Comments for Economics in Plain English http://welkerswikinomics.com/blog for students and teachers of Economics Tue, 22 May 2012 23:46:08 +0000 hourly 1 http://wordpress.org/?v=3.3.2 Comment on Fiscal stimulus, the Swiss way by Monique T http://welkerswikinomics.com/blog/2011/09/23/fiscal-stimulus-the-swiss-way/comment-page-1/#comment-24104 Monique T Tue, 22 May 2012 23:46:08 +0000 http://welkerswikinomics.com/blog/2011/09/23/fiscal-stimulus-the-swiss-way/#comment-24104 Hi Mirren, You brought up a good point in your last answer, about the consumers being "satisfied". I would agree that, as is the case for most government policies concerning economics, the government is not only concerned with the economic benefits of their actions, but also the political implications. The goal of the government is often first and foremost to get re-elected... Now, that normally coincides with a good economy since people like that, but it is possible that the government focuses solely on the short-term benefits, at the expense of the long-term wellness of the economy (eg lots of spending now leads to a greater deficit problem in the future). Thanks! Monique Hi Mirren,
You brought up a good point in your last answer, about the consumers being "satisfied". I would agree that, as is the case for most government policies concerning economics, the government is not only concerned with the economic benefits of their actions, but also the political implications. The goal of the government is often first and foremost to get re-elected… Now, that normally coincides with a good economy since people like that, but it is possible that the government focuses solely on the short-term benefits, at the expense of the long-term wellness of the economy (eg lots of spending now leads to a greater deficit problem in the future). Thanks!
Monique

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]]> Comment on Fiscal stimulus, the Swiss way by Monique T http://welkerswikinomics.com/blog/2011/09/23/fiscal-stimulus-the-swiss-way/comment-page-1/#comment-24103 Monique T Tue, 22 May 2012 23:39:25 +0000 http://welkerswikinomics.com/blog/2011/09/23/fiscal-stimulus-the-swiss-way/#comment-24103 What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand? The Swiss stimulus package focuses on increasing aggregate demand directly. By increasing government spending, they increase a component of aggregate demand, therefore making it a demand side policy. The American stimulus package cuts taxes in a hope that it will increase consumption and therefore AD, but they have no way of ensuring that is what is will do... People may just save their money instead. The Swiss plan contributes to AD through direct government expenditure, whether that is into research and development or into unemployment benefits. Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment? In an economy with a surplus, there is more room to use expansionary fiscal policy, because there is more money available for government expenditure. When there is already a deficit, it means that any money being used for expansionary policy is contributing to the deficit, which in time creates economic problems for an economy. With too high a deficit, the government will eventually have to make spending cuts, which will lead to unemployment in the long run. Overall, the country is in a much better situation if they have a surplus. Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer. When government spending of a certain size is put into the economy, all that money will for sure contribute to increasing aggregate demand. In addition, the multiplier affect may lead to the return on investment being even higher. However, with tax cuts, all the money that people are receiving from those cuts will probably not be put straight back into the economy - they will probably save at least some of it, for example. This means that a tax cut of equal size to government expenditure will have a smaller expansionary effect on aggregate demand. What is meant by the claim that Switzerland’s stimulus package is more of a demand-side policy than the United States’? How will the various types of spending in the Swiss plan contribute to the country’s aggregate demand?
The Swiss stimulus package focuses on increasing aggregate demand directly. By increasing government spending, they increase a component of aggregate demand, therefore making it a demand side policy. The American stimulus package cuts taxes in a hope that it will increase consumption and therefore AD, but they have no way of ensuring that is what is will do… People may just save their money instead. The Swiss plan contributes to AD through direct government expenditure, whether that is into research and development or into unemployment benefits.

Another difference between the two plans is how they will be paid for. In Switzerland, “the money is to be taken from an expected 2011 budget surplus,” while the US budget for 2012 is expected to have a deficit of around 10% of the country’s GDP. How does the budget situation in the two country’s impact the ability to use fiscal expansionary fiscal policy to promote the macroeconomic objective of full employment?
In an economy with a surplus, there is more room to use expansionary fiscal policy, because there is more money available for government expenditure. When there is already a deficit, it means that any money being used for expansionary policy is contributing to the deficit, which in time creates economic problems for an economy. With too high a deficit, the government will eventually have to make spending cuts, which will lead to unemployment in the long run. Overall, the country is in a much better situation if they have a surplus.

