Peter: Geithner and the Obama administration have already spent so much to stimulate the economy that we have a very large debt because of the gigantic stimulus program that was implemented. It is time to leave things in the hands of private business they are the one who really know what to do.
Sara: Well that is what Europe and the US have started to do, don’t you think?
Peter: Yes; if deficits need to be covered by further in indebting ourselves, eventually we will have to raise interest rates to cover that debt. Higher interest rates will take away the opportunity for our private sector to make productive investments in the economy since borrowing would become more expensive.
Sara: Well if you think that by creating other stimulus programs, citizens will save the money that was given to them instead of spending it, research has shown that not to be true. Although it did happen to some extent at first during 2008 - 2009 because most everyone feared their jobs could be lost and tried to save in order to protect themselves from potential unemployment, we know from previous research that most often people spend part or all of the money given to them especially if the money comes from new jobs for the unemployed, stimulating the economy and triggering the multiplying effect. Such influx of capital will drive the economy forward and therefore the IRS will increased their revenues thru taxation and the initial deficit will decrease considerably improving our fiscal strength.
Peter: Well I know that strong injections of capital into the banks by the feds by reducing interest rates alone could bring down the value of those reserves significantly making loans cheaper for those that want to borrow to spend and thereby stimulate the economy.
Sara: Right; you see now-a-days when banks lend money, they don’t take cash from their deposits, but rather generate a new deposit to make the loan, so the potential risk associated with new debt for the bank diminishing a bank's deposits is not there today.
Peter: Are you saying then that in slow economic times where industries have idle unused industrial capacity a stimulus program could generate new jobs and pay for itself through taxes. Moving the economy forward until it gets on its feet again.
Sara: Yes that’s right that is what I am saying. We have the capacity we have the need with so many unemployed citizens so we can generate the demand and get the economy moving to full capacity. And finally those with jobs could once again afford to pay the money they owe for their homes in unpaid mortgages or even buy new ones if given some time.