Are We About to ‘Prime the Pump’ or ‘Flood the Engine’?

OK, my mind is running in circles trying to work through this, so I’m going to take it slow.  In order for the government to spend a trillion dollars, it’s got to get a trillion dollars.  Since it’s not coming from taxs, it’s got to be raised on the bond markets.  What does that do to the bond markets?  What does it do if every major economy in the world is suddenly trying to raise large amounts of cash and selling more bonds?  This is exactly what Matt Yglesias wants to see happen.

The world needs a coordinated response in which each country commits to undertake stimulus that’s appropriate to the size of its economy and to its position in the global balance of trade. Further, we need a serious international commitment toward rebalancing in the medium-term — to a weaker dollar, less U.S. consumption, more American exports, and less foreign economic dependence on the U.S. consumer market as an employment strategy.

So, Americans need to stop buying stuff they may not need from China, while China continues to plunge their savings into American debt instruments…  that would indeed be an interesting bit of “coordination”.

Also, what if all this spending doesn’t bring the promised stimulus?  It’s entirely possible that many Americans can make it six months or a year without making too many major purchases.  If that happens, then where does all this new found liquidity end up?  Does it go right back into the bond market?  Are we ‘priming the pump’ of the real economy, or are we just setting ourselves up for a whole lot of future inflation.

I really wish I were smart enough to make heads or tails out of this.


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