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Monday, April 29, 2013

The Idiocy of Cutting Spending During a Recession

I've been trying to find a way to convey the idiocy of cutting government spending during a recession. I hope this helps.

First, it's important to understand the effects of a recession. The worst symptom of a recession is a lack of money. Does that mean that the money doesn't exist somewhere? No. It exists, it's just not in circulation, and if it's not in circulation, people can't get it either by earning or borrowing it. If people can't get money, they can't spend money, and since that money that they spend goes into the paychecks of the guy at the gas station, the lady at the grocery store, and the folks who build houses, then they also have no money. Now stretch that example out far enough, covering the thousands of types of jobs, and make it cover the entire country. That's recession; no flowing money.

So, let's use water as our example. Most cities have large tanks either up on big supports looking like some sort of steel monster (or painted to look like a piece of fruit), or set on top of a hill. For the purpose of this demonstration, they're not tanks, they're banks. Imagine that the water those tanks hold isn't water, it's money. Water mains carry water to users the same way that investors invest money in job creators - employers. The smaller pipes represent employers who channel the money to their employees in return for time and effort put in by the employees.

Our water flows like this: Tanks > Water Mains > Smaller Pipes > Users

Our money flows like this: Banks* > Investors* > Employers > Employees
*This order may be reversed and often is.

Here I am at home and one day, I turn on the tap, but nothing comes out. There's water in the tanks. There's water in the mains. There's water in the pipes. But I can't get the water to flow.

This is recession.

The banks have money. Investors have money. The "tanks" are full, there's "water" in the "mains", but the "water" - money - isn't flowing. Why?

Fear. Sometimes fear mixed with greed.

In order for me to cook, bathe, clean, to use for sanitation, and water my garden and flowers, I need water. 
In order for me to eat, pay my mortgage or rent, pay for transportation, afford clothing, pay for the kids' necessities, I need money.

When water doesn't flow, we have a water shortage or drought.
When money doesn't flow, we have a money shortage or recession.

Money isn't flowing.

This is recession.

So, if the problem affecting being able to cook, bathe, clean, use for sanitation, and water my garden is a lack of water, or specifically, since we know there is water in the tank and in the mains, lack of movement of water, I need to get the water moving in order to fix the problem.

If the problem affecting being able to eat, pay my mortgage or rent, pay for transportation, afford clothing, pay for the kids' necessities is a lack of money, or specifically, since we know there is money in the bank and in the investors' pockets, lack of movement of money, I need to get the money flowing in order to fix the problem.

Here's the catch: Government can't make banks lend or investors spend or employers create jobs. Government can only make enough money available to them so that they feel safe enough - because there's an abundance of money - to let the money start flowing again and government does that by making more money available at very low interest rates to banks and investors who can then lend at low, but still profitable, interest rates to consumers - you and me. 

Making enough water available so that the valves are opened on the tanks and mains gets the water flowing to our homes.
Making enough money available so that loans are opened at banks and by investors gets the money flowing to our wallets, and from there back into the system to kickstart the system and make it work again. 

It's like using the shock paddles to resuscitate a person whose heart stops. It takes a bunch of new money - a shock - in the system to jolt it back to life. Only government has that much money, and that's why cutting back on spending during a recession only makes it worse, and never makes it better!

This is recession.