Which is more likely to have a direct expansionary effect on aggregate demand, tax cuts of a certain size or government spending of the same size? Explain your answer.
When government spending of a certain size is put into the economy, all that money will for sure contribute to increasing aggregate demand. In addition, the multiplier affect may lead to the return on investment being even higher. However, with tax cuts, all the money that people are receiving from those cuts will probably not be put straight back into the economy – they will probably save at least some of it, for example. This means that a tax cut of equal size to government expenditure will have a smaller expansionary effect on aggregate demand.

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]]> Comment on The almighty bond market: Niall Ferguson’s concerns about the US deficit explained by dnyanzi http://welkerswikinomics.com/blog/2009/06/10/the-almighty-bond-market-niall-fergusons-concerns-about-the-us-deficit-explained/comment-page-1/#comment-24079 dnyanzi Tue, 22 May 2012 17:19:46 +0000 http://welkerswikinomics.com/blog/?p=1026#comment-24079 @Mirren Mecathum I generally agree with your answers, I would just want to add that the effect on teenagers in the future may not only be an increase in taxes but also a decrease in government expenditure to get rid of the debt. @Mirren Mecathum
I generally agree with your answers, I would just want to add that the effect on teenagers in the future may not only be an increase in taxes but also a decrease in government expenditure to get rid of the debt.

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]]> Comment on The almighty bond market: Niall Ferguson’s concerns about the US deficit explained by dnyanzi http://welkerswikinomics.com/blog/2009/06/10/the-almighty-bond-market-niall-fergusons-concerns-about-the-us-deficit-explained/comment-page-1/#comment-24077 dnyanzi Tue, 22 May 2012 17:09:54 +0000 http://welkerswikinomics.com/blog/?p=1026#comment-24077 1)Why do you think the US government has such a huge budget deficit this year? ($1.9 trillion) Previously, the largest budget deficit on record was only around $400 billion. The US government has had a huge deficit of $1.9 trillion due to the recession in 2009, in which many people became unemployed and where production took a downturn. To finance the general expenditure of schooling, infrastructure, unemployment benefits etc plus the added stimulus package which should increase aggregate demand and real GDP; the government’s expenditure has exceeded its revenue greatly causing a colossal budget deficit. 2)How does the issuance of new bonds by the US government lead to less money being available to private households and firms? With an increase in supply of bonds their purchase price decreases, this makes it cheaper for private households and firms to invest in government bonds. Furthermore with a lower price the interest rate paid to the lender increases as the face value of the government bond is fixed, making it more attractive to the public. Because the money is now being diverted into saving -which is a leakage of the circular flow model- firms and households now have less money to spend. 3)Do you think investors will ever totally lose faith in US government bonds? Why or why not? I do not think that investors will totally lose faith in US government bonds, because even if the government does not pay back the interest directly, the economy is surely going to experience a boom in its business cycle in which the government may be able to pay back its debt. Investors may however lose faith slightly as the government may not be reliable in paying back the interest. 4)In what way is the government’s huge budget deficit a “tax on teenagers”? In other words, how will today’s teenagers end up suffering because of the federal budget deficit? Teenagers may suffer due to the budget deficit as the government may need to make serious budget cuts and this could result in less invest in public universities, lower incomes for workers in the public sector etc. Furthermore the government may increase taxes such as direct taxes to reduce their debt and this will decrease the disposable income of workers and reduce their standard of living. 1)Why do you think the US government has such a huge budget deficit this year? ($1.9 trillion) Previously, the largest budget deficit on record was only around $400 billion.
The US government has had a huge deficit of $1.9 trillion due to the recession in 2009, in which many people became unemployed and where production took a downturn. To finance the general expenditure of schooling, infrastructure, unemployment benefits etc plus the added stimulus package which should increase aggregate demand and real GDP; the government’s expenditure has exceeded its revenue greatly causing a colossal budget deficit.

