What Everyone Should Know About Budget Deficits and Public Debt

[oldfart]

What Is the Eurozone Crisis

If it doesn't matter then why are these European countries in crisis...................

Why did Russia fall due to debt..........................

Somebody forgot to tell them that all they needed to do is print more money because it doesn't matter anyway.

Wow. If only you'd have been there in time to tell Greece that. You could have saved the world and Greece a lot of dang trouble Old Fart.

Rush over there and set them straight please.

I'd try to answer you except that you are slipping into incoherence. And you don't do sarcasm very well.

OK, why is the Eurozone in crisis? Maybe it has something to do with a monetary union without a fiscal union, a bad idea of epic proportions. Add banks that got caught in a real estate bubble of their own creation. Throw in the austerity nonsense and stir well. Instant depression and political instability.

And what about Russia has a burr under your saddle? They are behaving like any other oligarchical one-party state with the expected results.

Is there a point to your post, or do you just think that sounding off makes you seem important?

 

[Kimura]

Yes, but a different view is that operationally QE is nothing more but printing money(maybe digitally) and having the government spend it. Both of these views are 100% correct. It just depends at what level and how you choose to look at the economy. MMT definitions are cool, but they are different from pretty much any other definitions people use.

It's not printing money, dude. There isn't an increase in net financial assets. QE only changes the composition of these assets.

Again you are using widely different definitions than most of the people. We are actually not arguing about any substance but just the use of language and definitions. To me QE means inflation in the way I define inflation. To you it may not since your definition of inflation and it's consequences are widely different. Same applies to printing money.

We don't get to make up our own definitions of inflation. Inflation can be defined as an increase in the general price level of goods and services over a certain time period.

QE doesn't create inflation. All the FED does is change the composition and duration of these assets held by the public.

For example, a Treasury has a duration - two year, five year, thirty year, etc. Cash has ZERO duration, so all we're doing is changing it to a longer duration, shifting those financial assets to a shorter duration. This all that occurs and there's no new creation any type of financial assets. What I'm telling you is widely known by Treasury and FED staffers.

 

[percysunshine]

An incredibly long winded piece. It boils down to: 'We can always print more money, so it is OK to borrow more'.

Which is 'OK' in the sense that living in the Weimar Republic was kind of 'OK'.

Weimar Republic - Wikipedia, the free encyclopedia

I understand that most posters on a political board such as this are like you. They know nothing of economics and are proud of their ignorance. They regurgitate nonsensical pap fed them by ideologues. Probably they lack the capacity to understand monetary theory.
So they make cute remarks about those who try to explain things.

A few on this board have put in the effort to understand economics and have the cahones to put up with idiots like you who never participate in an economic discussion (throwing one-liners doesn't count) because you are too intellectually lazy to be bothered with thinking. But some folks are interested in learning. Cut them a break and shut up if you can't contribute to the discussion.

BTW, among other attributes, you are boorish. This thread was created to discuss monetary policy. You can always ignore threads, so why make an ass of yourself by interjecting your ignorance? If there is a topic you initiate, I will certainly avoid snide one-liners just out of common courtesy, no matter how bat shit crazy it is.

Typical. The 'you are to stupid to understand' response does not cut it here. That is a lame dodge. Address the point. That is, if you even understand it.

 

[Rozman]

We are fast approaching a point where the largest expenditure by the Government will be interest on the borrowed money, remind me again how that is a good thing?

Government - Interest Expense on the Debt Outstanding

395 BILLION THIS YEAR with one month to go.............

It's boogles the mind.

And the Lib response to fix all our problems is we need to spend more.
More on infrastructure,education,social programs,entitlements,health care....
on and on and on and on they go.

 

[percysunshine]

An incredibly long winded piece. It boils down to: 'We can always print more money, so it is OK to borrow more'.

Which is 'OK' in the sense that living in the Weimar Republic was kind of 'OK'.

Weimar Republic - Wikipedia, the free encyclopedia

The Weimar Republic is a terrible example. Hyperinflation is MUCH more than a monetary event. Weimar Germany had its debt denominated in Sterling, and its industrial capacity was wiped out by war, so its industrial capacity was pretty much useless. Its output was effectively controlled by other countries.The more they printed, it wasn't being off-put by real goods and services, which is what caused the hyperinflation. This can't happen in the United States. Sorry to burst your bubble.

Using your comparison, where are the goods and services backing the Fed purchases? They will have to unwind the position eventually.

The comparison with Weimar is fair. The US does not have war reparations, but we have obligations without the means to pay them short of inflating our way out of the problem. Weimar had to pay back the industrialists, and we will have to pay back the bankers. We have retiring baby boomers, interest on the debt, and the debt itself. Watch what happens when either the Fed or China unwind their positions. The government is allowing the Fed to print money, but for now, it is still on their books. It wont stay that way forever, and the payments will be with cheaper dollars because it is the only way out of the problem given the current state of politics in Washington.

 

[Kimura]

An incredibly long winded piece. It boils down to: 'We can always print more money, so it is OK to borrow more'.

Which is 'OK' in the sense that living in the Weimar Republic was kind of 'OK'.

Weimar Republic - Wikipedia, the free encyclopedia

The Weimar Republic is a terrible example. Hyperinflation is MUCH more than a monetary event. Weimar Germany had its debt denominated in Sterling, and its industrial capacity was wiped out by war, so its industrial capacity was pretty much useless. Its output was effectively controlled by other countries.The more they printed, it wasn't being off-put by real goods and services, which is what caused the hyperinflation. This can't happen in the United States. Sorry to burst your bubble.

Using your comparison, where are the goods and services backing the Fed purchases? They will have to unwind the position eventually.

The comparison with Weimar is fair. The US does not have war reparations, but we have obligations without the means to pay them short of inflating our way out of the problem. Weimar had to pay back the industrialists, and we will have to pay back the bankers. We have retiring baby boomers, interest on the debt, and the debt itself. Watch what happens when either the Fed or China unwind their positions. The government is allowing the Fed to print money, but for now, it is still on their books. It wont stay that way forever, and the payments will be with cheaper dollars because it is the only way out of the problem given the current state of politics in Washington.

What bankers are you talking about? The US issues its own currency. It doesn't borrow its own fiat.

 

[percysunshine]

The Weimar Republic is a terrible example. Hyperinflation is MUCH more than a monetary event. Weimar Germany had its debt denominated in Sterling, and its industrial capacity was wiped out by war, so its industrial capacity was pretty much useless. Its output was effectively controlled by other countries.The more they printed, it wasn't being off-put by real goods and services, which is what caused the hyperinflation. This can't happen in the United States. Sorry to burst your bubble.

Using your comparison, where are the goods and services backing the Fed purchases? They will have to unwind the position eventually.

The comparison with Weimar is fair. The US does not have war reparations, but we have obligations without the means to pay them short of inflating our way out of the problem. Weimar had to pay back the industrialists, and we will have to pay back the bankers. We have retiring baby boomers, interest on the debt, and the debt itself. Watch what happens when either the Fed or China unwind their positions. The government is allowing the Fed to print money, but for now, it is still on their books. It wont stay that way forever, and the payments will be with cheaper dollars because it is the only way out of the problem given the current state of politics in Washington.

What bankers are you talking about? The US issues its own currency. It doesn't borrow its own fiat.

Then how would you characterize the transaction when the Federal Reserve buys treasuries? Have they let you see their books which show the assets?

 

[Norman]

Yes, but a different view is that operationally QE is nothing more but printing money(maybe digitally) and having the government spend it. Both of these views are 100% correct. It just depends at what level and how you choose to look at the economy. MMT definitions are cool, but they are different from pretty much any other definitions people use.

It's not printing money, dude. There isn't an increase in net financial assets. QE only changes the composition of these assets.

Again you are using widely different definitions than most of the people. We are actually not arguing about any substance but just the use of language and definitions. To me QE means inflation in the way I define inflation. To you it may not since your definition of inflation and it's consequences are widely different. Same applies to printing money.

We don't get to make up our own definitions of inflation. Inflation can be defined as an increase in the general price level of goods and services over a certain time period.

