Why deficit spending may be good for you...

[Pekkerwood]

if you are a greedy %$^@#.

The following is not necessarily my opinion but is something to think about.

Our United States government has deficit spending. Our government borrows money at about 4% to cover the shortfall each year. In order not to borrow this money it either has to reduce expenditures (not bloody likely), or increase revenue (tax collections). Increasing taxes will not work on the majority (Lower and Middle class), as it is a sure sign of political death, therefore they have to increase taxes on the top 5% of earners. Therefore if we do not spend at a deficit I will have to pay even more taxes.

Lets's examine:

Suppose my tax increase is $100,000 per year to offset $100,000 in government deficit. Through my businesses, I am able to earn about a 27% percent return on my capital, Meaning if I don't have to pay it in taxes, I can make about $27,000 be having it. Theoritically I will owe the government 4% per year because I didnt pay the taxes as my repayment of the deficit. Not a bad deal for me. I really only have to be able to beat the 4% return for this to be a good deal (not normalized for taxes for you sharpsters out their, it would actually have to be about 7%) .

Note: I am will aware that this only works at the individual level. I am aware that our GDP will not continue to grow 3 or 4% per year and that our borrrowing rate will not remain low as we continually grow weak. I am just pointing out that an individual can benefit poor collective policy at times.


Pekkerwood

[Sassy]

Isn't there some benefit to the bail out? I mean if the government buys 80% of this failed businesses with their stocks at such low rates then when the businesses get back on their feet and become profitable again, won't the government make money when they sell the stock back?

just wondering.... maybe I'm over analyzing this....

[Pekkerwood]

Sassy:

Yes, in general the government is not buying stock but the assets. If the assets are "marked to market" in theory the government is buying $700 billion in assets for the $700 billion dollars. The trick is in the valuation. Make no mistake the financial institutions are not getting made whole, as I understand it they are selling at distressed prices. The problem is their is no market for the securities, so what is the fair price?

Yes their will be a benefit. If we do not free up the credit markets where banks are willing to lend to each other in the over night markets it will be a nightmare. I am already seeing ton of credit contraction. Many businesses are getting their lines pulled so banks can reduce their top line because they cannot raise new capital easily with the bad debt on their books. That business that lost the credit line may have to lay off their employees.

On another contrarian note. Suppose a the government bailed out a hypothetical company to the tune of $50 billion. Lets say that company over its 100 year history paid out a total of $500 billion in wages and salaries and corporate taxes. The assumeing that the government collected 30% of those wages and bonuses the government took in $150 billion in taxes and gave back $50 billion. Still a pretty good deal for that company to have been in business over all. Just another way of looking at it.

[Sassy]

I hadn't thought about it that way. This always gets too complicated for my small brain. If I think about it for too long, my head will explode.

There just doesn't seem to be a good solution.