Downbound Train

So, President Obama obviously prefers governmental spending over more pro private consumption fiscal stimulus. He puts a lot in stakes with this package worth over $ 800 bn, though it should inject money and demand in the economic system and take care of some of Americas excess supply.

Though the left usually emphasise the supposedly larger multiplicators (rise in GDP, per dollar of stimulus) in government spending rather than tax reliefs, the disadvantages are clear and unjust. Not only does Obamas package lack the positive supply-side effects of tax reliefs, the package contains money to social welfare and unemployment benefits sure to reduce the incentives to work or contribute.

The financing of this is another problem. The national debt/equity ratio, so to say, could look better and is now in the same level of debt/GDP as Germany.

The best stimulus package there is, can only be the simple tax cut financed by a reduction of the public sector. That´s the action that stimulates the economy, has positive effects on aggregate supply and private savings. But best of all it isn’t financed by stolen money.

The rest is up to the Fed. If this does not work, a negative interest rate may do the trick. A wonderful thought, isn´t it? The ultimate monetary stimulus and absolutely not impossible. Discount rates of 0,05 %  has been seen from the Fed lately.

/Glommy

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