Thought Experiment, Part III

Inspired by this post.

Imagine we have nation with 20% unemployment. The government decides to use Keynesian policies to deal with this, and they use debt at 2% to employ those unemployed people by having them dig holes, and then fill them in again.

At the end of a year, we have no unemployment. A lot of people have income, and they’ve bought food and entertainment, etc. All is well, yes?

Well, no. There is still that lingering debt at 2%. And there is nothing productive built or created with that money. It’s the financial equivalent of a twinkie – tasty, but lacking in any nutritional value. Basically, we’re making a bet that we’ll grow and/or inflate faster than 2%. Not an unreasonable assumption, but not etched in stone.

People spent money to buy those bonds, and now they don’t have that money to spend on other projects. Now, many of those people are foreigners, and to the extent that we can ‘swindle’ foreigners out of their money and use it to employ americans, bully for us… if you like the idea of knowingly swindling foreigners out of their money.

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