[amberamuletuk]

I've been mulling the following thought in my mind for a few days:

In a free economy, the interest rate on borrowing money is set by how much savings there are and how much demand there is for borrowing. When the gov't increases it's demand for money and runs deficits, the interest rate will increase as an effect of this increased demand for a limited supply of savings. Following this example, when the gov't finally reduces it's spending, the interest rate will then go down, as a result of the reduction in demand. The lower interest rate will then encourage private investment and borrowing to take it's place.

So instinct tells us that if the gov't borrowed less, the private sector would appropriately increase it's activity because more money would be available. But, while the instinct is correct, this is not the economy we have! The interest rate is not set by the amount of capital/savings in reserve, it is set by the decree of the fiat money makers! Private investment and spending is already maxed out because of the manipulation of the interest rate to basically zero, so even if the gov't spent/borrowed less, there would be no reduction in the interest rate and no increase in private demand for investment and borrowing! Which leads me to the conclusion that if the gov't reduces it's spending at a time like this, the economy will crash, because removing $1.4 trillion dollars of activity from the economy with nothing to counter it would cause the economy to dramatically slow down, back to depression levels!

Thoughts?