Where Our Capital Winds Up

There is a lot of debate on the cable TV news programs as to what is stimulative and what is not stimulative for our domestic economy. I should not have to say “our domestic economy” as that is a bit redundant, but I do it for a reason, to emphasize the importance of differentiating between money that stays here in the United States, and money that leaves our economy. There is a difference in my opinion.

Earlier today a talking head made the comment that money given back by the government in the form of lower taxes or a tax rebate and used to pay down mortgage or credit card debt is not stimulative. I disagree. The problem in part is because there is a crisis of confidence within the banking system. I think that if the banking system saw mortgages current and credit card debt being paid back in a timely manner that that would give those institutions more confidence in our domestic economy as well. Those dollars that are used by consumers to pay down debt, do not necessarily leave the domestic economy. Those dollars create demand deposits at commercial banks which permit and encourage banks to lend money.

The problem that has been with us for some time is the fact that each year, for now a generation or more, larger and larger amounts of our money leaves our domestic economy and goes to pay for commodities and goods made overseas.

Think of the domestic economy as a basketball and the air that gives the ball its bounce as the money. But, if the ball is leaking air, the bounce changes and eventually there is not enough air in the ball for it too bounce. The government can put more money into the domestic economy and the bounce will come back, but if the leak is not corrected the bounce will eventually go flat. Money spent for oil imports and all the products that are imported from China and the rest of Asia, is money leaving our domestic economy.

The best stimulative bang for the buck for the Federal Government is investing in infrastructure and creating a demand for goods and services made in the USA. Hardwood floors that are made in Massachusetts by American workers is the kind of work that is stimulative for our domestic economy. Oil and products imported from abroad has less stimulative benefit because the money leaves the system.

This is why the economists that understand the importance of the movement of capital and its travels through our economy are all in agreement that the stimulus package needs greater attention and proportion to rebuilding our infrastructure.

Over the years America has become a nation that imports everything it wants. Fruit from South America in the winter, to clothes, cars and electronics from the Far East, to $700 billion dollars in oil from around the world and the Middle East. There is a price to be paid for not having a balance in our trade with the rest of the world. Stimulating our economy is just a piece of the problem, where that capital eventually ends up is also important to the long term welfare of our economy.

Stay tuned.