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December 16, 2008

Paying for the rescue

The federal government is doing a lot to contain the recession, but how will these efforts be paid for? When will the check come due, and in what form will payment occur?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"There will be two ways that we pay for this rescue, if you will, of the economy. One will be, I think, a way that most people understand, and that is by having a larger debt. That is, much of the money that the government is using to try to stimulate the economy is being borrowed. It's being borrowed from internal sources, also foreign sources. That means the national debt will be higher. That means interest payments on that debt will be higher. That means there will be less money in the future to spend on other things. The second way that the government is trying to tame the recession is simply by printing money. This is under the control of the Federal Reserve. It's actually a recent move by the Federal Reserve to crank up the printing presses, and we could pay for this in the future through higher inflation. If this printing press process goes on long enough and is strong enough, we could see inflation rise, not immediately, but maybe in a year or two. And of course with higher inflation, that means our dollars buy less. And so that's a second way of paying for this. The whole notion here, of course, is that it's not that government officials don't recognize these costs, but they think that the benefits of doing this now to help the economy are worth the future costs."

Posted by Dave at December 16, 2008 08:02 AM