I have spent quite a bit of time the past couple of weeks encouraging investors to not adopt too pessimistic of an attitude in regard to present market conditions. One of the best ways to keep perspective is by brushing up on your knowledge of economics. Please read The Little Book of Economics by Greg Ip.
The following is from Chapter Thirteen of this awesome book.
Susan R. Linkous
Good Debt, Bad Debt
The Bottom Line
* Chronic deficits compete with private borrowers for limited savings driving up interest rates, retarding investment, and impairing future economic growth. Interest on the national debt starves other government programs.
* Budget deficits can be good. During recessions, tax revenues fall and spending on the poor and unemployment rises, softening the sting. There’s less competition with private borrowing.
* Governments sometimes use fiscal stimulus – that is, a deliberate increase in the deficit – too boost a weak economy. This is usually unnecessary, unless the Fed is unable to do the job because it has already cut interest rates to zero.
* A breaking point can come when debt is so high that investors suspect governments will try to renege either by defaulting, or through inflation.
* The United States’ long history of fiscal probity, favorable long-term growth outlook and control of the world’s reserve currency, suggest it has a long way to go before it faces a crisis, but the risk can’t be ruled out.
(This is page 209 of Greg Ip’s The Little Book of Economics)
Until next week,
Economies of scale – features of a firm’s technolgy that leads to a falling long-run average cost as output increases.
Economies of scope – decreases in average total cost that occur when a firm uses specialized resources to produce a range of goods and services.