Thursday, October 29, 2009
Gov't spending and its effect on income
As I have said (and shown by accounting identities) for years, government spending generally adds to the income and savings of the non-governmental sector.
Take a look at what happened in the year covering Q3 2008 to Q3 2009:
Over this period private wages and salaries declined $382 billion, from $5,419.2 to $5,037.8.
Yet, transfer payments (Social Security, Unemployment benefits, Medicare, Medicaid, etc) raised incomes by $257 billion.
Interest income, which is an important part of income paid by the government to holders of Government debt, actually fell. It went from $1,327.8 billion to $1,233.9 billion.
The more government spends, the greater the positive impact on non-governmental income and savings.
The drop in interest income also shows why, if the Fed were to raise interest rates, it would be INFLATIONARY, not deflationary.
Since the government is a net payer of interest, if rates were to rise, that would equate to an income boost to savers who hold gov't securities, but who might not be contributing all that much to the total output of goods and services.
That's why a rise in interest rates would likely be very bullish for stocks and the economy, at least for a while, or until rates hit a point where the yield on fixed income investments beat that of equities.