QE doesn't create inflation. All the FED does is change the composition and duration of these assets held by the public.

For example, a Treasury has a duration - two year, five year, thirty year, etc. Cash has ZERO duration, so all we're doing is changing it to a longer duration, shifting those financial assets to a shorter duration. This all that occurs and there's no new creation any type of financial assets. What I'm telling you is widely known by Treasury and FED staffers.

There are at least two different definitions of inflation. Furthermore MMTer telling you that you can not make your own definitions is:

MMTers unlike any other economists are not afraid to tell you how WRONG you are though for using common definitions.

Anyway what I was truly referring to is the fact that according to some FED doesn't create inflation because there is this period of "Disinflation". Thus -1+1 is not equal to positive number. But your stance is not even this, you are first using the austrian definition of inflation and then adding in assets as a form of money. Since the bonds+money as an aggregate do not increase when the fed does operations there is no inflation according to you. That is correct, but EXTREMELY misleading to someone not from your framework.

Someone else will say that hey, the FED printed money and swapped assets with it. Public has the money, FED has the bond, cash held by public has increased -> inflationary. That is the reality where normal people live in I would say... Further you can't be sure that the bond would even exist without the fed, but that's a other story.

 

[Norman]

The Weimar Republic is a terrible example. Hyperinflation is MUCH more than a monetary event. Weimar Germany had its debt denominated in Sterling, and its industrial capacity was wiped out by war, so its industrial capacity was pretty much useless. Its output was effectively controlled by other countries.The more they printed, it wasn't being off-put by real goods and services, which is what caused the hyperinflation. This can't happen in the United States. Sorry to burst your bubble.

Using your comparison, where are the goods and services backing the Fed purchases? They will have to unwind the position eventually.

The comparison with Weimar is fair. The US does not have war reparations, but we have obligations without the means to pay them short of inflating our way out of the problem. Weimar had to pay back the industrialists, and we will have to pay back the bankers. We have retiring baby boomers, interest on the debt, and the debt itself. Watch what happens when either the Fed or China unwind their positions. The government is allowing the Fed to print money, but for now, it is still on their books. It wont stay that way forever, and the payments will be with cheaper dollars because it is the only way out of the problem given the current state of politics in Washington.

What bankers are you talking about? The US issues its own currency. It doesn't borrow its own fiat.

This again is a schemantic issue and not an issue of what you really think of the economy.

Person 1 thinks that since he has burrowed money to the government, well then, obviously the government DOES borrow it's own fiat!
Person 2, a renagade government employee at the printing presses thinks that, we are not borrowing anything since we are the issuers of the currency! We either take it in, or take it out and that's it. There are no other functions.

It's like watching two stubborn engineers arguing whether sound is made out of frequencies or waves. Or like two economists (one being an accountant and the other a traditional economist) arguing whether economy is zero sum game or not. Or an american and a chinese person debating whether a table is a table or "表".

MMT seems more like a language structure to base your theory on than a real theory to me, half of the proponents are commies and half of them anarchists it seems. But everytime you discuss with them they think you are wrong just for using the wrong language! And then they have the nerve to tell you that "you are entitled to your own definitions" (after ignoring every possible wordbook definition).


Kimura summed it up very well. "What are you talking about?" is the issue here.

 

[Rshermr]

Using your comparison, where are the goods and services backing the Fed purchases? They will have to unwind the position eventually.

The comparison with Weimar is fair. The US does not have war reparations, but we have obligations without the means to pay them short of inflating our way out of the problem. Weimar had to pay back the industrialists, and we will have to pay back the bankers. We have retiring baby boomers, interest on the debt, and the debt itself. Watch what happens when either the Fed or China unwind their positions. The government is allowing the Fed to print money, but for now, it is still on their books. It wont stay that way forever, and the payments will be with cheaper dollars because it is the only way out of the problem given the current state of politics in Washington.

What bankers are you talking about? The US issues its own currency. It doesn't borrow its own fiat.

This again is a schemantic issue and not an issue of what you really think of the economy.

Person 1 thinks that since he has burrowed money to the government, well then, obviously the government DOES burrow it's own fiat!
Person 2, a renagade government employee at the printing presses thinks that, we are not burrowing anything since we are the issuers of the currency! We either take it in, or take it out and that's it. There are no other functions.

It's like watching two stubborn engineers arguing whether sound is made out of frequencies or waves. Or like two economists (one being an accountant and the other a traditional economist) arguing whether economy is zero sum game or not. Or an american and a chinese person debating whether a table is a table or "表".

MMT seems more like a language structure to base your theory on than a real theory to me, half of the proponents are commies and half of them anarchists it seems. But everytime you discuss with them they think you are wrong just for using the wrong language! And then they have the nerve to tell you that "you are entitled to your own definitions" (after ignoring every possible wordbook definition).


Kimura summed it up very well. "What are you talking about?" is the issue here.

Damn, norman, you were offered education FREE OF CHARGE and then you refuse to thank the educator. No wonder you are so completely ignorant. If I were you, I would stay with supply side economics. Now, those supply side folks are about as popular as a fart in church among actual economic minds, but it is where you are comfortable.
Funny. Study after study shows that con tools like you simply want to be told what to believe. How true that is. And they show how stupid cons are. For instance, you mentioned a few times "burrow, and burrowing". Here is the definition of burrow:

bur·row
noun
1. a hole or tunnel dug by a small animal, esp. a rabbit, as a dwelling.
synonyms: hole, tunnel, warren, dugout; More

verb: burrow; 3rd person present: burrows; past tense: burrowed; past participle: burrowed; gerund or present participle: burrowing
1. make a hole or tunnel, esp. to use as a dwelling.
"moles burrowing away underground"
Now, apparently you believe that there are small animals burrowing in our economy, me poor ignorant con. Is that a supply side theory???

 

[Norman]

What bankers are you talking about? The US issues its own currency. It doesn't borrow its own fiat.

This again is a schemantic issue and not an issue of what you really think of the economy.

Person 1 thinks that since he has burrowed money to the government, well then, obviously the government DOES burrow it's own fiat!
Person 2, a renagade government employee at the printing presses thinks that, we are not burrowing anything since we are the issuers of the currency! We either take it in, or take it out and that's it. There are no other functions.

It's like watching two stubborn engineers arguing whether sound is made out of frequencies or waves. Or like two economists (one being an accountant and the other a traditional economist) arguing whether economy is zero sum game or not. Or an american and a chinese person debating whether a table is a table or "表".

MMT seems more like a language structure to base your theory on than a real theory to me, half of the proponents are commies and half of them anarchists it seems. But everytime you discuss with them they think you are wrong just for using the wrong language! And then they have the nerve to tell you that "you are entitled to your own definitions" (after ignoring every possible wordbook definition).


Kimura summed it up very well. "What are you talking about?" is the issue here.

Damn, norman, you were offered education FREE OF CHARGE and then you refuse to thank the educator. No wonder you are so completely ignorant. If I were you, I would stay with supply side economics. Now, those supply side folks are about as popular as a fart in church among actual economic minds, but it is where you are comfortable.
Funny. Study after study shows that con tools like you simply want to be told what to believe. How true that is. And they show how stupid cons are. For instance, you mentioned a few times "burrow, and burrowing". Here is the definition of burrow:

bur·row
noun
1. a hole or tunnel dug by a small animal, esp. a rabbit, as a dwelling.
synonyms: hole, tunnel, warren, dugout; More

verb: burrow; 3rd person present: burrows; past tense: burrowed; past participle: burrowed; gerund or present participle: burrowing
1. make a hole or tunnel, esp. to use as a dwelling.
"moles burrowing away underground"
Now, apparently you believe that there are small animals burrowing in our economy, me poor ignorant con. Is that a supply side theory???

I hate to say it but... I told you so.

See this is exactly what I meant, MMTers only criticize your grammar and schematics but nothing of actual substance. Of course, with plenty of insults included.

 

[Kimura]

There are at least two different definitions of inflation. Furthermore MMTer telling you that you can not make your own definitions is:

Are you referring to the difference between demand-pull and cost-push inflation?

