Obama's economic thinking at odds with reality. Opting for the Herbert Hoover solution.

http://www.nakedcapitalism.com/2009/11/obama-debt-could-cause-a-double-dip-recession.html

Barack Obama has now come clean about his thinking on why his administration has decided to focus first on reducing the deficit and next on jobs. He fears a double-dip recession will occur if foreigners lose confidence in the U.S. dollar, causing interest rates to spike.

This is nonsense and it demonstrates how much at odds Obama’s economic thinking is with reality. This is the clearest indication that the Obama Administration doesn’t understand how modern money works. In fact, by focusing on deficit reduction, he has increased the chances of a double dip instead of decreasing them.

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The President just doesn’t seem to understand how the economy works frankly. Reducing deficits by cutting spending or raising taxes decreases aggregate demand. And it is a decrease in aggregate demand which would induce a double-dip recession. So, the President’s logic just doesn’t work.

But what about a strike on U.S. government debt? As you probably surmised from the above, if the U.S. private sector is increasing its savings, there is automatically a greater domestic bid for U.S. treasury securities. So, it is a misnomer to say the U.S. is dependent on foreigners, thinking that this must continue. If the private sector saves more, a larger percentage of government bonds will be bought with domestic savings. In Japan, interest rates did not spike when the government increased deficit spending for this very reason.

The only question we have to ask ourselves is whether we want to reduce debt by:

The Liquidation Scenario. decreasing aggregate demand and precipitating a major depression in order to liquidate zombie companies and malinvestment. This would cause a massive wave of defaults and decrease debt burdens significantly through bankruptcy and debt repudiation. or;

The Glide Path Solution. increasing aggregate demand by maintaining government spending while trying to liquidate zombie companies and malinvestment. This would allow the private sector to decrease debt burdens significantly over time through increased savings. It also has the benefit of reducing dependency on foreign sources of capital. The downside is a major increase in government debt, the spectre of big government and a long muddle through.

As I have said previously, the Obama Administration is doing neither of the above. It has opted for a third Herbert Hoover solution:

The Hoover Status Quo. decreasing aggregate demand and precipitating a double dip recession in order to reduce government deficits. This would cause a wave of defaults and decrease debt burdens through bankruptcy and debt repudiation. Meanwhile they will try to prop up zombie companies and maintain malinvestment. This would simultaneously prevent the private sector from decreasing debt burdens through increased savings and maintain dependency on foreign sources of capital – all without ending the spectre of big government.

more...

...self-fulfilling prophesy. Obama is screwed both ways. If he doesn't reign in the deficits the ideology-infused currency traders will bail from the dollar, if he does reign in the deficits the economy tanks again.

If one investor let his ideology get in the way of making money, another will say fuck my ideology I want some fucking cash money.

he has also given the keys to the Treasury to Goldman Sachs, one of the biggest culprits in the shenanigans that put the economy in the toilet in the first place.

no doubt. *sigh*

was that he failed to bail out the banks.

Bailing out the banks is not something that is cited as a reason for the Depression by most economist till recently.

you'll find out that Hoover didn't bail out the banks because he was worried about the deficit.

Jesus Christ, you people are more full of laughs than a barrell full of monkeys.

used to justify what happened.

Hey and you know what FDR did at the same time he bailed out the banks...he fucking regulated them.

don't want any of that nasty regulation crap.

The President has no clue on economic or banking matters the guys he is relying on are anti-regulation morons.

wasn't facing a nation in debt to foreign nationals. We still had a manufacturing base.

While FDR did the impossible, Obama is relegated to playing chess with marbles.

An FDR mentality (which Obama does NOT have) is needed, but the FDR textbook approach will not work today.

I have no answers.