A long word that most people just take on faith. I get the concept of deficit spending, but I find a huge, glaring logical inconsistency. If you are not just printing money (which worked wonders for Zimbabwe and Argentina), you must borrow that money. By borrowing money, you are taking away cash that would otherwise be lent to businesses.
We see this today - the stimulus and TARP funds are in bank reserves right now to shore up bank balance sheets against "toxic assets" with little resale value. But what if they weren't? Where would they go? But where did those TARP funds come from? Banks, somewhere, be they American banks or foreign banks or foreign central banks. Banks with liquid assets, who had invested wisely in the bubble years or got lucky at the crash, and seeing a bad economy, ran to the treasury for "safe" investments. Treasury was all to willing to oblige. But what if their had not been massive deficit spending to finance?
- First, there would have been more demand for the same supply of "safe" treasury assets. This alone would have caused an expansion of the money supply and made the Fed redundant because it would have forced interest rates to zero or even lower.
- As those interest rates dropped, commercial investments would have looked better and better to banks. So banks would have started lending and investing. Currently fashionable argument is that banks aren't lending because the economy is bad. Really, banks aren't lending because the US treasury is offering a sweet deal to finance massive government spending. All that stimulus cash would still have found its way to the market, it just would have been in the form of small business loans, M&A, and mortgages. The current Obama fetish with admonishing bankers for not lending is laughable and see through - it is the direct result of his policies.
- We would also still get plenty of foreign investment. China would start to act like Japan did in the '80's, buying up cheap real estate and taking controlling interests in large American firms. Is this worrisome? Sure. But is it more worrisome than China taking a large interest in the federal government, on which we depend for national security against... China? No, not even remotely.
You can talk about multipliers all you want, but they all apply just as well to private lending; and without deadweight loss incurred by government hamfistedness in the economy. So they apply better to private lending. Banks won't just sit on money if they have it and if the market drives interest down on treasury bonds; they will invest or die. It's the same reason why I'm lathering at the mouth about buying a house as soon as I can; you can get good investments cheap right now.
The main point is, in a fractional reserve system, the amount of liquidity is set by the reserve rate, the rules about what constitutes a collateral asset, and the inflation rate. If government is borrowing to spend, it is taking liquidity from business.