“Sin-Yaw, I won the lottery!” She sat down across my desk. “I had a 2nd on my house and went refinancing for a lower rate. The bank said it was too risky and just wrote it off.”
“YOU? Got the bail-out money?” I asked.
“YEESS.” She waltzed out of my office and left me thinking of this stimulus package.
If someone borrowed money and use it wisely, the debt would generate future income that pays back the loan and more. Otherwise, the borrower simply ends up poorer. This is the golden rule. No getting around it.
If the government borrows money, John Maynard Keynes said it is different. If the citizens spend them away, the consumption whirl into virtuous cycle and multiply the wealth many times over. Don’t buy imports, however, since then the money then becomes part of their virtuous cycle and the citizens just ended up poorer.
The government can also invest on infra-structure that boosts everyone’s productivity. Extra productivity means more wealth to pay back those debts. The pitfalls are those wasteful projects, such as the infamous bridge to nowhere, that do not really improve productivity.
If neither happens, the debts translate into inflation: more money and same productivity equal higher prices. Inflation discourages savings, punishes the most vulnerable, and ends up impoverishing everyone. Inflation also happens in the future. The next generation pays, with no choice and much bitterness. Or they can borrow against their offspring and thus enter the vicious cycle.
Only two would lend money to our government: yourselves or foreigners. Which one will forgive the debts? If the USA is bailing out its society, who bails out the USA? I guess it is OK anyway. Our kids will figure it out.