Theory of Disproportionate Borrowing

I do believe there would be revolution if the people of this great nation understood our banking and monetary system. Some individuals even believe there is a secret cabal of Banks working against the best interests of people of the world.

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Theory of 

Disproportionate 

Borrowing:

The redistribution of consumer wealth increases consumer spending which boosts the economy (often not by manufacturing), causing importation of mass goods -which, in turn, increases the country's debt, thereby causing more inflation; thus, goods rise in price. This price hike means that consumers need to boost earnings or borrow to cover this increase. This cycles on and on until something stops it.


There are two ways to tackle this problem:

A downturns in the country's economy is usually a short-lived problem that stems from a lack of demand. The (John Maynard Keynes - Labour style) solution is a simple but radical one: Involving a short-termed boost in the Government's public spending. (Once the economy returns to a state of buoyancy, the government reclaims its budget deficit by increasing taxes and reducing public spending once more.)

John Maynard Keynes 
(Photo credit: Wikipedia)

This is known as the "demand management policy." It's when the economy slumps and public spending goes up. Then, when trade is booming once again, the government spends little or nothing.

The other method, is to do as the Conservatives have always done (this is the Adam Smith method). Cuts across the board, hitting welfare, unemployment, and the NHS. Hoping this halt in spending balances out the lack of demand enough to kick-start the economy once more.

Profile of Adam Smith 
(Photo credit: Wikipedia)

Both in the past have worked well; however, there are also problems with both economic solutions: These only work well in the short-term and create as many problems as they solve.

The main problem though is one of demand. If there is no current demand, surely it stands to reason that a false boost through an increase in public spending is the economic equivalent of putting a plaster on a knife wound.

It won't work.

Cutting spending only makes life harder, putting a further strain on general consumer spending and the economy in in particular.


So what is the solution?

That's the difficulty. Without demand there isn't much that anyone can do. 

Demand is the only real issue here.