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View Diary: Why Can’t We Spend? (17 comments)

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  •  A few updates to economics of 30s (1+ / 0-)
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    VA Classical Liberal

    You are right that the greatest economic insight of the 20th century was Keynes articulation of his macroeconomic theories and the insight that national income was a function of consumer spending, government spending, and business investment, less taxes and less the balance of payments deficit.

    Someone else has already mentioned some of the most important differences though between the way the economy worked when Keynes wrote and the way it began to work after the 1970s.

    In the 1970s, economists discovered several feedback loops that limited how much government spending could be used to stimulate the economy.  One which most of us armchair economists are familiar with is inflation.  The other was that government borrowing demand for credit could cause a shortage of lending capital leading to rising interest rates.

    In the 1930s Roosevelt was basically borrowing from better off Americans (who had been terrified out of the capital markets) to employ the poor.  Eventually this was a good deal for both.

    Now the main creditor is China.  If you wonder why Geithner spends so much time in China, it's because they are basically in the position to tell us precisely how much they are willing to lend us, and it's not infinite.  Their concern is that if deficits get too out of hand, we will inflate the currency, decreasing the value of their decades of savings.  

    So we absolutely cannot "spend, spend, spend."

    If only the Chinese creditors would simply tell the US government that they will no longer finance our insane levels of military spending.

    •  That day may come (0+ / 0-)

      around the time China feels that it needs to get Taiwan back.

      •  It already has Taiwan back (2+ / 0-)
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        pragprogress, Sunspots

        I find the China-Taiwan "act" to be one of the more preposterous things going on in international relations.  I was once doing consulting for an environmental organ of the PRC and was in Beijing.  I was introduced to a Taiwanese professor in the same field and I asked him about unification (this was around the time Hong Kong was reunited) and he kind of laughed at me.  The whole thing is Kabuki theater.

        Both PRC and ROC have always said that Taiwan is part of China.  The only issue is the system.  They've now pretty much settled that dispute.  They are fully integrated economically with massive investments in each other and each other's businessmen and government officials doing constant travel back and forth and exchanges.

        Most of China's rhetoric aimed at Taiwan about "rebellious provinces" is actually propaganda in coded language aimed at potentially rebellious provinces in western mainland China -- sort of like yelling at your dog when you're angry at your son.

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