2)How does the issuance of new bonds by the US government lead to less money being available to private households and firms?
With an increase in supply of bonds their purchase price decreases, this makes it cheaper for private households and firms to invest in government bonds. Furthermore with a lower price the interest rate paid to the lender increases as the face value of the government bond is fixed, making it more attractive to the public. Because the money is now being diverted into saving -which is a leakage of the circular flow model- firms and households now have less money to spend.

3)Do you think investors will ever totally lose faith in US government bonds? Why or why not?
I do not think that investors will totally lose faith in US government bonds, because even if the government does not pay back the interest directly, the economy is surely going to experience a boom in its business cycle in which the government may be able to pay back its debt. Investors may however lose faith slightly as the government may not be reliable in paying back the interest.

4)In what way is the government’s huge budget deficit a “tax on teenagers”? In other words, how will today’s teenagers end up suffering because of the federal budget deficit?

Teenagers may suffer due to the budget deficit as the government may need to make serious budget cuts and this could result in less invest in public universities, lower incomes for workers in the public sector etc. Furthermore the government may increase taxes such as direct taxes to reduce their debt and this will decrease the disposable income of workers and reduce their standard of living.

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]]> Comment on The magic of markets – missing in Zimbabwe! by Joseph http://welkerswikinomics.com/blog/2007/08/25/the-magic-of-markets-missing-in-zimbabwe/comment-page-1/#comment-24072 Joseph Tue, 22 May 2012 16:44:32 +0000 http://welkerswikinomics.com/blog/2007/08/25/the-magic-of-markets-missing-in-zimbabwe/#comment-24072 >6:34 No one is mad at the Boe for acting qulckiy. We're mad as hell at them for DIGGING into the ashfill (3 times!) in the first place when they had viable alternatives.Now our kids are stuck playing for God knows how long on a small blacktop unable to venture onto the playground or field.That is why we are mad. Because the BOE and its principal are stubborn, stupid, defensive and arrogant. And they won't take responsibility for their failures.At that meeting Bombace actually floated the idea that a contractor brought contaminated soil (gee, it was ash too) to the site and that that was how it got to the back of the building.I mean, c'mon already! >6:34 No one is mad at the Boe for acting qulckiy. We’re mad as hell at them for DIGGING into the ashfill (3 times!) in the first place when they had viable alternatives.Now our kids are stuck playing for God knows how long on a small blacktop unable to venture onto the playground or field.That is why we are mad. Because the BOE and its principal are stubborn, stupid, defensive and arrogant. And they won’t take responsibility for their failures.At that meeting Bombace actually floated the idea that a contractor brought contaminated soil (gee, it was ash too) to the site and that that was how it got to the back of the building.I mean, c’mon already!

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]]> Comment on Understanding the Consumer Price Index – the Fed’s “Drawing Board” by Debbie P http://welkerswikinomics.com/blog/2009/11/05/understanding-the-consumer-price-index-the-feds-drawing-board/comment-page-1/#comment-23959 Debbie P Sun, 20 May 2012 00:14:28 +0000 http://welkerswikinomics.com/blog/?p=1240#comment-23959 Hi! I think you reflected well on these questions. Especially one question 3 where you mentioned that "By using the median price, it takes into account that extreme prices occur and it is not a general trend of where the prices are going. " Good Job! Hi!

I think you reflected well on these questions. Especially one question 3 where you mentioned that "By using the median price, it takes into account that extreme prices occur and it is not a general trend of where the prices are going. "
Good Job!

