Comment 68524

By A Smith (anonymous) | Posted August 28, 2011 at 17:12:18 in reply to Comment 68520

From 1997-2008, home prices in Toronto INFLATED by an average of 8%/year. In these years, the government(s) of Canada ran surpluses. Not only that, but government spending as a percentage of GDP fell from 43.8% to 38.1%. Gas prices rose from $0.68/ltr, to over a $1.00/ltr.

In contrast, from 1990-1996, deficits averaged 5.82%/GDP, yet Toronto home prices DEFLATED by an average of 5.4%/year. During this time frame, government spending averaged 49.1%/GDP. Gas prices fell form $0.73/ltr to $0.68/ltr.

If you worry about deficits and inflation, look no further than Japan. They have been running massive deficits and yet prices there keep falling.

Furthermore, U.S. inflation only died down AFTER Reagan began pushing the federal debt back up, following thirty years of steady decline in the debt/gdp ratio.

Another thing, the government doesn't simply print money like you think it does, it spends. When it spends, it credits bank accounts, thereby creating additional savings in the private sector. If those people choose to spend and they do it faster than the economy can increase production, then yes, it's possible you may have inflation.

However, if you consider that Canada's current industrial capacity utilization rate is only 79% and unemployment is 7.2%, there is still a lot of idle capacity waiting to be put to use producing things people want to buy.

I don't know about you, but I would rather risk an overheated economy than a idle economy. At least with the former, the solution is easy, raise interest rates and drain reserves to slow lending.

In contrast, as seen in the U.S. and Japan, unless the government increases the amount of savings in the private sector (by running deficits), they will slow their spending and pay down debt.

More public deficit = Less private debt

Look at the second chart...

http://www.creditwritedowns.com/wp-content/uploads/2010/01/sectoralbalances.gif

Japan's corporate sector is STILL deleveraging, even after 30 years.

Here is a good video on that scenario...

http://www.youtube.com/watch?v=HaNxAzLKegU

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