I suggest we be careful about letting our deficit get too small like Japan did should our economy begin to recover.
And if we do, I suggest we stand ready to reverse any decline in the deficit immediately should things begin to turn south.

The right size deficit is the one that coincides with full employment.
And it’s the same size deficit that coincides with ‘net savings desires’ for that currency.

This varies from nation to nation, and also over time with changing financial conditions.

3 Responses

  1. Hi Warren, The right size deficit equating to net savings desire for that currency doesn’t necessarily match level of spending required to get to full employment? Does it?

    Because of Dollar hegemony, the US enjoys foreigners’ high net savings desire for $. For other nations, net savings desire for their currency may not sufficiently match the level of deficit spending required to get to full employment. In that case, they could end up with low growth, deflationary environment like Japan’s. And if deficit spending exceeds net savings desire for that currency, that nation could end up with stagflation.

    Thoughts?

    Regards,

    Jack

    1. Hi Warren, The right size deficit equating to net savings desire for that currency doesn’t necessarily match level of spending required to get to full employment? Does it?
      YES, IT DOES BY DEFINITION

      FOREIGN DESIRES TO SAVE $US FINANCIAL ASSETS ALLOWS ARE TAXES TO BE LOWER THAN OTHERWISE FOR A GIVE SIZE US GOVT. THAT WAY WE HAVE ENOUGH SPENDING POWER TO BUY ALL THAT WE CAN PRODUCE DOMESTICALLY PLUS ALL THAT THE REST OF WORLD WANTS TO SELL US.

  2. can take this as a damning correlation, for those who still fear increasing public currency supply (fiscal “deficit”)?

    it’s interesting to see how long the variable lag & overshoot is – indicates concept-specific “awareness” & implication kinetics in a particular population, bureaucracy and policy apparatus (including squabbling lobbies)?

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