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]]> Comment on Understanding the Consumer Price Index – the Fed’s “Drawing Board” by Debbie P http://welkerswikinomics.com/blog/2009/11/05/understanding-the-consumer-price-index-the-feds-drawing-board/comment-page-1/#comment-23958 Debbie P Sun, 20 May 2012 00:11:24 +0000 http://welkerswikinomics.com/blog/?p=1240#comment-23958 1.Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets greater weights than others? The Bureau of Labor Statistics weight different items included the measure of the consumer price index because different products are given different weightings. For example, housing will have a larger payment compared to jewelry. Hence, having taken all measures in account, the Bureau of Labor Statistics will then take the weighted average –by adding up the total value of the changes and then dividing by the number of items in the group. Just as the video mentioned, housing gets greater weights than jewelry, which is a luxury, good. 2.What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy? CPI measures the changes in the price level of consumer goods and services purchased by households. Therefore, it is important to us because people can see if inflation or deflation has happened or is going happen through the CPI figures. 3.What is one short-coming of the traditional method used for measuring the inflation rate using CPI? CPI is often a long-term measurement. Therefore it is not perfect for measuring monthly price changes but better for long term inflation. 4.Why did the BLS decide exclude oil and food prices from its “core CPI” figure? BLS decided to exclude oil and food prices because those factors are subject to large relative price swings that usually have nothing to do with inflation. Without the two factors, CPI would be more accurate than if those two factors were included. 1.Why does the Bureau of Labor Statistics weight different items included in the measure of the consumer price index? What type of good gets greater weights than others?

The Bureau of Labor Statistics weight different items included the measure of the consumer price index because different products are given different weightings. For example, housing will have a larger payment compared to jewelry. Hence, having taken all measures in account, the Bureau of Labor Statistics will then take the weighted average –by adding up the total value of the changes and then dividing by the number of items in the group. Just as the video mentioned, housing gets greater weights than jewelry, which is a luxury, good.

2.What are some of the purposes the CPI figure serves? Why do we care about changes in the price level in an economy?
CPI measures the changes in the price level of consumer goods and services purchased by households. Therefore, it is important to us because people can see if inflation or deflation has happened or is going happen through the CPI figures.

3.What is one short-coming of the traditional method used for measuring the inflation rate using CPI?
CPI is often a long-term measurement. Therefore it is not perfect for measuring monthly price changes but better for long term inflation.

4.Why did the BLS decide exclude oil and food prices from its “core CPI” figure?

BLS decided to exclude oil and food prices because those factors are subject to large relative price swings that usually have nothing to do with inflation. Without the two factors, CPI would be more accurate than if those two factors were included.

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]]> Comment on The Big “C” – America’s crisis of confidence and the Great Recession by Nadiya S http://welkerswikinomics.com/blog/2010/08/25/the-big-c-americas-crisis-of-confidence-and-the-great-recession/comment-page-1/#comment-23833 Nadiya S Thu, 17 May 2012 16:19:58 +0000 http://welkerswikinomics.com/blog/?p=1756#comment-23833 Hey dnyanzi :) Great response! However in question 3, you replied that paying of debts now would worsen the already bad economic times becasue consumers would spend even less...however, if consumers are all experiencing debt, this mean that they are financially unstable, and this instability and uncertainty might cause even further decrease in consumer confidence, therefore it will take longer for spending to increase, becasue the pressure of debt makes people want to spend less....just a thought :) Nadiya Hey dnyanzi :)

Great response! However in question 3, you replied that paying of debts now would worsen the already bad economic times becasue consumers would spend even less…however, if consumers are all experiencing debt, this mean that they are financially unstable, and this instability and uncertainty might cause even further decrease in consumer confidence, therefore it will take longer for spending to increase, becasue the pressure of debt makes people want to spend less….just a thought :)
Nadiya

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]]> Comment on The Big “C” – America’s crisis of confidence and the Great Recession by Nadiya S http://welkerswikinomics.com/blog/2010/08/25/the-big-c-americas-crisis-of-confidence-and-the-great-recession/comment-page-1/#comment-23832 Nadiya S Thu, 17 May 2012 16:14:54 +0000 http://welkerswikinomics.com/blog/?p=1756#comment-23832 3. Is there any benefit in the economy for consumers to save and pay off their debts now? Is this a rational decision given the current economic conditions? There are benefits to paying off debts first. Paying off, and getting rid of debt, will make consumers more confident to spend in the future because with no debt, they will feel more financially stable. Once everyone feels this way, the economy can begin to recover because with increased confidence there will be increased spending, and the AD, AS, national level of output will all start to climb once again. Thus, it is a rational decision to pay off debts first and gain that financial stability. 4. If fiscal and monetary policies along with lower taxes for corporations are not the answer, then what is? What other possibilities are available for the government to implement? Firstly, it may not be the question of fiscal or monetary policies, but rather that the economy goes through natural slumps and booms, so the economy will naturally return to its fullest while going through the cycle. However another thing that can be done is instead of demand side policies, the government can implement supply side policies in order to stimulate economic recovery. 3. Is there any benefit in the economy for consumers to save and pay off their debts now? Is this a rational decision given the current economic conditions?
There are benefits to paying off debts first. Paying off, and getting rid of debt, will make consumers more confident to spend in the future because with no debt, they will feel more financially stable. Once everyone feels this way, the economy can begin to recover because with increased confidence there will be increased spending, and the AD, AS, national level of output will all start to climb once again. Thus, it is a rational decision to pay off debts first and gain that financial stability.

