Re: Refuting supply-side economics

From: William F Hummel (wfhummel_at_comcast.net)
Date: 09/26/04 

Date: Sun, 26 Sep 2004 16:49:56 GMT

On 26 Sep 2004 05:30:05 -0700, Larry Innes wrote:

>Just because a mechanism have been working in the last forty years
>does not mean it will not come to an end when it reaches a threshold.
>For instance, if a person borrows from loan shark A 1 million at 5%
>for one year, then borrows from loan shark B 1.05 million at 5%, and
>so on, he can in theory borrow for a long period of time through
>rolling over the debt repetitively. But there will be a day when the
>debt is more than loan sharks are willing to or able to lend (say 3
>million dollars). The only way to get out of this death trap is if he
>somehow figures out a way to invest and earn more than 5% per year
>with the money he borrows. But this is not what US government is
>doing. They kept borrowing from the loan sharks and kept spending more
>without producing (and tax) more (relative to its budget). This is a
>death spiral.
>
>You said: "the fact is that other countries need the US more than the
>US needs them." This is basically saying that the loan sharks needs
>its debtor more than he needs them. This is simply not true. The loan
>sharks will get their money back one way or another. But one day the
>debt will be higher than what the loan sharks are willing (or able) to
>lend. The US economy will be ruined when the loan sharks refuse to
>lend more and thus kill the roll over mechanism.

The "loan shark" analogy is simply absurd. You are equating
government borrowing to private borrowing, which inevitably leads to
that sort of confusion. But you are not alone in this. Many
economists make the same mistake.

The government doesn't borrow because it _needs_ the money. It is the
public that needs base money in order to pay its taxes and to back the
credit money used in daily commerce. The government has unlimited
spending power in its own base money (currency and credits at the
central bank). It borrows only to recapture what it deficit spends,
the purpose being to maintain the purchasing power of the currency.

In its own self-interest, the public lends to the government when it
has acquired more non-interest-earning base money in the aggregate
than it wishes to hold. Investing in risk-free, interest-earning
bonds offered by the government is the only way the public can earn a
return on its excess base money.

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