Do balanced federal budgets cause bubbles?

[Kurt_and_Hunter]

Economically it is not optimal to balance the federal budget. It is optimal to have a small, controllable federal deficit. (I do not know the arcana of exactly why that is. It is just an economics thing.)

The 1920s and 1990s were two notable periods of "fiscal responsibility." In both cases the apparent benefits were subsequently swamped by the ruin of stock market bubbles. (I believe our housing bubble was merely the last phase of a 1996-2007 asset bubble.)

I don't know the extent of the connection.

Discuss.

[Cant trust em]

1. I wonder if its a causal relationship. nt

[Kurt_and_Hunter]

2. The question would be whether the US selling no bonds has

an effect on interest rates such that they are undesirably low. (Relative to the surrounding economy)

I don't know.

But it's funny that a cancer of utter irresponsibility (Companies like Netscape that wouldn't exist five years later having larger market caps than GM ad such) was running through the US economy in 1998 while everyone was happy that we had finally gotten responsible.

[Ozymanithrax]

3. Bubbles are the result of uncontrolled speculation for short term gain...

They lead initially to high short term gain and disastrous long term loss. A balanced budget will not lead to an economic bubble. It doesn't add anything to the economy. You can not speculate on a balanced budget.

Government policy can lead to bubbles if the government doesn't have any regulation to control rash speculation.

The Internet/tech bubble of the 90's happened because a new technology changed things and no one really knew it's limits leading to wild speculation, just as the Tulip bulb crash occurred because of uncontrolled economic speculation due to a virus changing the tulip plant which led to wild speculation about the worth of rare plants. Bush's ownership society of 2004, where he pushed home ownership as an endless road to prosperity, was the direct result of government deregulation leading to uncontrolled speculation on mortgages. Deregulation of the banks allowing banks to do very risky things was the result of government economic policy led to uncontrolled speculation.

Speculation for short term gain leads to bubbles. Through regulation of the banks and other economic actors, the government can limit excessive speculation and stop economic bubbles. This slows the economy down a little, cuts the high high profit peaks, and fills the deep loss troughs.

[kenny blankenship]

4. The reason a deficit is preferable to balanced budget is pretty simple

It's the same reason the Fed would like mild inflation. In a fractional reserve system, lending money is creating money. The borrowing of large sums by the govt is creating money and creating demand, causing demand in the economy to be greater than it would be if the govt. ran no deficit. This helps to give the economy a "forward bias" for growth, to borrow a metaphor from electronics. Hopefully it is spending its money in ways that increase the volume of goods and services. Even military spending can be beneficial, but excessive military spending drains money and human capital away from normal economic activity that is directed toward utility and material comfort

The proposed connection between "balanced budgets manias" and asset bubble manias is not intrinsic, but it is connected through the motives of those who instigate and who most profit from asset manias. An asset bubble will become a bubble only by gaining proximity and eventual power over the credit creation institutions of the society in which it occurs. A local bubble that stays local will not be remembered by history; it will come and go quickly and few people will be involved in it. A real bubble takes in everyone and the bubblemeisters are soon in control of the major financial institutions private and public, and even the government will bend the knee to its power. It cannot grow to the size of a recognized bubble without getting its jaws right up to the credit creation spigot -that takes complicity within government to bring off. Once a bubble conspiracy is underway and paying off, government leaders will not dare disturb it for fear of being blamed for the devastation that will follow the collapse. Even those who understand the irrational nature of the investment mania, whatever asset class it is, and who may hate the bubble and despise the bubble blowers, and who know that behind the bubble's promises of endless wealth, widespread destruction and chaos are rushing in like a wolf pack, often feel forced despite themselves to participate in the mania to protect their relative wealth and status. This is all to say that a true investment mania will be accompanied by a kind of ideological hegemony. The men who lead the economy aren't just knowledgeable in how to get rich through piling into shares of Yahoo (ATH: $118 - currently: $16), or how everyone can be a millionaire through no money down real estate deals - why, they are experts and philosophers in everything! Their ideas will hold sway generally, their credibility guaranteed by their instant wealth. Everyone knows the saying, and knows there's no retort to this: If you were so smart you'd be rich like they are.

Even those people of established wealth and standing, who may see the bubble for what it is, will be largely silenced and find it hard to argue publicly against it, because in speaking up they will invite ridicule on themselves by those few who have been made fantastically rich in the bubble and also by those - many millions of them - who hope soon to enter the world of fairytale wealth themselves. (It's not like a magic spell, it is a magic spell, and if you question the logic of the bubble men or disprove their assumptions, you interfere with the mass illusion they've created at your own peril.) The class of speculative men, who don't care what hell is unleashed next year so long as they can become rich next month, will regard the borrowing of the Federal government as a rival to their new religion. And so it is. A bubble like the one we've been experiencing, first in Dow industrials, then in techs, then in real estate, requires a rapidly growing share of the stream of all available credit. If it doesn't get it, if a limit is imposed, the bubble will stall and implode. They look on with natural jealousy at the hundreds of billions the Federal govt. siphons yearly out of the credit stream. Their politics will assert that the government has no right to borrow all that money away from the private economy! The government must live within its means, they say, as dictated by IRS revenues, to which as you know they would like to never contribute a dime. First they want the federal budget in balance, then they want Social Security inflows diverted to their institutional accounts - for safekeeping! The whole of their wisdom is this: the government should not tax and it should not borrow. So they always maintain; unless of course it becomes necessary for their survival that the government suddenly borrow trillions to bail them out of their scams when they blow up like a Krakatoa. The failure of their financial scams results in the cratering of IRS revenues, but suddenly the bubble men won't care about the federal government pawning its vital organs and putting a lien on the future earnings of unborn generations in order to save their criminal hides.

[Hannah Bell]

5. i've seen the same claim elsewhere, going back further, & i tend to believe it.