from John Mauldin’s Thoughts from the Frontline

In a liquidity trap, the rules of economics change. Things that worked in the past don’t work in the present. Central bankers’ economic models, iffy in the best of times, become even less reliable. In fact they sometimes suggest actions that are quite destructive.

The problem is not merely one of insufficient spending; the key problem is insufficient income. By definition, income has to come before spending. You can take money from one source and give it to another, but that is not organic growth. We typically think of organic growth as only having to do with individual companies, but I like to think the concept also applies to countries. The organic growth of a country can come from natural circumstances like ample energy resources or an equable climate or land conducive to agricultural production, or it can come from developing an educated populace. There are many sources of potential organic growth: energy, tourism, technology, manufacturing, agriculture, trade, banking, etc.

While deficit spending can help bridge a national economy through a recession, normal business growth must eventually take over if the country is to prosper. Keynesian theory prescribed deficit spending during times of business recessions, offset by the accumulation of surpluses during good times, in order to be able to pay down debts that would inevitably accrue down the road. The problem is that the model developed by Keynesian theory begins to break down as we near the event horizon of a black hole of debt.

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