Anyway what I was truly referring to is the fact that according to some FED doesn't create inflation because there is this period of "Disinflation". Thus -1+1 is not equal to positive number. But your stance is not even this, you are first using the austrian definition of inflation and then adding in assets as a form of money. Since the bonds+money as an aggregate do not increase when the fed does operations there is no inflation according to you. That is correct, but EXTREMELY misleading to someone not from your framework.

I'm not using the Austrian definition of inflation which is obviously incorrect. Even modern Austrians will tell you that inflation is more than an increase in the supply of money.

I'm not being misleading. My goal is to educate people about the framework of modern money.

Someone else will say that hey, the FED printed money and swapped assets with it. Public has the money, FED has the bond, cash held by public has increased -> inflationary. That is the reality where normal people live in I would say... Further you can't be sure that the bond would even exist without the fed, but that's a other story.

It's not inflationary. Let's forget about the problems inherent in the Quantity Theory of Money. Banks don't lend out reserves, except to each other in the Fed funds market.
They don't use reserves in any capacity to loan out money. They loan out their own deposits (loans create deposits). The Post Keynesians have written extensively about this for over thirty years. QE isn't inflationary, quite the contrary. It actually removes income which could have been earned by the private sector.

 

[oldfart]

It's not printing money, dude. There isn't an increase in net financial assets. QE only changes the composition of these assets....

We don't get to make up our own definitions of inflation. Inflation can be defined as an increase in the general price level of goods and services over a certain time period.

QE doesn't create inflation. All the FED does is change the composition and duration of these assets held by the public.

There are at least two different definitions of inflation....

Anyway what I was truly referring to is the fact that according to some FED doesn't create inflation because there is this period of "Disinflation"....

Someone else will say that hey, the FED printed money and swapped assets with it. Public has the money, FED has the bond, cash held by public has increased -> inflationary. That is the reality where normal people live in I would say... Further you can't be sure that the bond would even exist without the fed, but that's a other story.

I'm having a bit of trouble with your argument. First, it seems to me that you are making a distinction without a difference. For all practical purposes Treasuries held by a primary dealer and deposits at the Fed are identical as monetary base. The dealer can execute a repo any time they want and the Fed will lend with the Treasury as collateral. QE by switching between the two technically changes the monetary base, but in circumstances where the Fed is pursuing an accommodating monetary policy, the difference is illusory. And with $2 trillion of excess reserves in the banking system, I have a hard time seeing how changes in the monetary base cause much of anything.

Second, the key reason that changes in the monetary base, and monetary policy in general, is of such little leverage is that the Fed is constrained by the zero lower bound on nominal interest rates. The equilibrium real interest rate is negative and the only way to achieve that is through inflationary expectations.

Your argument holds well when the economy is not in a liquidity trap, when increases in the monetary base generally increase the money supply and aggregate demand. If there is a lot of unused capacity, most of this demand increase is met by increased production, but as resources get tighter, more of it is reflected in price increases. So if we have no liquidity trap and close to full employment, QE would indeed be inflationary. But we are not in such a situation.

I think the problem is that many pundits use rules of thumb rather than economic analysis and it works most of the time. Usually a tripling of the monetary base would cause inflation. But given the current circumstances, any robust monetary theory (I myself would be classified as an original Walrasian Keynesian) would produce the same result. The outlyers are those who deny the existence of a liquidity trap, like Martin Feldstein who has been predicting hyperinflation in six months for the last five years.

I've probably missed something in the last forty years, but I am aware of only one definition of inflation (a general increase in the price level), although there are a lot of different ways to measure it (mainly a price index and a GNP deflator). What have I missed?

All the best, Jamie

 

[Rshermr]

This again is a schemantic issue and not an issue of what you really think of the economy.

Person 1 thinks that since he has burrowed money to the government, well then, obviously the government DOES burrow it's own fiat!
Person 2, a renagade government employee at the printing presses thinks that, we are not burrowing anything since we are the issuers of the currency! We either take it in, or take it out and that's it. There are no other functions.

It's like watching two stubborn engineers arguing whether sound is made out of frequencies or waves. Or like two economists (one being an accountant and the other a traditional economist) arguing whether economy is zero sum game or not. Or an american and a chinese person debating whether a table is a table or "表".

MMT seems more like a language structure to base your theory on than a real theory to me, half of the proponents are commies and half of them anarchists it seems. But everytime you discuss with them they think you are wrong just for using the wrong language! And then they have the nerve to tell you that "you are entitled to your own definitions" (after ignoring every possible wordbook definition).


Kimura summed it up very well. "What are you talking about?" is the issue here.

Damn, norman, you were offered education FREE OF CHARGE and then you refuse to thank the educator. No wonder you are so completely ignorant. If I were you, I would stay with supply side economics. Now, those supply side folks are about as popular as a fart in church among actual economic minds, but it is where you are comfortable.
Funny. Study after study shows that con tools like you simply want to be told what to believe. How true that is. And they show how stupid cons are. For instance, you mentioned a few times "burrow, and burrowing". Here is the definition of burrow:

bur·row
noun
1. a hole or tunnel dug by a small animal, esp. a rabbit, as a dwelling.
synonyms: hole, tunnel, warren, dugout; More

verb: burrow; 3rd person present: burrows; past tense: burrowed; past participle: burrowed; gerund or present participle: burrowing
1. make a hole or tunnel, esp. to use as a dwelling.
"moles burrowing away underground"
Now, apparently you believe that there are small animals burrowing in our economy, me poor ignorant con. Is that a supply side theory???

I hate to say it but... I told you so.

See this is exactly what I meant, MMTers only criticize your grammar and schematics but nothing of actual substance. Of course, with plenty of insults included.

Just trying to help you. Sorry it makes you so upset. Really, burrowing, me boy, is important to understand.

 

[jasonnfree]

We are subjected constantly to threatening talk by politicians and media personalities about budget deficits and public debt. Budget surpluses, or at least balanced budgets, are touted as fiscally responsible, whereas deficits are painted as burdensome and unsustainable. This framing of the debate appears to be bearing fruit for the 1 percent it is intended to serve. For instance, a recent American survey reveals that almost half those polled opposed an increase in the debt ceiling to facilitate deficit spending while a further third of respondents indicated uncertainty on the issue. This is despite concern among respondents over what a refusal to raise the debt ceiling would mean for the economy. This suggests that people do not necessarily oppose the deficit spending other than for the supposed "affordability" issues they think it poses. In reality, there is no affordability issue and nothing inherently responsible in balancing the budget. To the contrary, such a move would be burdensome in the extreme, as well as unsustainable. Particularly at a time of high joblessness and underemployment, efforts to reduce rather than increase the deficit are the height of irresponsibility.

In most nations, including the U.S., the government can never run out of money. In the present discussion, 'government' shall be taken to mean the consolidated government sector, which includes the fiscal and monetary authorities. In the U.S., for instance, the federal government includes Congress, which authorizes taxing and spending measures, and the Federal Reserve, which serves as the monetary agent of Congress. The U.S. government, and most other national governments, can never run out of money because they are the original sources of the money they spend. They issue their own currencies. Exceptions are state governments and member nations of the European Monetary Union, who are mere users of currencies, not issuers of them.

The fact that a government can never run out of its own money does not mean that any level of government spending is unproblematic, or that all government spending is good. But it does mean that deficits and surpluses need to be thought about in a different way than politicians and journalists would have us believe.

National governments such as the U.S. federal government are sovereign in their own currencies because of the following factors:

1. The government is the sole creator and destroyer of its own money. It creates money when it spends and destroys money when it taxes.

2. The exchange rate of the currency is allowed to float on international currency markets. As a consequence, fiscal and monetary policy are not constrained by a requirement to maintain a fixed exchange rate.

3. The government does not borrow significant amounts in foreign currencies. It does not need any other entity's currency in order to spend, and so has no need to borrow in other currencies.

