Economy blah blah spending blah blah

Now, I've been trying really hard the last few months to understand what's been going on in the economy, and still I find most of this article to be pretty inscrutable. I'm not even saying that it's wrong: I'm just saying that I don't understand it. For example, first it says this:

Big deficits force the government to borrow more money, saddling future generations with large financial burdens. The problem is especially acute now because credit markets, which at times in recent months have been all but frozen as the financial system has been buffeted, could be further strained by the need to finance the huge deficit.

Well, wait a minute. Yes, there is a credit freeze--for private individuals, companies, and investors. But there isn't a credit freeze for the United States government--in fact, the whole reason there is a credit freeze is because lenders will only lend to the United States government (because it is perceived to be the one borrower that cannot possibly fail). The article even explicitly mentions the favorable interest rates that the government can borrow at as a result of this investor "flight to safety":

...the good news, at least for the moment, is that the Treasury’s borrowing costs are as almost as low as they have ever been. Short-term Treasury rates are hovering just above zero, but the rates on 10-year Treasury bonds are below 2 percent.

Maybe he means that huge government deficits will worsen the credit crunch because the government will end up sucking up all the dollars that would have been lent to private borrowers? But isn't the whole point of the deficit spending to increase demand to get the economy back at full capacity and get lenders confident enough to lend again? I mean, if there was no stimulus everyone agrees the recession, unemployment, and credit situation would be worse, right?

Bah. Time to go find a blog post somewhere that actually explains what the hell is going on with this stuff...

Hold your breath

Apparently we're once again moving to the brink of disaster in the credit markets. Krugman tells us not to worry about the plummeting stock market:

Panic about the credit markets instead. Interest rate on 3-month Treasuries at 0.02%; interest rate on high-yield (junk) bonds over 20%.

This is an economic emergency.

If my understanding is correct, the spread between those two numbers indicates how scared investors are that borrowers in the private market (including banks, companies, and you and me) will default. Treasuries are loans to the federal government, and are considered virtually 100% safe (since the government can always tax, borrow, or print money to repay a debt, and will basically never default). Since everyone is "flocking to safety" and loaning to the federal government, the federal government can demand to borrow at very low interest rates and still find a lender. In fact, the federal government can now borrow $100 today and only have to repay a total of $100.02 three months from now!

On the flipside, "junk" bonds--which are considered higher risks for default, and which can only find lenders by offering to borrow at very high interest rates--their interest rates are shooting through the roof. This is because nobody wants to invest in the private markets, because they are afraid that private borrowers will default.

And so a wide gap between those two interest rates indicates people are getting the hell out of the private markets and essentially stuffing their cash under the government's mattress.

Incidentally, while this is all bad news, it also illustrates why federal deficit spending is required in these situations. The government can borrow money for free; now is the time for the government to borrow lots of it and get it spent in the economy, so as to make up for the decrease in consumer spending and keep lots of businesses alive (thus preserving jobs). And of course, this should be done in a constructive way, with spending on things like increased unemployment insurance, infrastructure, financial aid to the states, and tax relief for everyone.

Anyone who talks about balanced budgets right now just doesn't know what they're talking about. Obama needs to run, like, a 500 billion dollar deficit next year.

A time to spend

Says Krugman:

It’s now clear that rescuing the banks is just the beginning: the nonfinancial economy is also in desperate need of help.

And to provide that help, we’re going to have to put some prejudices aside. It’s politically fashionable to rant against government spending and demand fiscal responsibility. But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold.

It's somewhat counterintuitive but true: federal deficit spending is good in a recession, because it gets money flowing in the economy. Moreover, since lenders have lost confidence in the private banks, they all want to lend to the federal government--even if it means lending at an interest rate of a fraction of a percent. So the government essentially has a credit card with a hyper-low interest rate of, like, 0.15% that it can use to get money flowing in the economy in various ways: by increasing unemployment benefits, by cutting taxes, and by investing in infrastructure improvements. The idea is that you keep spending until the economy recovers, at which point tax revenues also recover and you can balance the budget and pay down the debt.