Economists often point out that the government can offset large falls or rises in private spending growth. This can prevent a depression using deficits when private sector spending and output is collapsing. But it can also be a stabilizing force that prevents the economy from overheating.But sometimes, governments mimic the private sector and amplify the trend in the economy. Economists call this pro-cyclicality. In worst case scenarios, pro-cyclicality is quite destabilizing.
Debt deflation and liquidity
This term ‘pro-cyclical' got a lot of buzz after the financial crisis and during the European sovereign debt crisis. In both cases, private sector demand growth was collapsing. There was a lot of fear that these crises could end up in another Great Depression. So, the question was about...
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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.