[Der Fuhrer]

Originally Posted by Mr. Blonde

Der, it's really hard for me to take a post like that seriously when you include things like:

Maybe you should change your name to Mr. Serious. Seriously, no one wants to read nothing but serious shit, it's fucking lame and boring. If you do, then you're probably lame and boring. I add things like that for some comedy relief, if not for you then for myself because it makes me laugh.

Obviously I know a lot more than you, though, Mr. Blonde. Although I don’t know what your educational background is, I’m sure most of your time at college was spent butt fucking your fraternity brothers. I do, however, respect your opinions on most subjects because you do not appear to be a dumbass. As I said before, I could go into more details, but that's boring. However, to humor you I will now give you an in-depth analysis on one reason why Obama is a terrible president.

He has the largest government deficit EVER. Yes, I know Bush also ran a deficit, but Obama took Bush's budget and went BLING BLING on that shit. What happens when a government runs a deficit, and how does a government pay for this deficit? There are two options, raise taxes or borrow more. Obviously Obama's deficit is so large he's likely going to have to do both. Look at this chart comparing Bush's and Obama's spending.



When he taxes the "rich" (apparently over $200K is rich, maybe he hit the crack pipe too much living on the south side) and corporations even more (corporations already pay more tax in America than any other country in the world), the actual rich people will hide their money where the government can't take it or they will leave the country altogether, and corporations will continue to flee to other countries with pro-business governments (i.e. ones that don't have any corporate tax) as they already are. This will result in less employment and will likely have the unintended consequence of actually lowering tax revenues. The solution will be to print more money and this will create inflation. It is called seigniorage and it's just another tax.

The other option is to borrow more money. The problem is that there is not an inexhaustible amount of funds available for lending. The amount of lending that can occur is basically equal to the amount of savings minus currency on hand and banks' required reserve ratios. When the government needs to borrow more money, it increases the demand for loanable funds. Private investment gets "crowded out" when this happens because there is only a limited amount of loanable funds. Crowding out has potentially serious implications for economic growth because capital investment in the private sector is, on average, more efficient than that of the government. This is true because private firms are profit maximizers whereas public spenders are utility maximizers. Efficient capital investment is a staple of persistent economic growth. Therefore less private investment leads to less efficient capital investment which leads to less economic growth.

How much crowding out occurs depends on the elasticity of the supply of loanable funds, which in this market, I would say is fairly inelastic. I have poorly drawn two graphs below to illustrate how this occurs.

In graph one, the supply of loanable funds is quite elastic, which is shown by its relatively flat slope. In other words, ΔQ/Δr, where r is the interest rate, is fairly large. In this example, let's assume that Q1 is $5 billion. Let's also assume that of this $5 billion, $2 billion is private borrowing and $3 billion is government borrowing. Now let’s suppose the government wants to increase its deficit by an additional $5 billion, and it finances this deficit through increased borrowing. So Demand + has shifted to the right by $5 billion. However, when we have non-vertical, non-horizontal curves, the vertical and horizontal shifts in one curve will be greater than the change in the variables. In this case, Demand doubled, which means Q will less than double. The result will be that Q2 has only increased by $4 billion. Thus at Q2 we have a situation where the government wants to borrow $8 billion, the private sector wants to borrow $2 billion, but only $9 billion of loanable funds are willing to be supplied to the market. So what happens? Because the government has absolutely zero risk of defaulting on its debt, lenders will always prefer to lend to the government rather than the private sector. The result in this example will be that $8 billion in loanable funds will be supplied to the government and the private sector will only be able to borrow $1 billion in the market instead of the $2 billion that it would like. Thus $1 billion of private investment has been crowded out by the increased government deficit of $8 billion.



The second graph shows the exact same situation, except that the supply curve of loanable funds is much more inelastic, meaning that ΔQ/Δr is quite small. In this case even more crowding out occurs because the ΔQ resulting from a ΔDemand is even less than the ΔDemand. In this situation, using the above example, Q might only increase by $3 billion and thus the private sector would be crowded out by the government entirely. $8 billion in loanable funds would be supplied to the government and there would be no credit available in the private sector.



We can also show this effect mathematically. However, unless you have studied economics to at least an intermediate level, it is unlikely that you will understand this analysis. But since we're all about being serious and proving our points with facts, I'll try my best to explain it clearly.