Reflecting on these three factors for a moment turns the normal way fiscal issues are presented to us on its head. According to most politicians and media, the government needs to tax or borrow before it can spend. Taxing and borrowing, it is claimed, are funding measures. This framing of the policy debate plays right into the hands of the 1 percent, because it makes it seem as if popular policies such as social security, public education, public health care and public infrastructure might be unaffordable due to a lack of money, when in reality only a lack of real resources could ever truly make these policies unaffordable.

For a currency sovereign such as the U.S. government, the truth is the opposite of the story normally presented to us. Until the government's money has been created, no taxes could be paid and no government money could be borrowed.

The consolidated government sector creates money when it spends or lends. Once government money has been created, it becomes possible for the government to receive back tax payments or "borrow" back its money from the non-government sector.

Here, the non-government sector is defined to include both the domestic private sector (households and businesses) and the external sector (foreign individuals, businesses and governments). In short, we in the non-government cannot pay taxes or purchase government debt until we have obtained the government's money, and this is impossible prior to its creation through government spending or lending.

So, as a matter of logic, government spending or lending is prior to taxation and public borrowing. Taxes and public borrowing do not -- and could not -- fund government spending or public lending. It is the other way round.

The government spends by crediting private bank accounts, or, equivalently, by paying checks to citizens that, once cleared, result in credits to private bank accounts. As a consequence, private banks will have more deposits and a corresponding amount of additional reserves. The latter are held in special accounts with the central bank. Since private bank deposits and reserves are financial assets of the non-government, government spending when considered in isolation causes an increase in non-government holdings of financial assets. Government spending creates financial assets.

Conversely, the government taxes by debiting private bank accounts. There is a corresponding reduction in private bank deposits and the reserves of private banks. Considered in isolation, taxation causes a decrease in non-government holdings of financial assets. Taxes destroy financial assets.

A budget deficit occurs when the government spends more than it taxes. The net result is an overall increase in financial assets held by the non-government. In other words, budget deficits increase net financial assets. Budget surpluses do the reverse, and balanced budgets keep the level of net financial assets constant.

Under current practice, the government matches any deficit with borrowing by issuing public debt. In effect, the extra bank reserves created by the deficit are exchanged for government securities. The net impact is that the non-government, taken as a whole, possesses more financial assets than it did before the deficit spending, but the extra financial assets are normally held in the form of securities rather than reserves. The qualifier "normally" is added because under some circumstances, including the present, some central banks are choosing to buy back previously issued government debt by crediting reserve accounts, thereby expanding the amount of reserves in the system (referred to as quantitative easing).

In aggregate, net financial assets comprise currency, reserves and government securities. The reason is that all other financial assets – private financial assets – are matched by private liabilities and so net to zero. For example, a private bank deposit is an asset of its owner but a liability of the bank, netting to zero for the non-government as a whole.

Operations such as public debt issuance and quantitative easing alter the composition of non-government net financial assets but leave the overall level of net financial assets unaffected. Debt issuance converts reserves held by the non-government into government securities. Quantitative easing does the reverse. Since both reserves and government securities are financial assets of the non-government, moving between them does not affect the non-government's total holdings of net financial assets.

The current practice of matching deficit expenditure with public debt is unnecessary. Rather than issuing debt, the government could simply allow the extra financial assets to remain in the form of reserves rather than securities and pay the target rate of interest on reserves. This would make it more obvious to members of the general community that there is no funding difficulty for the government. No doubt this is the 1 percent's real motive in continuing the charade of public debt issuance.

In any case, whether the government issues debt or not, the economic impact of the budget deficit will be the same. The non-government will have more financial wealth and so more capacity to spend. If greater spending occurs, there will be a boost to output and employment. Alternatively, the non-government might prefer to increase its rate of saving. Or, more likely, some combination of higher private spending and saving will occur. At a time when many households are overly indebted, increased private expenditure and increased saving to meet debt obligations are both desirable effects, and deficit spending makes both possible.

With all the above in mind, it becomes clear that government debt is not really "debt" in the way debt is usually conceived. If you or I (or a private household) are in debt, our means to pay it back are either (i) income we have earned or revenue we have received, (ii) past savings, or (iii) an additional loan to cover the earlier one. There is always a danger here of our debt becoming impossible to repay. If we lose our job, run out of savings or can't obtain another loan, we may be forced to default.

The situation is very different in the case of a sovereign government. It can never become impossible for the government to make its debt repayments. The government does not need to obtain tax revenue in order to make payments. It does not need nor benefit from prior "savings" of tax revenues. The government can never have more nor less financial capacity to spend, irrespective of past spending and revenue flows. It simply repays debt plus interest as payments fall due through the issuance of government money.

In short, the government, unlike a private household, is not revenue constrained. For this reason, comparing governments to households on fiscal matters is incorrect as well as being counterproductive if it influences economic policy or our choices at the polling booth.

The important question when it comes to government policy does not concern money but whether the necessary real resources are available. A shortage of doctors and nurses would place a limit on the health care system. A shortage of teachers would do the same in the case of education. And so on.

All this raises a question. If taxes do not fund government spending, why are they necessary?

At the most fundamental level, it is the enforcement of tax payments that ensures a demand for the government's money. By enforcing a tax obligation, the government ensures that we need to obtain its money, even if only to pay our taxes.

This gives the government the capacity to move some resources, including labor services, from the private to public sector. Some workers will be willing to work for the government in order to obtain money. For the same reason, some businesses will be willing to sell goods and services to the government.

Since we already have a need for the government's money to make tax payments, there will also tend to be a general willingness to make private transactions in the same money or in other monies convertible at par into government money (e.g. private bank deposits) rather than look for some other, alternative money. In this way, people who do not transact directly with the government can obtain the government's money indirectly through private exchange of goods and services with those who do.

Beyond meeting the tax obligation, it is not strictly necessary that we use the government's money the rest of the time. As long as the government can move the desired resources to the public sector – as determined through the democratic process – the currency we use for other transactions among ourselves is not of absolute concern.

Nevertheless, for convenience and safety, we generally do transact in the government's money or near equivalents such as private bank deposits. The government's money remains trustworthy provided the tax obligation is effectively enforced.

In addition to making tax payments, many of us in the private domestic sector desire to save in the national currency. In aggregate, it is only possible for us to spend less than we earn – that is, to be in surplus – if at least one other sector runs a deficit. This follows from a basic accounting identity:

Private Sector Surplus + Government Surplus + External Surplus = 0

Most nations tend to run an external deficit. This means that the domestic private sector can only maintain a surplus if the government runs a deficit larger than the external deficit:

Private Sector Surplus = Government Deficit – External Deficit

In general, budget deficits are appropriate whenever private domestic spending and export demand are insufficient to ensure full employment. The presence of unemployment indicates that we intend to save more and spend less than is consistent with full employment.

The consolidated government sector is in a unique position to alter the capacity of the private sector to spend while remaining in surplus. By increasing government spending, cutting taxes, or some combination, the government enables both extra spending and extra private saving.

If, instead, there happened to be full employment, and the government attempted to increase spending or cut taxes, the result would be an increase in prices with no real benefit in terms of output, employment or saving. In effect, the government would be attempting to purchase resources that were already being used by the private sector, and this would bid up prices.

In such a situation, a further transfer of resources from the private to public sector would be inflationary unless taxes were increased. Higher taxes would take away some of our spending power and leave more room for non-inflationary public expenditure.

In other words, the constraint on government deficit expenditure is inflation, which depends on the availability of real resources, not a lack of money. Inflation will occur if the government attempts to use real resources that are already employed in the private sector without increasing taxes.

In a situation like the present, though, with significant unemployment and many workers consigned to part-time jobs when they actually want full-time ones, there is plenty of scope to increase production without the expenditure being inflationary.

The main takeaways are these:

1. The government is not revenue constrained. Claims of the U.S. government (and most other governments) running out of money or getting irretrievably into debt need to be recognized for the nonsense they are. There is no need for us to be tricked into voting for either higher taxes on workers or cuts in public services, education, health care, public transport, welfare, social infrastructure – the list could go on … – if we keep this simple fact about the monetary system in mind.

