Fiscal stimulus, Ricardian equivalence and government global Ponzi scheme

[Rajiv]

Fiscal stimulus, Ricardian equivalence and government global Ponzi scheme by Krzysztof Rybinski

The crisis of 2008 is a global one, the whole world is affected. In such case one should use a closed economy intellectual framework to understand what can happen going forward. Exchange rates do not matter (we do not trade with Mars yet). Protectionism matters because it impedes effective allocation of resources in times when some some resources become scarse (capital). Panics and manias (like the recent one about Eastern Europe) matter because it may lead to domino effect and make matters worse. But all these factors are of second order of importance, the most important is global public intervention aimed at increasing demand (fiscal expansion and polices to ensure credit growth). In a closed economy fiscal policy should be effective, there are no Marsian exporters that will benefit from higher demand on Earth, so rising Earth fiscal deficit (lower taxes and higher public spending) should in principle work. Markets and the private sector would benefit from lower taxes and higher public spending, growth will return and debt will be paid back. Right? Wrong!!!
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[jk]

Re: Fiscal stimulus, Ricardian equivalence and government global Ponzi scheme

from the link

So the only rational expectations that can be formed are those that taxes have to rise big time in the future (so today they will save, not spend) or that inflation will be crated to erode the value of debt (so demand for public debt should fall, people will buy inflation linkers or gold).

emphasis added