4. If fiscal and monetary policies along with lower taxes for corporations are not the answer, then what is? What other possibilities are available for the government to implement?
Firstly, it may not be the question of fiscal or monetary policies, but rather that the economy goes through natural slumps and booms, so the economy will naturally return to its fullest while going through the cycle. However another thing that can be done is instead of demand side policies, the government can implement supply side policies in order to stimulate economic recovery.

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]]> Comment on The Big “C” – America’s crisis of confidence and the Great Recession by Nadiya S http://welkerswikinomics.com/blog/2010/08/25/the-big-c-americas-crisis-of-confidence-and-the-great-recession/comment-page-1/#comment-23831 Nadiya S Thu, 17 May 2012 16:14:10 +0000 http://welkerswikinomics.com/blog/?p=1756#comment-23831 1.Why is consumer spending and confidence so important for businesses? Consumer confidence and spending determines the level of demand, and the level of demand is important for aggregate supply. This is extremely important for businesses because it determines how much they invest in order to grow as a business. If consumer spending is low along with the confidence, there is nothing to say that the investment into creating more and better quality products will pay off, thus the businesses do not have incentive to grow and develop, which is the ultimate goal. Whereas if consumer spending is increasing, there will be increased profits that the business will be able to put to use for expansion. 2.What role does business investment into capital play in the economy and why is it so important in leading the economy towards recovery? In the circular flow of demand, investments are injections, which is essential for a recovery (versus leakages). With investment into capital, business will be able to expand their production, and this will stimulate economic recovery and growth. 1.Why is consumer spending and confidence so important for businesses?
Consumer confidence and spending determines the level of demand, and the level of demand is important for aggregate supply. This is extremely important for businesses because it determines how much they invest in order to grow as a business. If consumer spending is low along with the confidence, there is nothing to say that the investment into creating more and better quality products will pay off, thus the businesses do not have incentive to grow and develop, which is the ultimate goal. Whereas if consumer spending is increasing, there will be increased profits that the business will be able to put to use for expansion.

2.What role does business investment into capital play in the economy and why is it so important in leading the economy towards recovery?
In the circular flow of demand, investments are injections, which is essential for a recovery (versus leakages). With investment into capital, business will be able to expand their production, and this will stimulate economic recovery and growth.

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]]> Comment on “Why can’t the government just print more money?” – NOT such a silly question! by lesley http://welkerswikinomics.com/blog/2010/08/28/why-cant-the-government-just-print-more-money-not-such-a-silly-question/comment-page-1/#comment-23804 lesley Wed, 16 May 2012 17:34:41 +0000 http://welkerswikinomics.com/blog/?p=1783#comment-23804 yes i understand but still they should print more money anyway and use this money for povety and for medical and to do away with starvation in the whole world . just pay off all defecit and start fresh like just admit it the the world needs this break now forget politics for a one time pay all debt and feed the world and yes its that bloody simple. yes i understand but still they should print more money anyway and use this money for povety and for medical and to do away with starvation in the whole world . just pay off all defecit and start fresh like just admit it the the world needs this break now forget politics for a one time pay all debt and feed the world and yes its that bloody simple.

