The debt downgrade is not good, but not all that happens as a result is bad.  No matter how pathetically this result is spun to reflect on the Tea Party, intransient Republicans, and George Bush the administration cannot escape responsibility.  He took a giant Keynesian gamble and it has failed miserably, as it has in the past.  I am more surprised by how well the economy has performed given the dramatic shift to centralist government under this president.

Businesses are sitting on huge sums of cash and they are not spending it because of the atrocious regulations and new laws and the stepped up class warfare.  Wealth goes where it is wanted and respected, not where it is demonized.

But cash is also sitting idle because interest rates are low.  If normal investments are too risky and short term yields are too low there is only one other place for it to go and that is consumption.  That is what Keynes would anticipate.  But the wake of unwinding excess credit has pushed more cash into reducing debts than increasing consumption.  Savings is growing.

It is worth noting that Apple computer has more cash than the Treasury. (My family of three has eleven Apple products.) Perhaps we will find that private businesses manage resources much better than the government and we will deploy more resources in that direction.  The 500 point decline  may have been triggered when a large New York bank began to charge large depositors for holding cash in effect making short term interest rate turn negative, which it already was if inflation was considered.

In this environment the best deployment of cash is to reduce debt. You earn nothing on your cash but you can assuredly save 5% or more by paying off your mortgage.  Not paying 5% is the same as earning 5% and the savings is with lower risk.

Low interest rates is a way of saying there is too much money in circulation OR that the demand for money or the velocity or turnover of money is too low.

This debt debate and the ensuing downgrade is testament to the fact that the current administration and the current political leadership is unwilling to make the reductions in spending necessary to restore our credit rating.  Only the next election can remedy that. But a reduction in government spending alone will not redeem our standing.  Much of the regulation and legislation passed in the  last few years must be reversed.  At the risk of being repetitive,  loose monetary policy can no longer bail out reckless fiscal policy.

If we ONLY reduce the demand that would come from a reduction in government spending WITHOUT stimulating production the drop in spending will likely trigger another recession.  If such a  recession ends up reducing government spending it would be an investment ultimately worth making.  The last round of spending to lengthen unemployment benefits and stimulate green jobs did little to nothing to stimulate anything of long term value.

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