It has been a while since I have updated blog... sorry. However, I do want to answer the couple of questions that came in. Here is Dr. Pantusco's Response...
I will begin by paraphasing the question.. If we don't spend then the economy will get worse, which hurts us through lost jobs. But if we spend too much then the our personal finances will suffer. What should we do?
good question. If people decide to save their money, in the short run the demand for some retail items (mainly durable goods, cars, boats, electronincs) will decrease. Then the production of these goods will fall. And, of course workers will be laid off. But, what will eventually happen. First, the increase in savings allows banks to have more reserves. As reserves increase, interest rates fall and banks available credit increases. The lower interest rates will inspire spending on items that people typically borrow money to purchase (cars, houses, boats). Also, as people save more, they will be more likely to invest in whatever they think will earn them the greatest rate of return, this could be stocks (which could be undervalued), real estate, gold, corporate bonds etc.. The saved money finds its way back into the economy. The person who saves is not only going to help the economy in the long run but also help their household.
It is not the chicken or the egg, it is the short run versus the long run. Do you want to help the economy and your household in the long run by getting your personal spending under control, or do you want to spend what you have now in hopes of giving a short term stimulus to your neighbor.
The second question is loaded. but, I will try to answer as concise and clear as possible. Yes, the stimulus package is inflationary in two ways, (1) the additional spending will put upward pressure on the goods and services purchased by the government and (2) the spending has to be paid for. If money comes from foreign sources then more money enters the US economy, and more money enters the US banking system. More money leads to more inflation.
It is doubtful that the government will pay off a significant portion of the deficit/debt with newly printed money. As long as investors line up to lend money to the government, there is no need for the government to print money. Therefore, it is likely the deficit will be paid for by borrowed funds (shichis not as inflationary as printing). In the latest auction of US treasury bonds, about 28 percent of the lenders were foreign. China does not own our country. China has businesses that invest in US government securities, but so does Great Britain, Japan, etc. I believe China holds about 6 or 7 percent of our debt.
The problem will occur when countries no longer want to purchase our Treasury Bonds. Right now this is not the case. The US dollar is pretty strong relative to other currencies, and still a very safe haven for foreignors to put their funds. When other investment opportunites improve, money will flow out of the US. This could be bad. How can the US pay its debt and fund its deficit then? Will they increase taxes? if they do, then consumer spending will fall (or be crowded out). Obviously, that is bad for growth. The goods new is that inflation will fall.
The amazing things is that foreign companies are willing to lend us so much money at so low an interest rate. As the world economy improves, I doubt that will last; then it will get interesting.
