I think the Fed’s ability and awareness to fight deflation makes all the difference in the world.

In massive deflation asset prices collapse as they are sold at inappropriate fire-sale prices to raise emergency funds. Economics essentially breaks down and great businesses are destroyed as the line between illiquid and insolvent vanishes.

To me it is perfectly reasonable to be fiscally tight and monetarily loose, but that is by no means my original idea. That is the old and standard IMF solution, completed successfully in countless countries around the world. IMF or not, that seems a standard path in the end. Most recently that was the basic path in places like Argentina and Iceland, which have gone from total failure to stability, growth and jobs.

In fact fiscal tightness and monetary looseness is such a normal endgame that the only question may be when it happens and how many years and how much growth are lost in the interlude.

In Germany, that set the stage for rising nationalism, blaming of the crisis on a significant minority underclass, and ultimately the rise of the Nazi Party. You can see these same forces at play in the US today, though the names and ethnic groups involved are a little different.

There ARE differences. We aren’t tied to a gold standard (thus massive monetary easing is very simple). Our debts are denominated in our own currency. We responded to the initial crisis with fiscal stimulus, rather than budget cuts that deepened the crisis. I’m sure the smart people here can come up with other key differences that I’ve missed.

Still, the similarities are chilling. Hopefully we find a better solution than Germany did?

“Dan Hess, you are the poster boy for upper class idiocy.”

Har har, don’t I wish! I actually am a middle class public servant. So a balanced budget would roast my hide forthwith! But I also have children and therefore want to see America remain great.

I think comparisons with the Great Depression are very important to make. In many ways our situation is almost totally the reverse of what it was in the lead-in to the Great D. Then, we were had an enormous balance of payments surplus, and we were the great exporter to the world. We sat on a huge pile of reserves. As world trade slowed, we went through the greatest negative balance-of-payments shock history had ever seen. Meanwhile, debtor nations cruised on through, seeing little negative demand shock and sometimes even a boost.

Conversely, the nation that is the position of the US ahead of the Great D is not the US of 2011 but rather China of 2011. In a mercantilist system where they buy our bonds and sell us goods, they get the jobs. If we want the jobs, we have to break this cycle by balancing our budget.

Besides, I’m pretty sure that when Congress passes an increase to the debt ceiling, its members don’t silently think “Great, that’s $500 billion more I can spend in arrears without anyone asking any questions.” I tend to the notion that a debt ceiling gives us a reason for some soul-searching.

There was infrastructure development as well, although the article does criticize that decision too.

http://www.boston.com/business/articles/ 2011/01/12/evergreen_solar_to_cut_800_jo bs_as_it_tries_to_compete_with_china/

Unfortunately that is pretty typical of governmental efficiency.

Wealth is generated when people work at a useful job. The government can and does redistribute wealth, in the interests of social equity, but it is not very good at creating wealth. Moreover, governmental actions tend to distort the economy in ways that reduce wealth production.

A fine balance to maintain, perhaps, but I don’t think balancing the budget would devastate the economy. At worst it would weaken the safety net.

The reason why Americans lack confidence is that 18% of Americans have lost their livelihood. A budget balanced via spending cuts would quickly raise that to 25% and give us a genuine, sparkly Great Depression II.

I know that’s exciting if you have 5000 friends, a large arsenal and a defensible hilltop in Montana with a good water supply.

But the rest of us think it’s pretty sensible to balance the budget by, you know, funding the government the way we did when our budget was balanced – cutting defense spending and requiring the very, very wealthy to pay 40% of their gained income, and 28% of their capital gains, in taxes.

And then we think the path to long term prosperity is to invest in strengthening our education system and at least slow down the outsourcing our jobs to Asia. And many of us think that it would be a good idea to spend less than $500B per year on foreign energy supplies, perhaps through some reasonable conservation and alternate energy measures, and ending $30B in annual subsidies to foreign multinationals in the oil business.

But then why do what’s proven to work? Dan Hess thinks he deserves a tax break!

Those overseas and local dollars which are presently pouring into treasury debt would go into American goods and services, as well as raise demand for assets. Jobs would get a big boost from this.

“You want to increase the debt ceiling? You have to cut the structural deficit 10% (or better 30%), and you have a deal.”

The analogy of getting thrown out of your house is a poor one. Felix, you are confusing a second derivative with a first derivative. (Main variable = budget, first order derivative = spending, 2nd order derivative = change in spending). Spending remains very positive. The change in spending goes negative, but that isn’t the end of the end of the world.

If your credit line is not increased but you still have your job (analogous to tax revenues still coming in) your spending will have to curbed or you will have to earn more but it is not the end of the world. Would this be contractionary? Perhaps, but so was Volcker’s action in the early 1980s. America did not end up on the street. Quite the contrary.

Please explain, petertemplar? Treasury bonds are sold at auction. The interest rates are set by the buyers in the auction. (The coupon is estimated ahead of the auction in an attempt to keep the sale price from diverging too far from the par. But that is still buyer-driven.)

Are you advancing a different line of reasoning?

Great analogy assuming the credit card owner is the monopoly issuer of the currency the credit card debt is in.

The debt ceiling is just a parlor trick.

We don’t “borrow” money from any country. We set our own interest rates. And we could make it zero if we wanted.

The whole idea that the US govt could default is beyond absurd.

I love most of your reporting but this reads like another Peter Peterson press release.