2. A budget deficit or surplus in itself is neither good nor bad. It can only be assessed in relation to the economic situation. Currently, unemployment and underemployment prevail. This indicates that in most nations the budget deficit is too small, not too large. This creates no real difficulty for the government but can give rise to a political obstacle if we are silly enough to fall for stunts such as the debt ceiling battle that, in reality, are played out precisely to deceive us into supporting austerity measures directly at odds with our own welfare.

What Everyone Should Know About Budget Deficits and Public Debt | heteconomist.com

A Closely Related Presentation By Randall Wray

L. Randall Wray -- Modern Money: the way a sovereign currency "works"

In your last paragraph takeway on-the debt #1. "and the government not getting irretrievely in debt" you say. Isn't this the seventeen plus trillion debt the repubs are worried about? It is a huge amount historically. How did it get that high if it was several trillion less under Bush and it's said that government spending is lower under Obama?

 

[Rshermr]

We are subjected constantly to threatening talk by politicians and media personalities about budget deficits and public debt. Budget surpluses, or at least balanced budgets, are touted as fiscally responsible, whereas deficits are painted as burdensome and unsustainable. This framing of the debate appears to be bearing fruit for the 1 percent it is intended to serve. For instance, a recent American survey reveals that almost half those polled opposed an increase in the debt ceiling to facilitate deficit spending while a further third of respondents indicated uncertainty on the issue. This is despite concern among respondents over what a refusal to raise the debt ceiling would mean for the economy. This suggests that people do not necessarily oppose the deficit spending other than for the supposed "affordability" issues they think it poses. In reality, there is no affordability issue and nothing inherently responsible in balancing the budget. To the contrary, such a move would be burdensome in the extreme, as well as unsustainable. Particularly at a time of high joblessness and underemployment, efforts to reduce rather than increase the deficit are the height of irresponsibility.

In most nations, including the U.S., the government can never run out of money. In the present discussion, 'government' shall be taken to mean the consolidated government sector, which includes the fiscal and monetary authorities. In the U.S., for instance, the federal government includes Congress, which authorizes taxing and spending measures, and the Federal Reserve, which serves as the monetary agent of Congress. The U.S. government, and most other national governments, can never run out of money because they are the original sources of the money they spend. They issue their own currencies. Exceptions are state governments and member nations of the European Monetary Union, who are mere users of currencies, not issuers of them.

The fact that a government can never run out of its own money does not mean that any level of government spending is unproblematic, or that all government spending is good. But it does mean that deficits and surpluses need to be thought about in a different way than politicians and journalists would have us believe.

National governments such as the U.S. federal government are sovereign in their own currencies because of the following factors:

1. The government is the sole creator and destroyer of its own money. It creates money when it spends and destroys money when it taxes.

2. The exchange rate of the currency is allowed to float on international currency markets. As a consequence, fiscal and monetary policy are not constrained by a requirement to maintain a fixed exchange rate.

3. The government does not borrow significant amounts in foreign currencies. It does not need any other entity's currency in order to spend, and so has no need to borrow in other currencies.

Reflecting on these three factors for a moment turns the normal way fiscal issues are presented to us on its head. According to most politicians and media, the government needs to tax or borrow before it can spend. Taxing and borrowing, it is claimed, are funding measures. This framing of the policy debate plays right into the hands of the 1 percent, because it makes it seem as if popular policies such as social security, public education, public health care and public infrastructure might be unaffordable due to a lack of money, when in reality only a lack of real resources could ever truly make these policies unaffordable.

For a currency sovereign such as the U.S. government, the truth is the opposite of the story normally presented to us. Until the government's money has been created, no taxes could be paid and no government money could be borrowed.

The consolidated government sector creates money when it spends or lends. Once government money has been created, it becomes possible for the government to receive back tax payments or "borrow" back its money from the non-government sector.

Here, the non-government sector is defined to include both the domestic private sector (households and businesses) and the external sector (foreign individuals, businesses and governments). In short, we in the non-government cannot pay taxes or purchase government debt until we have obtained the government's money, and this is impossible prior to its creation through government spending or lending.

So, as a matter of logic, government spending or lending is prior to taxation and public borrowing. Taxes and public borrowing do not -- and could not -- fund government spending or public lending. It is the other way round.

The government spends by crediting private bank accounts, or, equivalently, by paying checks to citizens that, once cleared, result in credits to private bank accounts. As a consequence, private banks will have more deposits and a corresponding amount of additional reserves. The latter are held in special accounts with the central bank. Since private bank deposits and reserves are financial assets of the non-government, government spending when considered in isolation causes an increase in non-government holdings of financial assets. Government spending creates financial assets.

Conversely, the government taxes by debiting private bank accounts. There is a corresponding reduction in private bank deposits and the reserves of private banks. Considered in isolation, taxation causes a decrease in non-government holdings of financial assets. Taxes destroy financial assets.

A budget deficit occurs when the government spends more than it taxes. The net result is an overall increase in financial assets held by the non-government. In other words, budget deficits increase net financial assets. Budget surpluses do the reverse, and balanced budgets keep the level of net financial assets constant.

Under current practice, the government matches any deficit with borrowing by issuing public debt. In effect, the extra bank reserves created by the deficit are exchanged for government securities. The net impact is that the non-government, taken as a whole, possesses more financial assets than it did before the deficit spending, but the extra financial assets are normally held in the form of securities rather than reserves. The qualifier "normally" is added because under some circumstances, including the present, some central banks are choosing to buy back previously issued government debt by crediting reserve accounts, thereby expanding the amount of reserves in the system (referred to as quantitative easing).

In aggregate, net financial assets comprise currency, reserves and government securities. The reason is that all other financial assets – private financial assets – are matched by private liabilities and so net to zero. For example, a private bank deposit is an asset of its owner but a liability of the bank, netting to zero for the non-government as a whole.

Operations such as public debt issuance and quantitative easing alter the composition of non-government net financial assets but leave the overall level of net financial assets unaffected. Debt issuance converts reserves held by the non-government into government securities. Quantitative easing does the reverse. Since both reserves and government securities are financial assets of the non-government, moving between them does not affect the non-government's total holdings of net financial assets.

The current practice of matching deficit expenditure with public debt is unnecessary. Rather than issuing debt, the government could simply allow the extra financial assets to remain in the form of reserves rather than securities and pay the target rate of interest on reserves. This would make it more obvious to members of the general community that there is no funding difficulty for the government. No doubt this is the 1 percent's real motive in continuing the charade of public debt issuance.

In any case, whether the government issues debt or not, the economic impact of the budget deficit will be the same. The non-government will have more financial wealth and so more capacity to spend. If greater spending occurs, there will be a boost to output and employment. Alternatively, the non-government might prefer to increase its rate of saving. Or, more likely, some combination of higher private spending and saving will occur. At a time when many households are overly indebted, increased private expenditure and increased saving to meet debt obligations are both desirable effects, and deficit spending makes both possible.

With all the above in mind, it becomes clear that government debt is not really "debt" in the way debt is usually conceived. If you or I (or a private household) are in debt, our means to pay it back are either (i) income we have earned or revenue we have received, (ii) past savings, or (iii) an additional loan to cover the earlier one. There is always a danger here of our debt becoming impossible to repay. If we lose our job, run out of savings or can't obtain another loan, we may be forced to default.

The situation is very different in the case of a sovereign government. It can never become impossible for the government to make its debt repayments. The government does not need to obtain tax revenue in order to make payments. It does not need nor benefit from prior "savings" of tax revenues. The government can never have more nor less financial capacity to spend, irrespective of past spending and revenue flows. It simply repays debt plus interest as payments fall due through the issuance of government money.

In short, the government, unlike a private household, is not revenue constrained. For this reason, comparing governments to households on fiscal matters is incorrect as well as being counterproductive if it influences economic policy or our choices at the polling booth.

The important question when it comes to government policy does not concern money but whether the necessary real resources are available. A shortage of doctors and nurses would place a limit on the health care system. A shortage of teachers would do the same in the case of education. And so on.

All this raises a question. If taxes do not fund government spending, why are they necessary?

At the most fundamental level, it is the enforcement of tax payments that ensures a demand for the government's money. By enforcing a tax obligation, the government ensures that we need to obtain its money, even if only to pay our taxes.

