Hysterics of the Federal Deficit

By David Ceely

     Our government is the monopoly supplier of US dollars (USD), or fiat money. USD is accepted as legal tender by the private sector, which it uses to exchange for goods and services. Therefore, the two should be viewed as a partnership with the same goal, maximizing prosperity for the net private sector. Government spending and taxation should be at a level that does not oppress the private sector economically. The government’s balance sheet does not resemble that of MacDonald’s or a household’s and should not be conducted as such. To expand the economy we need to increase aggregate, which means taxes need to be cut and government spending needs to increase.

     The government can never run out of USD that it creates. Therefore it can never default on its loans due to economic considerations as long as it is a monopoly supplier of its currency, its liabilities are denominated in USD and the value of the dollar is not tied to another asset i.e. gold. Under our modern monetary system, taxes and deficit spending are a system of debits and credits. When the government deficit spends, it debits the account of the private sector and when it taxes it credits the account of the private sector.

Taxes, at the federal level, do not pay for anything but instead regulate aggregate demand. US Treasury bonds are not a fiscal tool used to finance deficits but a monetary tool to determine interest rates. In order to collect taxes or sell bonds there must first be money in the system, which means the federal government deficit has already spent it into existence. Therefore its budget is never revenue constrained. Taxes do not have to be raised to pay off the debt incurred from fighting two wars nor do taxes have to be raised to payout future social security, Medicare or Medicaid obligations. In order for the government to pay off its debt, it would need to tax, or confiscate, private sectors savings to zero. Doing so would impose an undue hardship on the private sector and send the economy into a deflationary spiral otherwise known as a depression.

There is a catch, however. The government should not create more money than the economy can produce. Inflation stems from overspending and under taxing, which lowers living standards whereas deflation stems from under spending and over taxing, which also lowers living standards. Therefore, deficits should decrease during booms and increase during contractions.

Our government is a tool that maximizes private sector prosperity. This means welfare and unemployment benefits should be extended. There should be a universal health care plan for anyone who wants it. Top public universities around the nation should be made free to put downward pressure on higher education costs.

Now, I realize the federal debt is already $15.3 trillion and what I proposed will increase the deficit. But, did you realize the private sector’s debt is larger at $40.5 trillion? Because the private sector does not create USD it must save to pay down its debt. That savings hurts our economy, which derives 70% of GDP from private sector consumption.  To jumpstart growth we must target spending increases and tax cuts towards the poor and middle class because they spend more of their income than the wealthy. And under our monetary system one person’s spending represents another’s income, which makes everyone wealthier.

Link to private sector debt to GDP: www.paecon.net/PAEReview/issue57/Keen57.pdf assumption debt to GDP is 165%

Link to GDP: http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1 GDP2011 Q4 = 15294300000000000

Link to Federal Government Debt: http://www.brillig.com/debt_clock/

Consumer spending as % of GDP: http://www.futureofuschinatrade.com/fact/us-china-trade-data-household-consumption-share-of-GDP and http://blog.independent.org/2010/09/05/consumption-spending-is-70-percent-of-gdp-so-what/

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