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Might not be so Bad

Here’s one thing I am not worried about: suppose the Bush tax cuts go away, and the budget is cut pro-rata.  That would be a good thing.  I have always believed in balanced budgets.  Yes, restoring balance may be painful for a little while, but the results are usually good after a “big bang,” whether that is a default, currency conversion, or massive privatization.

Why are balanced budgets good? Duh, they are sustainable, particularly if they are done on an accrual basis, which is not the norm.  Sustainable government budgets engender confidence in businesses and individuals, because they sense stability, and stability encourages growth.  Businessman can plan sensibly, because they have a sensible government.

I don’t think the economy would do badly in this scenario.  Hopefully, we would clear out the least valuable programs (I dream), and the taxes raised were not counted on by those subject to the change.

I don’t think this would have a big effect on the US economy.  So Congress can’t agree; that is good, because it forces cuts that Congress would never make given their disagreements.

This is the next best thing to a balanced budget amendment.  Eliminate Keynesian idiocy, and manage the economy sensibly, balancing the budget as a normal matter, and don’t use government or central bank policy to moderate it, because that only creates liquidity traps like the one we are in.  (Need I mention that the Fed should either peg to gold, or that it should only have a a double mandate — bank solvency first, inflation second. unemployment does not figure in, largely, because the Fed has no effect on unemployment.)

Let the economy be free, aside from regulating banks tightly; it will be far better than what we currently have.  Regulation of maturity transformation is important because maturity-transformation violates basic asset-liability management rules.  We need to force banks not to take interest rate risk.  No more borrowing short and lending long.  Long-dated lending requires long-dated financing.  Organize society for stability, not boffo profits for banks in the bull phase, and huge losses/bailouts in the bear phase.

I don’t care about short-term pain, so long as we end up in a better spot afterward, with better growth prospects.

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2 Responses to Might not be so Bad

  1. cig says:

    So you want to turn the US into the Eurozone? What is the Eurozone? As it stands, it’s about balanced budgets and a central bank with a bank solvency first, inflation second mandate. It works like a gold standard for member states. Very exactly what you advocate here for the US.

    If that worked, there’d be no need to change anything. Both political union and disbanding are about making Keynesian policies possible (top down or bottom up respectively).

    So basically your previous post was Keynesian and now you’ve turned anti-Keynesian. Perhaps we need a bit of consistency in this house.

  2. Dave_G says:

    Hi David,

    I have to say, I’m a bit surprised with this post. Usually you’re a pretty level-headed & rational guy.

    But I think in this case you are substituting ideology for common sense. As you know, this whole debacle has pretty much proven that Keynes was absolutely right. ISLM rules the economy, and we’re up against the zero-bound. You argue that making the economic bust would be a good thing, and that’s just absurd.

    To see you in the ‘hard money’ camp is pretty sad. Your credibility in my eyes was just diminished considerably.

    You say that it “might” not be so bad, yet the snowball effect of no growth and your overly-tight economic policy recommendations virtually grantee that the pernicious effects will magnified.

    You’re missing the human / crowd psychology effects.

    Go back and take Econ-101 before blogging again, I hate to see you embarrass yourself like this.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

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