Crazy times of Guns, Butter and Debt
There was once a sense of "rational" government spending leading policy but the tables have turned and we're hoping for the best 😬
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This is a different article, it's shorter than the last two but that’s because my only goal with this article is for you to think “WTF is going on?”. I used the model as a bystander, as an example of how far we seem to be from the shore of economic stability.
We’re living in unprecedented times, traditional monetary systems are in uncharted territories and it's anybody's guess how it’ll turn out. Some people with laser eyes (Crypto trend based on #LaserRayUntil100K) already have a theory and are hoarding bitcoin and other crypto assets.
I don’t know how it's going to end but just in case, lets get prepared for a bumpy ride.
We will, Oh we will. We’ll pay for the party
Debt on all time highs, stocks on all time highs, venture capital on all time high, Government stimulus on ALL time high. Something’s gotta give and here is what I mean.
The president of the United States Joe Biden recently published his latest stimulus for the economy and it’s in the trillions, with a T! Billions are being sent to almost every sector of society and this comes after a year of massive public spending. All this for an already heavily indebted superpower.
The memes made my week, like:
Now, watching all this, I remembered a simple model that used to be applicable and talked about every time a crazy amount of money was going to be spent by a government, and that’s the Guns vs. Butter Model.
Before you read on and think about it. Yes, it’s super simplistic but bear in mind that an economic model is a simplified description of reality, a simple mental framework designed to yield hypotheses about economic behavior that can be tested.
To be fair, usually this type of discussion and spending was during wars where the government reduced spending in consumer goods and cut social benefits to finance war. This time, all the money is going “to the people” but the military spending will also be staying the same, Biden plans to request $704 billion for the Defense Department, which is close to what the Pentagon got in 2021.
How and Why? Is there no real fear of inflation? Has the principles that govern economics changed and now there is an infinite amount of cash to spend? Was the Production Possibility Curve a lie all this years? We’ll see, let's hope for the best. 😬
The guns vs butter model
The guns vs. butter model is a classic economic example of the production possibility curve or PPC, which demonstrates the idea of opportunity cost between two types of goods and the relationship between a nation's investment in defense and civilian goods.
Guns: Security goods such as personnel—both troops and civilian support staff—as well as military equipment like weapons, ships, or tanks.
Butter: Non-security goods that increase social welfare, such as schools, hospitals, parks, and roads.
In a theoretical economy with only two goods, a choice must be made between how much of each good to produce. As an economy produces more guns (military spending) it must reduce its production of butter (civilian goods), and vice versa.
As you can see, and as our rational-economic-decision-maker brain would dictate, in theory we should have a limit on our spending. If you wanted to produce more guns, you had to lower the amount of butter to have the money and resources to produce more guns.
But in 2021 we as a society are trying something new, specially the United States, we are making our own production possibility curve where the possibilities are endless.
With a 28 Trillion dollar debt as of today, the US is off to the races and with no intentions of reducing any spending on defense or on any other expenditure as far as I’m concerned. Au contraire mon ami, we are going big on butter from now on.
We’ll see how it goes 🙏 that’s it for today.
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Want to know more about the model….
I didn’t go deep into the Guns vs. Butter model, but it’s fascinating and if your interested, here are a few links for you and if you need more, just google it! :)
The model in South Asia: https://www.stimson.org/2020/covid-19-and-the-guns-versus-butter-debate-in-south-asia/
“the overt nuclear weapons status of India and Pakistan for the last 22 years has not seemed to shift for the guns-butter trade off towards domestic spending”
Guns versus Butter: The Indirect Link by Alex Mintz and Chi Huang
Guns Versus Butter Tradeoff: The Theory of Defense Quality Factor by Emre Dikici. A paper that aims to give recommendations for the optimal guns versus butter tradeoff decision for a developing country
Revisiting the “Guns versus Butter” Argument in China (1950–2014): New Evidence from the Continuous Wavelet Analysis