I’m not sure I follow what’s being said here, it doesn’t make that much sense to me. It seems like he’s saying that “stimulative” spending is propping up the economy and if it’s slashed GDP will contract by the difference between the slashing and what’s still spent.
This premise seems to be somewhat mainstream, that we need the government to spend to keep the economy from collapsing, but I don’t agree with it for a couple of reasons.
First is that economic activity today is a refelction of expectations for the future, and the more spending the government does the higher the expectation for sub-optimal growth and higher taxes to support it. The TIPS spreads are an excelent indicatior of where the markets think we are headed, and they contracted by almost 2% last month - which shows there isn’t a lot of confidence that our economy will come roaring back any time soon.
Government, by itself, has no wealth and it does not create wealth by borrowing and spending. All that does is cause money to circulate, like the little boy who breaks the shopkeeper’s window with a rock, but what it spends will have to sucked back out when the piper comes calling. Government spending does not prop up the economy, it makes future expectations look not so rosy.
There is also something about this that is neglected when folks talk about stimulus being somehow beneficial. Any hope of reinflating a deflating economy with fiscal policy can be counterbalanced by the Fed. If the Fed is set on a ~1% inflation target which it seems to be, and interest rates are only one of many tools for carrying out monetary policy, it means we get almost no intended benefit if there was any to be had in the first place.
Ronald Reagan atriculated these ideas best and I think he had a track record to back up his claims that no one can be as economicly productive as the people. Government needs to get out of the way, stop taking our money and let us do what we do best if we want to have a bright future.
‘The markets can no longer afford the debt that was issued during the voluntary mania and will not be able to service recent excesses that have been coercively imposed. All five previous post-bubble contractions changed the world and this one will continue to the point of forcing a bear market in ambitious government. Think of it as a bear market for epicurean governments.’
Exciting times ahead.