As President Obama and Secretary Gates seek to tighten the budget and reduce spending, companies such as Lockheed Martin are being pushed against the ropes.

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Not surprisingly, governments are more likely to tighten their belts when budget deficits and interest rates are high at times, in other words, precisely unlike these.

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So for neo-chartalism to work as intended, budget-makers must both tighten policy once demand has been restored and inflation threatens and also be credible in their commitment always to do so.

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Because of the profligacy of its predecessor, the government of President Fernando de la Rua felt obliged, on taking office last December, to tighten fiscal policy, even though the budget deficit was relatively modest (and was due partly to the transition costs of switching to a private pension system).

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Last week, his campaign confirmed that, if necessary, Mr da Silva would be ready to tighten policy and to run a larger primary budget surplus (before interest payments are taken into account) in order to ensure that Brazil can meet its debt obligations.

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But he has already made clear that, like families around the country who are making tough decisions about their family budget, that we need to tighten our belts where we can, but we have to do that in order to preserve the ability to invest in the future.

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Moreover, since politicians are usually unwilling to tighten fiscal policy enough in a boom, any loosening of the budget reins tends to result in permanently higher debt.

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