This gives the government the capacity to move some resources, including labor services, from the private to public sector. Some workers will be willing to work for the government in order to obtain money. For the same reason, some businesses will be willing to sell goods and services to the government.

Since we already have a need for the government's money to make tax payments, there will also tend to be a general willingness to make private transactions in the same money or in other monies convertible at par into government money (e.g. private bank deposits) rather than look for some other, alternative money. In this way, people who do not transact directly with the government can obtain the government's money indirectly through private exchange of goods and services with those who do.

Beyond meeting the tax obligation, it is not strictly necessary that we use the government's money the rest of the time. As long as the government can move the desired resources to the public sector – as determined through the democratic process – the currency we use for other transactions among ourselves is not of absolute concern.

Nevertheless, for convenience and safety, we generally do transact in the government's money or near equivalents such as private bank deposits. The government's money remains trustworthy provided the tax obligation is effectively enforced.

In addition to making tax payments, many of us in the private domestic sector desire to save in the national currency. In aggregate, it is only possible for us to spend less than we earn – that is, to be in surplus – if at least one other sector runs a deficit. This follows from a basic accounting identity:

Private Sector Surplus + Government Surplus + External Surplus = 0

Most nations tend to run an external deficit. This means that the domestic private sector can only maintain a surplus if the government runs a deficit larger than the external deficit:

Private Sector Surplus = Government Deficit – External Deficit

In general, budget deficits are appropriate whenever private domestic spending and export demand are insufficient to ensure full employment. The presence of unemployment indicates that we intend to save more and spend less than is consistent with full employment.

The consolidated government sector is in a unique position to alter the capacity of the private sector to spend while remaining in surplus. By increasing government spending, cutting taxes, or some combination, the government enables both extra spending and extra private saving.

If, instead, there happened to be full employment, and the government attempted to increase spending or cut taxes, the result would be an increase in prices with no real benefit in terms of output, employment or saving. In effect, the government would be attempting to purchase resources that were already being used by the private sector, and this would bid up prices.

In such a situation, a further transfer of resources from the private to public sector would be inflationary unless taxes were increased. Higher taxes would take away some of our spending power and leave more room for non-inflationary public expenditure.

In other words, the constraint on government deficit expenditure is inflation, which depends on the availability of real resources, not a lack of money. Inflation will occur if the government attempts to use real resources that are already employed in the private sector without increasing taxes.

In a situation like the present, though, with significant unemployment and many workers consigned to part-time jobs when they actually want full-time ones, there is plenty of scope to increase production without the expenditure being inflationary.

The main takeaways are these:

1. The government is not revenue constrained. Claims of the U.S. government (and most other governments) running out of money or getting irretrievably into debt need to be recognized for the nonsense they are. There is no need for us to be tricked into voting for either higher taxes on workers or cuts in public services, education, health care, public transport, welfare, social infrastructure – the list could go on … – if we keep this simple fact about the monetary system in mind.

2. A budget deficit or surplus in itself is neither good nor bad. It can only be assessed in relation to the economic situation. Currently, unemployment and underemployment prevail. This indicates that in most nations the budget deficit is too small, not too large. This creates no real difficulty for the government but can give rise to a political obstacle if we are silly enough to fall for stunts such as the debt ceiling battle that, in reality, are played out precisely to deceive us into supporting austerity measures directly at odds with our own welfare.

What Everyone Should Know About Budget Deficits and Public Debt | heteconomist.com

A Closely Related Presentation By Randall Wray

L. Randall Wray -- Modern Money: the way a sovereign currency "works"

In your last paragraph takeway on-the debt #1. "and the government not getting irretrievely in debt" you say. Isn't this the seventeen plus trillion debt the repubs are worried about? It is a huge amount historically. How did it get that high if it was several trillion less under Bush and it's said that government spending is lower under Obama?

It is easy to assume that the national debt is all the result of spending. But it is also completely untrue. Spending helps increase the national debt, but so does a lack of revenue. Which was during the great 2008 recession the biggest problem. So that is point number 1. Second, when you have a demand based recession, which this recession definitely was, you need to increase demand. Doing so causes employers to hire employees, which does a couple of good things. First it decreases unemployment, and increases employment. Increased employment means folks pay taxes, which increases the revenue side of the equation. Second, the added spending resulting from people going from unemployed to employed means that there is additional increases in demand. More hiring, more gov revenue, etc. So, stimulus spending increases the spending side of the ledger, but also increases the revenue side of the ledger. But it takes time, so the stimulus spending will always make the deficit, and the national debt, higher in the short term. And things will only get "better" as far as the deficit and national debt at a point when we approach "full employment".

then, there is the whole inflation issue. So, you will see inflation always increasing. Which is why you really want to primarily consider inflation as a percent of gdp. And while it has been raising, it is a good distance from historical levels.

The main thing to understand is that actual levels of national debt will always go up, unless we see a deficit in a particular year. Which we very rarely see. But the ratio of national debt to gdp will decrease, as it pretty much always does, once we reach levels of unemployment close to full employment. Say, perhaps 5 to 5.5% or under.

 

[jasonnfree]

We are subjected constantly to threatening talk by politicians and media personalities about budget deficits and public debt. Budget surpluses, or at least balanced budgets, are touted as fiscally responsible, whereas deficits are painted as burdensome and unsustainable. This framing of the debate appears to be bearing fruit for the 1 percent it is intended to serve. For instance, a recent American survey reveals that almost half those polled opposed an increase in the debt ceiling to facilitate deficit spending while a further third of respondents indicated uncertainty on the issue. This is despite concern among respondents over what a refusal to raise the debt ceiling would mean for the economy. This suggests that people do not necessarily oppose the deficit spending other than for the supposed "affordability" issues they think it poses. In reality, there is no affordability issue and nothing inherently responsible in balancing the budget. To the contrary, such a move would be burdensome in the extreme, as well as unsustainable. Particularly at a time of high joblessness and underemployment, efforts to reduce rather than increase the deficit are the height of irresponsibility.

In most nations, including the U.S., the government can never run out of money. In the present discussion, 'government' shall be taken to mean the consolidated government sector, which includes the fiscal and monetary authorities. In the U.S., for instance, the federal government includes Congress, which authorizes taxing and spending measures, and the Federal Reserve, which serves as the monetary agent of Congress. The U.S. government, and most other national governments, can never run out of money because they are the original sources of the money they spend. They issue their own currencies. Exceptions are state governments and member nations of the European Monetary Union, who are mere users of currencies, not issuers of them.

The fact that a government can never run out of its own money does not mean that any level of government spending is unproblematic, or that all government spending is good. But it does mean that deficits and surpluses need to be thought about in a different way than politicians and journalists would have us believe.

National governments such as the U.S. federal government are sovereign in their own currencies because of the following factors:

1. The government is the sole creator and destroyer of its own money. It creates money when it spends and destroys money when it taxes.

2. The exchange rate of the currency is allowed to float on international currency markets. As a consequence, fiscal and monetary policy are not constrained by a requirement to maintain a fixed exchange rate.

3. The government does not borrow significant amounts in foreign currencies. It does not need any other entity's currency in order to spend, and so has no need to borrow in other currencies.

Reflecting on these three factors for a moment turns the normal way fiscal issues are presented to us on its head. According to most politicians and media, the government needs to tax or borrow before it can spend. Taxing and borrowing, it is claimed, are funding measures. This framing of the policy debate plays right into the hands of the 1 percent, because it makes it seem as if popular policies such as social security, public education, public health care and public infrastructure might be unaffordable due to a lack of money, when in reality only a lack of real resources could ever truly make these policies unaffordable.

For a currency sovereign such as the U.S. government, the truth is the opposite of the story normally presented to us. Until the government's money has been created, no taxes could be paid and no government money could be borrowed.

The consolidated government sector creates money when it spends or lends. Once government money has been created, it becomes possible for the government to receive back tax payments or "borrow" back its money from the non-government sector.

Here, the non-government sector is defined to include both the domestic private sector (households and businesses) and the external sector (foreign individuals, businesses and governments). In short, we in the non-government cannot pay taxes or purchase government debt until we have obtained the government's money, and this is impossible prior to its creation through government spending or lending.