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]]> Comment on The almighty bond market: Niall Ferguson’s concerns about the US deficit explained by Mirren Mecathum http://welkerswikinomics.com/blog/2009/06/10/the-almighty-bond-market-niall-fergusons-concerns-about-the-us-deficit-explained/comment-page-1/#comment-23773 Mirren Mecathum Wed, 16 May 2012 05:31:11 +0000 http://welkerswikinomics.com/blog/?p=1026#comment-23773 Hi lgade2, I totally agree with your responses especially when you mentioned the economic crisis and how you linked it to the issue at hand. I also stated that the government had to increase its spending but it was good how you complimented that statement with the fact that the tax revenue actually did not decrease. It was a very concrete point. Hi lgade2,

I totally agree with your responses especially when you mentioned the economic crisis and how you linked it to the issue at hand. I also stated that the government had to increase its spending but it was good how you complimented that statement with the fact that the tax revenue actually did not decrease. It was a very concrete point.

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]]> Comment on The almighty bond market: Niall Ferguson’s concerns about the US deficit explained by Mirren Mecathum http://welkerswikinomics.com/blog/2009/06/10/the-almighty-bond-market-niall-fergusons-concerns-about-the-us-deficit-explained/comment-page-1/#comment-23772 Mirren Mecathum Wed, 16 May 2012 05:27:02 +0000 http://welkerswikinomics.com/blog/?p=1026#comment-23772 Why do you think the US government has such a huge budget deficit this year? Previously, the largest budget deficit on record was only around $400 billion. A budget deficit is usually used in government spending and it is when there is more money being used than coming in. Therefore the amount of expenditure incurred by the government would be higher than amount received from tax revenues. According to the article, the government had overspent through implementing stimulus packages. In order to carry out such implementations, a big sum has to be invested into it. How does the issuance of new bonds by the US government lead to less money being available to private households and firms? Market interest rates are closely related when talking about bonds. It is one of the aspects that need to be taken into account especially when a new bond is looking to be issued. Not only that, the rate of inflation in an economy needs to be analyzed as well to predict future fluctuations in price and how it affects the bond. Lastly, on a smaller note, the tax level is a determinant to consider as well. According to the article, the amount of money circulating in the economy would decrease to a less active level, as the typical household would react in a rational manner in this case saving the money. Do you think investors will ever totally lose faith in US government bonds? Why or why not? This is dependent on how the US government has been handling the bonds they have made in the past. If the US government has held up to all conditions of previous bonds, consumers would have no issue trusting the government to keep to their part of the “deal”. Faith will only be lost once the consumers find out that the government has been dishonest on their part causing economic corruption. In what way is the government’s huge budget deficit a “tax on teenagers”? In other words, how will today’s teenagers end up suffering because of the federal budget deficit? As teenagers are the “up and coming” generation of the economy, the consequences of what the deficit that is felt by the parents now will be passed on to them. This will start with the average price levels rising and if the teenager is lucky to even be employed, the next thing to worry about is the amount of tax incurred. Why do you think the US government has such a huge budget deficit this year? Previously, the largest budget deficit on record was only around $400 billion.

A budget deficit is usually used in government spending and it is when there is more money being used than coming in. Therefore the amount of expenditure incurred by the government would be higher than amount received from tax revenues. According to the article, the government had overspent through implementing stimulus packages. In order to carry out such implementations, a big sum has to be invested into it.

How does the issuance of new bonds by the US government lead to less money being available to private households and firms?

Market interest rates are closely related when talking about bonds. It is one of the aspects that need to be taken into account especially when a new bond is looking to be issued. Not only that, the rate of inflation in an economy needs to be analyzed as well to predict future fluctuations in price and how it affects the bond. Lastly, on a smaller note, the tax level is a determinant to consider as well. According to the article, the amount of money circulating in the economy would decrease to a less active level, as the typical household would react in a rational manner in this case saving the money.

Do you think investors will ever totally lose faith in US government bonds? Why or why not?

This is dependent on how the US government has been handling the bonds they have made in the past. If the US government has held up to all conditions of previous bonds, consumers would have no issue trusting the government to keep to their part of the “deal”. Faith will only be lost once the consumers find out that the government has been dishonest on their part causing economic corruption.

In what way is the government’s huge budget deficit a “tax on teenagers”? In other words, how will today’s teenagers end up suffering because of the federal budget deficit?

