Saturday, July 30, 2011

AP's Ben Feller seems confused

And the real kicker? This whole wrenching effort to shrink the debt may actually increase the debt.

Any emergency deal may not be broad enough to prevent the major credit rating agencies from downgrading the United States as a rock-solid investment. That, in turn, could increase the cost of borrowing for the government (hence more interest and debt), not to mention for everyone else. Canadian Business

No, a downgrade raises the cost of funds and results in less current spending by Congress. The ratings agency prior assumption is that multipliers are low, meaning that if Congress spends less then GDP goes up, taxes rise deficit goes down, total spending goes down, the private sector grows and the federal sector shrinks.

If federal multipliers were high we would not be in this mess, we would have a House full of spenders.

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