So, as a matter of logic, government spending or lending is prior to taxation and public borrowing. Taxes and public borrowing do not -- and could not -- fund government spending or public lending. It is the other way round.

The government spends by crediting private bank accounts, or, equivalently, by paying checks to citizens that, once cleared, result in credits to private bank accounts. As a consequence, private banks will have more deposits and a corresponding amount of additional reserves. The latter are held in special accounts with the central bank. Since private bank deposits and reserves are financial assets of the non-government, government spending when considered in isolation causes an increase in non-government holdings of financial assets. Government spending creates financial assets.

Conversely, the government taxes by debiting private bank accounts. There is a corresponding reduction in private bank deposits and the reserves of private banks. Considered in isolation, taxation causes a decrease in non-government holdings of financial assets. Taxes destroy financial assets.

A budget deficit occurs when the government spends more than it taxes. The net result is an overall increase in financial assets held by the non-government. In other words, budget deficits increase net financial assets. Budget surpluses do the reverse, and balanced budgets keep the level of net financial assets constant.

Under current practice, the government matches any deficit with borrowing by issuing public debt. In effect, the extra bank reserves created by the deficit are exchanged for government securities. The net impact is that the non-government, taken as a whole, possesses more financial assets than it did before the deficit spending, but the extra financial assets are normally held in the form of securities rather than reserves. The qualifier "normally" is added because under some circumstances, including the present, some central banks are choosing to buy back previously issued government debt by crediting reserve accounts, thereby expanding the amount of reserves in the system (referred to as quantitative easing).

In aggregate, net financial assets comprise currency, reserves and government securities. The reason is that all other financial assets – private financial assets – are matched by private liabilities and so net to zero. For example, a private bank deposit is an asset of its owner but a liability of the bank, netting to zero for the non-government as a whole.

Operations such as public debt issuance and quantitative easing alter the composition of non-government net financial assets but leave the overall level of net financial assets unaffected. Debt issuance converts reserves held by the non-government into government securities. Quantitative easing does the reverse. Since both reserves and government securities are financial assets of the non-government, moving between them does not affect the non-government's total holdings of net financial assets.

The current practice of matching deficit expenditure with public debt is unnecessary. Rather than issuing debt, the government could simply allow the extra financial assets to remain in the form of reserves rather than securities and pay the target rate of interest on reserves. This would make it more obvious to members of the general community that there is no funding difficulty for the government. No doubt this is the 1 percent's real motive in continuing the charade of public debt issuance.

In any case, whether the government issues debt or not, the economic impact of the budget deficit will be the same. The non-government will have more financial wealth and so more capacity to spend. If greater spending occurs, there will be a boost to output and employment. Alternatively, the non-government might prefer to increase its rate of saving. Or, more likely, some combination of higher private spending and saving will occur. At a time when many households are overly indebted, increased private expenditure and increased saving to meet debt obligations are both desirable effects, and deficit spending makes both possible.

With all the above in mind, it becomes clear that government debt is not really "debt" in the way debt is usually conceived. If you or I (or a private household) are in debt, our means to pay it back are either (i) income we have earned or revenue we have received, (ii) past savings, or (iii) an additional loan to cover the earlier one. There is always a danger here of our debt becoming impossible to repay. If we lose our job, run out of savings or can't obtain another loan, we may be forced to default.

The situation is very different in the case of a sovereign government. It can never become impossible for the government to make its debt repayments. The government does not need to obtain tax revenue in order to make payments. It does not need nor benefit from prior "savings" of tax revenues. The government can never have more nor less financial capacity to spend, irrespective of past spending and revenue flows. It simply repays debt plus interest as payments fall due through the issuance of government money.

In short, the government, unlike a private household, is not revenue constrained. For this reason, comparing governments to households on fiscal matters is incorrect as well as being counterproductive if it influences economic policy or our choices at the polling booth.

The important question when it comes to government policy does not concern money but whether the necessary real resources are available. A shortage of doctors and nurses would place a limit on the health care system. A shortage of teachers would do the same in the case of education. And so on.

All this raises a question. If taxes do not fund government spending, why are they necessary?

At the most fundamental level, it is the enforcement of tax payments that ensures a demand for the government's money. By enforcing a tax obligation, the government ensures that we need to obtain its money, even if only to pay our taxes.

This gives the government the capacity to move some resources, including labor services, from the private to public sector. Some workers will be willing to work for the government in order to obtain money. For the same reason, some businesses will be willing to sell goods and services to the government.

Since we already have a need for the government's money to make tax payments, there will also tend to be a general willingness to make private transactions in the same money or in other monies convertible at par into government money (e.g. private bank deposits) rather than look for some other, alternative money. In this way, people who do not transact directly with the government can obtain the government's money indirectly through private exchange of goods and services with those who do.

Beyond meeting the tax obligation, it is not strictly necessary that we use the government's money the rest of the time. As long as the government can move the desired resources to the public sector – as determined through the democratic process – the currency we use for other transactions among ourselves is not of absolute concern.

Nevertheless, for convenience and safety, we generally do transact in the government's money or near equivalents such as private bank deposits. The government's money remains trustworthy provided the tax obligation is effectively enforced.

In addition to making tax payments, many of us in the private domestic sector desire to save in the national currency. In aggregate, it is only possible for us to spend less than we earn – that is, to be in surplus – if at least one other sector runs a deficit. This follows from a basic accounting identity:

Private Sector Surplus + Government Surplus + External Surplus = 0

Most nations tend to run an external deficit. This means that the domestic private sector can only maintain a surplus if the government runs a deficit larger than the external deficit:

Private Sector Surplus = Government Deficit – External Deficit

In general, budget deficits are appropriate whenever private domestic spending and export demand are insufficient to ensure full employment. The presence of unemployment indicates that we intend to save more and spend less than is consistent with full employment.

The consolidated government sector is in a unique position to alter the capacity of the private sector to spend while remaining in surplus. By increasing government spending, cutting taxes, or some combination, the government enables both extra spending and extra private saving.

If, instead, there happened to be full employment, and the government attempted to increase spending or cut taxes, the result would be an increase in prices with no real benefit in terms of output, employment or saving. In effect, the government would be attempting to purchase resources that were already being used by the private sector, and this would bid up prices.

In such a situation, a further transfer of resources from the private to public sector would be inflationary unless taxes were increased. Higher taxes would take away some of our spending power and leave more room for non-inflationary public expenditure.

In other words, the constraint on government deficit expenditure is inflation, which depends on the availability of real resources, not a lack of money. Inflation will occur if the government attempts to use real resources that are already employed in the private sector without increasing taxes.

In a situation like the present, though, with significant unemployment and many workers consigned to part-time jobs when they actually want full-time ones, there is plenty of scope to increase production without the expenditure being inflationary.

The main takeaways are these:

1. The government is not revenue constrained. Claims of the U.S. government (and most other governments) running out of money or getting irretrievably into debt need to be recognized for the nonsense they are. There is no need for us to be tricked into voting for either higher taxes on workers or cuts in public services, education, health care, public transport, welfare, social infrastructure – the list could go on … – if we keep this simple fact about the monetary system in mind.

2. A budget deficit or surplus in itself is neither good nor bad. It can only be assessed in relation to the economic situation. Currently, unemployment and underemployment prevail. This indicates that in most nations the budget deficit is too small, not too large. This creates no real difficulty for the government but can give rise to a political obstacle if we are silly enough to fall for stunts such as the debt ceiling battle that, in reality, are played out precisely to deceive us into supporting austerity measures directly at odds with our own welfare.

What Everyone Should Know About Budget Deficits and Public Debt | heteconomist.com

A Closely Related Presentation By Randall Wray

L. Randall Wray -- Modern Money: the way a sovereign currency "works"

In your last paragraph takeway on-the debt #1. "and the government not getting irretrievely in debt" you say. Isn't this the seventeen plus trillion debt the repubs are worried about? It is a huge amount historically. How did it get that high if it was several trillion less under Bush and it's said that government spending is lower under Obama?