In order to simplify our model, we will start with a few simplifying assumptions to make life easier.

1. There is only one interest rate. This makes the analysis easier since we don't have to consider simultaneously the several different interest rates in the economy. This assumption is reasonable because the different interest rates generally move in the same direction.
2. Assume the interest rate is flexible.
3. Assume that variables change instantaneously. Although unrealistic, we're using this assumption because we are only concerned with the magnitude of changes rather than the path of the change
4. Assume borrowers and lenders act independently. This allows us to neglect those who act as both borrowers and lenders and the same time.

In terms of definitions, we only have the simple one that the interest rate is the price paid for the loan and the price received by making the loan. This is basically a supply and demand model, where the equilibrium occurs at Qs=Qd. Therefore we need to derive these behavioral relationships of demand and supply. We have three main borrowers in the credit market: households, firms, and the government.

Households borrow to spend more today than what they earn. The higher the interest rate, the worse a trade-off it is.

Firms borrow for investment purposes. This will be affected by the expectation of the future strength of the economy. Let X equal this value. It is an expected value derived using statistical techniques which are beyond the scope of this discussion. X is positively related to the demand for credit. Also, the interest rate increases the cost of borrowing and is therefore negatively related to demand.

The government will borrow funds to finance its deficit which occurs when it spends more than it taxes. Let G equal government spending and T equal taxes. Therefore the deficit equals G-T. G-T is positively related to the demand for credit.

Now let's put this all together to construct the demand side equation. Please note that lower case letters denote subscripts and capital letters denote variables.

Qd = f(R, X, G-T) = Do - DrR + DxXo + DzZo

Where Do is exogenous demand for credit. This is to indicate that there are probably other variables outside this model which affect demand. DrR is the portion of demand affected by the interest rate, denoted as R. The Dr in front of R is used to show that it is part of the demand equation in reference to the interest rate. It is also to show that the ΔQd/ΔR is not a 1 to 1 ratio, thus DrR. I will do this for all of the variables. A 'o' subscript reflects those forces determined outside the system which have an impact, thus Do is exogenous demand.

Also note that I have changed G-T into Z, just for simplicity. I have also included that X and Z are exogenous (determined outside of the model) thus we have DxXo and DzZo.

Now let's consider the supply side to the credit market. We need to know how banks obtain the funds to make these loans, and why they make them in the first place.

Banks get these funds from demand deposits (DD) and time deposits (TD). The definitions of these types of accounts are not relevant; you only need to know that the greater the amount of these deposits, the more loans can be made. Thus they are positively related to the supply of credit.

Banks make these loans in order to make a profit. The profit is determined by the interest rate paid for the loan. Therefore the supply of credit is positively related to the interest rate, R.

Now we can form the supply side equation.

Qs = f(R, DD, TD) = So + SrR + SddDDo + StdTDo

Also please note that the supply of time deposits has a sexually transmitted disease, denoted Std. Just kidding, it just got tested and it's clean.

Finally we have the equilibrium condition, Qs = Qd. So let's show the model completely.

1.) Qd = Do - DrR + DxXo + DzZo
2.) Qs = So + SrR + SddDDo + StdTDo
3.) Qs = Qd

I will solve for R first, because it is the only endogenous variable to solve. I want to solve for the endogenous variable because it is the only one which is determined within the model we have constructed. To solve for R, substitute 1 and 2 into 3. This gives you:

Do - DrR + DxXo +DzZo = So + SrR + SddDDo + StdTDo

Now we want to solve for R and find the reduced form equation. I'm not going to show the algebra and if you cannot do this simple algebra you should probably just kill yourself unless you are 15 years old or younger.

Once you get the terms with R on one side, factor out the R and you have:

R(Dr + Sr) = Do - So + DxXo + DzZo - SddDDo - StdTDo

Then divide both sides by Dr + Sr to obtain the reduced form equation for the equilibrium condition R.

R = Do - So + DxXo + DzZo - SddDDo - StdTDo / (Dr + Sr)

This equation is very useful because we have an endogenous variable on one side and exogenous variables on the other side. Thus you can determine how changes in the exogenous variables affect R. These effects can be seen in the slopes shown below.

