Saturday, September 10, 2011

Debt, Deficit, and Growth

(continuing my series on economics)

Some important definitions:
debt - money that is owed (like a mortgage or credit card balance).

deficit - a shortfall in your budget (losing money each month or year).

Obviously a family can deal with some amount of debt, and it can be good.  Borrowing for a home can be a way to get a home now and pay for it over your lifetime.  Borrowing for a car is probably less wise, and running up your credit card is just foolish.

In the same way, government debt is not necessarily bad.  As long as the economy is growing, the debt is controllable (you will have more future earnings to cover the interest payments).

Deficits are a whole different story.

Clearly, a family cannot survive for very long with debt and a deficit.  Eventually, the credit cards will run out, and you will be bankrupt.

With the government, things are more muddy.

The economy (as it is currently formulated) is dynamically stable - like a bicycle.  As long as it is running, it will stay upright.  If it stalls, it will fall over, and is difficult to restart.

The government can take action to keep the economy running (running a deficit to pump money into the economy and make it grow).

But this doesn't make sense in a static economy.  You're trying to restart an engine which has nowhere to go.  You can continue to print money and hand it out, but there are not any more goods being produced.  That will lead to inflation.

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