During the global economic contraction from late 2008 to the middle of 2009 central governments around the world attempted to boost domestic demand by providing fiscal stimulus. With sagging private demand many countries turned to Keynesian economic theory which states that the government should boost aggregate demand in the short run until private demand can return. Government money was thus injected into economies in order to mute the effects of the economic downturn including potentially higher unemployment levels. This government expenditure on stimulus, in turn, meant that country sovereign debt, already high in many developed countries, increased. Today the ratio of government debt to GDP in many developed countries is at levels not typically seen during peace time.
“when a man economizes in consumption, and lets the fruit of his economy pile up in bank balances or even in the purchase of existing securities, the released real resources do not find a new home waiting for them. In present condition their entry into investment is blocked by lack of confidence. Moreover, private economy intensifies the block. Moreover, the private economy intensifies the block. For it further discourages al those forms of investment–factories, machinery, and so on–whose ultimate purpose is to make consumption goods. Consequently, in present conditions, private economy does not transfer from consumption to investment part of an unchanged national real income. On the contrary, it cuts down the national income by nearly as much as it cuts down consumption. Instead of enabling labour-power, machine-power and shipping-power to be turned to a different and more important use, it throws them into idleness.”
“Some people, no doubt, are stinting their consumption because their incomes have diminished… others because their incomes are expected to diminish… The public interest in present conditions does not point towards private economy.”
“We are of the opinion that many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of the public authorities. We do not desire to see a renewal of such practices. At best they mortgage the Budgets of the future, and they tend to drive up the rate of interest — a process which is surely particularly undesirable at this juncture when the revival of the supply of capital to private industry is admittedly urgent necessity. The depression has abundantly shown that the existence o public debt on a large scale imposes frictions and obstacles to readjustments very much greater than that frictions and obstacles imposed by the existence of private debt.”
“If the Government wish to help revival, the right way for them to proceed is, not to revert to their old habits of lavish expenditure, but to abolish those restrictions on trade and the free movement of capital (including restrictions on new issues) which are at present impeding the even the beginning of recovery”