Fama’s Fallacy

Here’s how you have to think to win a Nobel prize:

Fama’s Fallacy:

There is an identity in macroeconomics… private investment [PI] must equal the sum of private savings [PS], corporate savings (retained earnings) [CS], and government savings [GS]…. (1) PI = PS + CS + GS…. Government bailouts and stimulus plans seem attractive when there are idle resources – unemployment. Unfortunately, bailouts and stimulus plans are not a cure. The problem is simple: bailouts and stimulus plans are funded by issuing more government debt…. The added debt absorbs savings that would otherwise go to private investment…. [G]overnment infrastructure investments must be financed — more government debt. The new government debt absorbs private and corporate savings, which means private investment goes down by the same amount…. Suppose the stimulus plan takes the form of lower taxes… lower tax receipts must be financed dollar for dollar by more government borrowing. The government gives with one hand but takes them back with the other, with no net effect on current incomes…

Eugene Fama

good grief!!!