will become of them. The cost of utilities is not going to go down, and neither is the price of food. The cost of debt servicing is not going to go down either, even when the government drops the prime the public lending rates are going up!

There are tough times ahead.

[Pliny]

The questio is... how does that increase consumer spending?

Making "money" available with easy credit and/or printing more currency devalues the purchasing power of the currency and prices rise. When too much "money" is around prices go up - not because goods and services have become more valuable but because the purchasing power of the dollar has shrunk - inflation. Continuing to add more money drives prices even higher and hyper inflation is the result. People seeing the value of saving a watered down dollar will now try and divest themselves of dollars before they become entirely worthless. Does that answer your question?

Right now we are seeing prices dropping for the most part and people are generally not spending. Prices are dropping because previously, huge writedowns of bad credit signaled a shrinking money/credit supply in the economy. As a consequence people choose to save over spend and prices drop. The shrinking of the monetary supply is the reason people, in the aggregate, will choose not to spend resulting in prices dropping. If the price of a single product in the economy dropped I would say it is the result of supply and demand. When prices drop generally supply and demand are being overridden by a common factor independent of supply and demand. The common factor is the monetary supply.

Dying businesses and floundering corporations start alarm bells ringing at the legislature and Government has to save dying businesses and corporations from floundering with bailouts and infusions of cash in the economy. Of course, the money supply has been inflated so prices start rising and people start complaining. Wage and price controls at this point are usually being proposed by government as an option to counter rising prices. But taking that tack kills the production side of the market because no one will produce goods and services for a loss. If they stay with further inflating the money supply to "help" the economy the result can only be further increases in prices and people looking to divest themselves of "money" and it's shrinking purchasing power for something more stable at the point of hyper inflation people will buy anything to get rid of their dollars.

All in all the connection has to be made that the quantity of money in an economy does not determine wealth.

[Pliny]

If folks think it is bad now, they will be a little surprised at what is about to happen. Things are going to get a lot worst. House values will decline another 20-35% in some areas, and job losses will begin to accelerate. Government spending will increase and social program expenditures by the provinces will force most into deficit.

There are tough times ahead.

I agree there will be tough times ahead.

We are in a deflationary period right now and government is worried. Optimumly they need to cut spending and cut taxes to shorten the duration of suffering. They will instead choose to shovel cash around and get inflation going again hoping they can keep it under control.

[Chris in KW]

Deficit spending.... everyone who keeps a budget (personal, corporate, or political) knows it's a bad idea. If you keep it up too long, your debt becomes increasingly expensive to maintain (interest). Free money now means pain later.

It's pretty obvious that the US is up to their necks in debt, and it's starting to cripple them. They have less spending power and less control in the world because of their debt.

If the US is up to their necks, Canada is chest-deep. We CAN'T afford to get further in.

What's fueling this deficit spending approach? Fear. And we should highly examine any decision that is based on fear. That's true in both personal and political decisions.

Don't allow your fear of the poor economy to force you into supporting what we all know is dumb economics!

I (usually) vote liberal. But that doesn't mean I support unwise spending.

Cheers all!

[DFCaper]

If the Governemnt wants to move spending to infastructure and corporate bailouts, then cut a bit within the civil service. With the long run of good times it has grown out of control. You know the government won't shrink it during good times, so then maybe we should shrink it during the not so good? At least DO NOT continue the contract employees employment and bonus'. Since that's just the government's way of having a larger civil service without showing them as part of the head count.

Then take that extra money, spend it on simulus in other industries to prevent complete collapses.

Cut taxes so that when the temperary simulus is done, we will not be running deficites with the new tax structure.

At Least with my plan, if it doesn't work, our government won't be broke. There current plan never worked for Rae, and it makes the situation worst if it doesn't work...

I'll wait till next week to decide what I really think of Harpers budget

[Pliny]

I don't question the reasons. I am saying it is what happens when people are unsure. They save rather than spend. Andn in a consumer economy, that make matters worse.

What's a consumer economy?

An interesting avenue to explore is how much expansion of an economy is necessary and how much is attributable to the expansion of government and their demands for revenues.

The banks are hoarding cash as well and paying off debt.

This is the correct action. Government wants them to extend credit as much as possible, get the economy rolling, prime the pump, - sound familiar - think of sub-prime mortgages.

I'm sure the plan would take many, many businesses down with it.

That is correct but unsupportable businesses are a part of the problem.

I don't agree your alternative is the only one. I agree spending in some areas should be cut. And tax cut should be temporary if leads to structural deficits. There is still a lot of stuff that could be trimmed. However, if confidence is to be restored, the government can do a lot on projects that people agree are national, that create jobs and that are not necessary.

The government does not create jobs. It only legislates the ease with which the private sector can create them.

[Smallc]

The government does not create jobs.

Yes, all those provincial and federal employees don't have jobs.

Edit: Forgot the municipal and first nations employees.

Edited January 25, 2009 by Smallc

[ironstone]

Does deficit financing help the economy?I'm not sure really.I think about the many decades of deficit financing by Liberals and Conservative till around the mid-nineties,and to what end?Ultimately,we and future generations will be saddled with huge debt.The interest alone is in the tens of billions of dollars annually,money that could be spent more wisely elsewhere.

There is one thing a sitting government could do to alleviate the situation,at least a little bit.Imagine having efficiency in all the many levels of government in this country.Currently,every single gov't department in Canada adheres to the "use it or lose it"mentality as it regards to their respective annual budgets.This encourages and promotes waste,and it never get's better.Imagine the savings if Canada didn't have an enormous,bloated public service.I know a number of people in the public service and I shake my head in disgust at the stories from the inside.Wouldn't it be nice to severely limit public funding to special interest groups as well?I wonder how many exist for the sole purpose of collecting public funds.

Government does not really create jobs,they have the power to create an environment which may help,or too often,hinder the creation of jobs.High taxes,red tape,a veritable sea of bureaucracy,too much of which does not help the economy.