It is easy to assume that the national debt is all the result of spending. But it is also completely untrue. Spending helps increase the national debt, but so does a lack of revenue. Which was during the great 2008 recession the biggest problem. So that is point number 1. Second, when you have a demand based recession, which this recession definitely was, you need to increase demand. Doing so causes employers to hire employees, which does a couple of good things. First it decreases unemployment, and increases employment. Increased employment means folks pay taxes, which increases the revenue side of the equation. Second, the added spending resulting from people going from unemployed to employed means that there is additional increases in demand. More hiring, more gov revenue, etc. So, stimulus spending increases the spending side of the ledger, but also increases the revenue side of the ledger. But it takes time, so the stimulus spending will always make the deficit, and the national debt, higher in the short term. And things will only get "better" as far as the deficit and national debt at a point when we approach "full employment".

then, there is the whole inflation issue. So, you will see inflation always increasing. Which is why you really want to primarily consider inflation as a percent of gdp. And while it has been raising, it is a good distance from historical levels.

The main thing to understand is that actual levels of national debt will always go up, unless we see a deficit in a particular year. Which we very rarely see. But the ratio of national debt to gdp will decrease, as it pretty much always does, once we reach levels of unemployment close to full employment. Say, perhaps 5 to 5.5% or under.

So basically a reduction of taxes (income) received because of the crashed economy combined with increased expenditures including stimulus because of the crashed economy increased the debt by three or four trillion under Obama? And I'm talking about the debt that the repubs are always complaining about, that's now 17+ trillion. Or was there interest payments there also?
One more thing, how did Obama spend the money they accuse him of spending if spending is down under Obama and a president doesn't control the purse strings anyway.
Also isn't quite a bit of this debt due to the ever increasing costs of military spending in Iraq and Afghanistan for over a decade, something Obama had no control over? I see where you answered the revenue question on re reading your reply. Thanks.

 

[oldfart]

In your last paragraph takeway on-the debt #1. "and the government not getting irretrievely in debt" you say. Isn't this the seventeen plus trillion debt the repubs are worried about? It is a huge amount historically. How did it get that high if it was several trillion less under Bush and it's said that government spending is lower under Obama?

It is easy to assume that the national debt is all the result of spending. But it is also completely untrue. Spending helps increase the national debt, but so does a lack of revenue. Which was during the great 2008 recession the biggest problem. So that is point number 1. Second, when you have a demand based recession, which this recession definitely was, you need to increase demand....But it takes time, so the stimulus spending will always make the deficit, and the national debt, higher in the short term. And things will only get "better" as far as the deficit and national debt at a point when we approach "full employment".

Great so far!

then, there is the whole inflation issue. So, you will see inflation always increasing. Which is why you really want to primarily consider inflation as a percent of gdp. And while it has been raising, it is a good distance from historical levels.

I think you misspeak here; inflation is a rate of change over a period of time while a percentage of GDP is a stock concept at a particular point in time. I think you mean to use "public debt as a percentage of GDP" as a measure of the debt, with which I agree.

The main thing to understand is that actual levels of national debt will always go up, unless we see a deficit [surplus?] in a particular year. Which we very rarely see. But the ratio of national debt to gdp will decrease, as it pretty much always does, once we reach levels of unemployment close to full employment. Say, perhaps 5 to 5.5% or under.

Exactly. c.p. a goal should be to slowly reduce the public debt as a percentage of GDP over time to a level needed to accommodate the needs of commerce and finance (you really don't want to rip those savings bonds out of the hands of gray-haired retired schoolteachers do you?).

 

[oldfart]

So basically a reduction of taxes (income) received because of the crashed economy combined with increased expenditures including stimulus because of the crashed economy increased the debt by three or four trillion under Obama?

OK in every downturn since the Great Depression the federal budget deficit has increased for two reasons: tax receipts are less because there is less income to pay taxes on, and spending on certain government programs known as "automatic stabilizers" such as unemployment compensation and needs-based assistance like SNAP increases because more people are eligible. This happens whether or not Congress or anyone else initiates anything (they have already passed the enabling legislation).

The staff of the Joint Committee on Taxation and the Congressional Budget Office (both of which are creations of Congress and not the administration, which has its own budget estimates) have been detailed by Congress to establish as good a macro model as possible and to make budget estimates of the effects of every piece of proposed legislation and to provide at least semi-annual updates of the budget forecasts. The most recent was about two weeks ago. You can get these at Congressional Budget Office (CBO). As part of this process they also generate an estimate of what full-employment productive capacity and what budget deficit there would be at full employment. This "production gap" and the associated full-employment federal budget deficit tells us what would happen if we were at full-employment, i.e what the deficit would be if tax revenues and spending on automatic stabilizer programs were "normal". That figure is about $200-250 billion per year right now.

So most of the cumulative deficits and increase in the public debt since 2008 are the result of the economic downturn directly. Only about $800 billion total of that $4 trillion plus is stimulus, tax cuts (about $250 billion) and increased spending (about $500 billion) that Congress passed. All of the stimulus measures have expired and the funds are spent.

And I'm talking about the debt that the repubs are always complaining about, that's now 17+ trillion. Or was there interest payments there also?

The budget includes the net interest on the public debt.

One more thing, how did Obama spend the money they accuse him of spending if spending is down under Obama and a president doesn't control the purse strings anyway.

Generally the budget is the red-haired stepchild of politics. Everyone has a hand in making it but no one want to be called responsible for it. Congress and administrations have shared culpability for the result.

The budget year that ends Monday will have absolute level of spending (not inflation-adjusted, or per capita, or percentage of GDP, but current dollar spending) of about $82 billion less than the previous year. In the more common measures of real government spending per capita as a percentage of GDP, spending is lower under the current Congress and administration than it was in 2008. We haven't had this kind of fall since 1946.

so isn't quite a bit of this debt due to the ever increasing costs of military spending in Iraq and Afghanistan for over a decade, something Obama had no control over? I see where you answered the revenue question on re reading your reply. Thanks.

Yes. Certain spending items such as the cost of foreign military operations and the "black budget" ar off the standard budget figures.

 

[Rshermr]

In your last paragraph takeway on-the debt #1. "and the government not getting irretrievely in debt" you say. Isn't this the seventeen plus trillion debt the repubs are worried about? It is a huge amount historically. How did it get that high if it was several trillion less under Bush and it's said that government spending is lower under Obama?

It is easy to assume that the national debt is all the result of spending. But it is also completely untrue. Spending helps increase the national debt, but so does a lack of revenue. Which was during the great 2008 recession the biggest problem. So that is point number 1. Second, when you have a demand based recession, which this recession definitely was, you need to increase demand....But it takes time, so the stimulus spending will always make the deficit, and the national debt, higher in the short term. And things will only get "better" as far as the deficit and national debt at a point when we approach "full employment".

Great so far!

then, there is the whole inflation issue. So, you will see inflation always increasing. Which is why you really want to primarily consider inflation as a percent of gdp. And while it has been raising, it is a good distance from historical levels.

I think you misspeak here; inflation is a rate of change over a period of time while a percentage of GDP is a stock concept at a particular point in time. I think you mean to use "public debt as a percentage of GDP" as a measure of the debt, with which I agree.

The main thing to understand is that actual levels of national debt will always go up, unless we see a deficit [surplus?] in a particular year. Which we very rarely see. But the ratio of national debt to gdp will decrease, as it pretty much always does, once we reach levels of unemployment close to full employment. Say, perhaps 5 to 5.5% or under.

Exactly. c.p. a goal should be to slowly reduce the public debt as a percentage of GDP over time to a level needed to accommodate the needs of commerce and finance (you really don't want to rip those savings bonds out of the hands of gray-haired retired schoolteachers do you?).

Yup, meant surplus, obviously. Thanks for the catch. Sometimes I loose concentration on this board. Not a good thing to do when you have sharks swimming around you. And yes, I did mean to say that you need to consider the national debt as a percent of GDP. Again, obviously.
OK. I promise. I will actually read what I type from here on out.

Jesus, I hope this is not an age thing.