As teenagers are the “up and coming” generation of the economy, the consequences of what the deficit that is felt by the parents now will be passed on to them. This will start with the average price levels rising and if the teenager is lucky to even be employed, the next thing to worry about is the amount of tax incurred.

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]]> Comment on The almighty bond market: Niall Ferguson’s concerns about the US deficit explained by lgade2 http://welkerswikinomics.com/blog/2009/06/10/the-almighty-bond-market-niall-fergusons-concerns-about-the-us-deficit-explained/comment-page-1/#comment-23752 lgade2 Tue, 15 May 2012 08:35:52 +0000 http://welkerswikinomics.com/blog/?p=1026#comment-23752 Hey lzhang2, I completely agree with your point about the economic crisis of 2009 being the primary cause for the government's huge budget deficit. However, I thought it was interesting how you mentioned that its great impact was due to its "unexpectedness"; but I think you're right. If the government had been anticipating an economic crisis of that scale, it could have prepared for having to increase spending on unemployment benefits, etc. Hey lzhang2,
I completely agree with your point about the economic crisis of 2009 being the primary cause for the government's huge budget deficit. However, I thought it was interesting how you mentioned that its great impact was due to its "unexpectedness"; but I think you're right. If the government had been anticipating an economic crisis of that scale, it could have prepared for having to increase spending on unemployment benefits, etc.

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]]> Comment on The almighty bond market: Niall Ferguson’s concerns about the US deficit explained by lgade2 http://welkerswikinomics.com/blog/2009/06/10/the-almighty-bond-market-niall-fergusons-concerns-about-the-us-deficit-explained/comment-page-1/#comment-23751 lgade2 Tue, 15 May 2012 08:30:24 +0000 http://welkerswikinomics.com/blog/?p=1026#comment-23751 The reason for huge budget deficit in 2009 was, above all, the economic crisis. The crisis resulted in a great increase in unemployment; which increased the government's spending for unemployment benefits. Additionally, the banks had many people incapable of paying back loans; due to unemployment. This costed the government money in the case that it had to "bail-out" said firms. Finally, the great decrease in income due to the unemployment also cost the government revenue in the form of income tax. Therefore, the US government experienced a huge deficit in 2009 not only because it received less tax revenue, but also because it had to increase its spending. The issuance of new bonds by the US government leads to less money being available to private households and firms. This is because as the US government issues a greater quantity of bonds, their value decreases. More people will therefore purchase the bonds, which will take money out of circulation; and indirectly from private households and firms. In my opinion, investors will never "totally lose faith" in government bonds. This is because the US government is stable, and even in a state of crisis it is likely that the US economy will eventually emerge and return to being successful. Therefore, although investors may lose some faith in the bonds, they will never "totally lose faith" in them. The huge budget deficit of the US government could result being a "tax on teenagers". The vastness of the deficit means that taxes will be likely to increase in the next years to increase the government tax revenue and therefore pay back the debts. Therefore, the youth of today will end up paying much greater taxes than generations before them; making it a "tax on teenagers". The reason for huge budget deficit in 2009 was, above all, the economic crisis. The crisis resulted in a great increase in unemployment; which increased the government's spending for unemployment benefits. Additionally, the banks had many people incapable of paying back loans; due to unemployment. This costed the government money in the case that it had to "bail-out" said firms. Finally, the great decrease in income due to the unemployment also cost the government revenue in the form of income tax. Therefore, the US government experienced a huge deficit in 2009 not only because it received less tax revenue, but also because it had to increase its spending.

The issuance of new bonds by the US government leads to less money being available to private households and firms. This is because as the US government issues a greater quantity of bonds, their value decreases. More people will therefore purchase the bonds, which will take money out of circulation; and indirectly from private households and firms.

In my opinion, investors will never "totally lose faith" in government bonds. This is because the US government is stable, and even in a state of crisis it is likely that the US economy will eventually emerge and return to being successful. Therefore, although investors may lose some faith in the bonds, they will never "totally lose faith" in them.

The huge budget deficit of the US government could result being a "tax on teenagers". The vastness of the deficit means that taxes will be likely to increase in the next years to increase the government tax revenue and therefore pay back the debts. Therefore, the youth of today will end up paying much greater taxes than generations before them; making it a "tax on teenagers".

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