ΔR/ΔXo = Dx/(Dr+Sr) ; ΔR/ΔZo = Dz/(Dr+Sr) ; ΔR/ΔTDo = -Std/(Dr+Sr) ; ΔR/ΔDDo = -Sdd/(Dr+Sr)

The last step is to find the reduced form equation for the equilibrium quantity condition. To do this just substitute the equation for R into either the Qd or Qs equation and simplify. It's easier to use the supply equation because the slope of R is positive. Doing so gives you the result:

Q = So + Sr (Do - So + DxXo + DzZo - SddDDo - StdTDo) / (Dr + Sr) + SddDDo +StdTDo

Now you need to put this all over a common denominator and combine like terms. Doing so gives the result:

Q = (SrDo + DrSo + SrDxXo + SrDzZo + DrStdTDo + DrSddDDo) / (Sr + Dr)

Now you can look at the slopes, which by the way, tell you a lot about what effects changes in exogenous variables have on the endogenous variable, Q.

ΔQ/ΔXo = DxSr/(Dr+Sr) ; ΔQ/ΔZo = SrDz/(Dr+Sr) <- most important for our discussion ; ΔQ/ΔDDo = DrSdd/(Dr+Sr) ; ΔQ/ΔTDo = DrStd/(Dr+Sr)

Now with this information we are ready to take a look at what happens to the credit market when the government changes its deficit.

First you must consider Dz, the amount that demand for loans changes with respect to changes in the government deficit. It seems very likely that this parameter will equal 1 because for every dollar increase in the deficit, the government will have to borrow an additional dollar. So looking at the above slope for ΔQ/Zo = SrDz/(Dr+Sr), if Dz = 1, then, ΔQ/ΔZo = Sr/(Dr+Sr) and likewise, ΔR/ΔZo = 1/(Dr+Sr).

Because Dr and Sr are positive it follows that 0 ≤ (Sr/Dr+Sr) ≤ 1

From this you can see that ΔQ/ΔZo ≤ 1 and ΔQ < ΔZo

As you can see this clearly proves what I have stated above with respect to the graphs. The change in the quantity is less than the change in the deficit, which means the quantity of new loans is not enough to cover the increase in funds the government wants to borrow. Because the government is much less risky, the increase in loanable funds will go to the government. As a result, private investment will fall by the amount of ΔZo - ΔQ.

If ΔQ/ΔZo = 1, then there will be no crowding out. Each dollar of deficit increase will be met by a dollar increase in new loans.

If ΔQ/ΔZo = 0, then there will be no new credit forthcoming. For every dollar of increased deficit, one dollar will be sacrificed from the private sector to fulfill the government's borrowing needs.

From this you can see the following conclusions. The larger that ΔQ/ΔZo is, the smaller the crowding out will be and the smaller ΔQ/ΔZo is, the greater the crowding out will be.

You should see that the size of the slope plays a big role in determining the amount of crowding out. You should also see that Sr and Dr play a very important part in determining the size of this slope.

A large amount of crowding out will occur if Sr/Sr+Dr approaches zero. This will occur if Sr approachs zero (supply of credit gets steeper) or if Dr approaches infinity (demand for credit gets flatter). If Sr/Dr+Sr is close to 1 then there is little crowding out. This will occur if Dr approaches zero (demand for credit gets steeper) or if Sr approaches infinity (supply of credit gets flatter).

If you actually took the time to read all of this, congratulations to you! You now have a basic understanding of credit markets and the effects of government spending on this market! You are awesome! Seriously, I took a lot of time to make this post. It included research, formulations, and I have two whole pages of scrap paper devoted to constructing this post. I sincerely thank you for reading it, and if you have any questions at all, please feel free to ask about them I’d be happy to answer them.

As you can see from all of this, Obama's massive deficit is going to have serious negative consequences for economic growth. What will the effects of this be? Well, firms will invest much less in a country will stifled economic growth, and they are far more likely to invest in a country with a high level of growth such as China or India. This is because they are profit maximizers. Obviously this has been occurring for quite some time now, but we’ve also been running a deficit for quite some time. If there is less investment by firms in America, you can count on there being fewer jobs. There are other institutional factors which play a role is suppressing economic growth other than fiscal policy such as the legal system and labor unions to name a few. The bottom line is that Obama sucks, end of story. His government programs will do nothing for the economy except give the poor more welfare and destroy economic growth. If you don't like what I have to say, don't blame me, blame economics.

See how boring serious is???