How does economic crises,moneycrises,overpo... rise harm the country?
Answer:
A "money crisis" is when there's too much money or too little money in circulation. If people have lots of money, and their money is worth less and less, then obviously prices are rising. This is called INFLATION. If people only have little money yet they realize that they can buy more and more stuff, then obviously the prices are going down (this happens rarely). This is called DEFLATION.
Prices go up because people keep spending more and more money. They spend it all, and then they borrow and spend that too ...and of course, the government does the same. This is one reason why the value of the dollar goes down and prices go up.
If most people would start saving money and pay off debts, and if the government would do the same, then prices would start to go down. We would have a deflation. Why would that be considered a cirsis? Because during a deflation, the stock market goes down too, and investors lose their money. That's why it's a crisis. Businesses go bankrupt. People lose their jobs. Unemployment is high, etc...
If prices increase moderately, that's good. But if prices rise too fast, that's just as bad as when prices go down.
The US government and the Fed try to keep a moderate inflation all the time. It's very hard to do it, but they try their best. This moderate inflation allows the economy to grow.
So how do they do it? The government fuels inflation by borrowing and spending. And the American people do the same. The Fed can control Americans' spending habits and cool down inflation by raising interest rates. By raising the rates, the Fed discourages the people from borrowing and spending money. The government (public sector) can borrow and spend as much as they want, but the private sector is discouraged from doing the same.
If the government would stop borrowing and start paying off the debt, then the Fed would lower the interest rates to create some inflation to stimulate the economy. By lowering the rates, the Fed would encourage people to borrow and spend. In this scenario, the public sector would shrink and the private sector would expand. That means the government would spend less, and people would spend more.
Usually governments are not good at managing money. People are more careful usually, because they spend their own money. The government spends other people's money. They don't care if they waste a few millions here and there. Individuals care about money, because it's their money. They earned it. Because of this, it is usually better to let the private sector expand and the public sector shrink. That means it's better to put a cap on government spending than to discourage people from spending.
you try to dam up the river, but it keeps rising and bursts the dam and drowns everybody downstream.
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