Thursday, June 21, 2012

Government moves the Economy

There are two kinds of needs. One involves individual consumption and  business productive capacity.  These needs are met out of earnings and borrowing.  They will inevitable create a bubble if they exceed the capacity to repay what is borrowed.

The other kind of need is Community.  That includes infrastructure and general welfare expenditures among others.  If these needs are met by interest bearing debt the result will also be the creation a bubble when the interest on the debt is an excessive component of public spending. 

The difference between Government  and the private component of the economy is the a Sovereign Government with a Sovereign currency has the legal capacity to set the interest it pays on its debt at zero if Congress wishes to do so.  The private sector and non-sovereign States cannot do this.  

The Federal Reserve System has shown this to be true under the Quantitative Easing programs that it has used in this Great Recession.  Similar methods were used during World War II to finance the greatest debt to GDP ratio in the History of the Nation.

This method does not become problematic until there is a shortage of Labor or productive capacity or input material. Government first needs to maintain a safety net floor to prevent extreme poverty and spend on protecting the Nation  It then must build a modern infrastructure and education system limited only by the capacity to provide the labor, production capacity and available raw materials. There is no limit on the interest free money it can create.