Big Spending Gets A Big Thumbs Up


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What's going on?

The OECD gave Donald Trump’s plans to boost near-term government spending a big thumbs up on Monday. The international economic organization said the spending should help improve both US and global economic growth in the coming years.

What does this mean?

The OECD has said before that it thinks the world is stuck in a low-growth trap and that increased government spending on infrastructure projects (e.g. airports, train networks and high-speed internet) is the best way out. In theory, this kind of spending helps the economy today by putting people to work on construction projects and in the future by improving efficiency (e.g. making it easier to fly goods from Memphis to Madrid, or allowing small businesses to develop in rural locales because of improved internet connectivity).

Why should I care?

The bigger picture: The US isn’t the only country getting on the government-spending bandwagon (a.k.a. “fiscal stimulus”).
Japan announced a huge $275 billion program earlier this year, while the head of the European Central Bank has repeatedly urged European governments, especially Germany, to spend more. In the UK, the government announced last week that it would increase its spending on infrastructure (although not by much) – and there’s a good chance that more spending will be announced next year.

For markets: Increased government spending is not a totally free lunch.
Governments will have to increase their borrowing in order to afford to spend more today, and all that borrowing will have to eventually get paid back. Plus, too much debt can restrict growth, because government spending goes to paying interest on the debt it took out rather than to more productive things. Also, it can lead to much higher inflation (here’s how). This can hurt people that have money saved in cash (or bonds), because – over time – that money increasingly becomes worth less.

Originally posted as part of the Finimize daily email.

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