What we need to know about deficits

 I submitted this to the Albuquerque Journal on Sept 23. It was fun to write. I hope they publish it.
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 Martin Crutsinger (AP) recently informed us in the Journal that the US Government deficit has increased to over a trillion dollars in the first 11 months of this fiscal year. He also reported the $379 billion of interest payments. And, he concluded with a quote from Michael Peterson, head of the Peterson Foundation, ”Absent more responsible budgets, the deficit and interest costs will continue to grow rapidly, diminishing America’s future.”

His numbers are correct, not his conclusion. I’ll attempt to explain why in straightforward  terms. Deficit hawks cling to the myth that “government must treat its spending like a household.”

The federal government creates all US dollars through the Fed (Federal Reserve Bank). Where else can dollars come from? Neither China nor billionaires can create dollars. Households and businesses use the US dollars that government creates. That's the crucial difference, user vis-a-vis creator.

The prevailing myth is that government, like a household, must borrow from the private sector to get money to spend. Also, the myth claims that taxes confiscate dollars from households and businesses. Nowhere does the myth explain the origin of dollars.

This is the real story. Upon authorization from Congress the federal government creates dollars to buy goods and services from the private sector. Then, government takes back some of those dollars through taxation. And, the Treasury sells securities to soak up the dollars remaining in the private sector after taxation. Those treasuries remain in the private sector as savings, and the interest on them is income for the private sector.

As a point of simple logic, dollars must exist in the private sector before tax collection or treasury sales (borrowing) is possible. That is, government must spend before it can tax or borrow. Like tickets collected at the ballpark dollars must exist in the economy before collection is possible.

Government deficits become private savings. So, future generations benefit from federal investment in infrastructure, research, and education. Also, they get to keep the savings in the economy. The national debt resulting from deficits is never paid off. We outgrow it. 

Data show that government deficits result in private surpluses (savings).

Naysayers raise the specter of hyperinflation - Weimar! Zimbabwe! - when they consider government creating money. They miss the point. Government uses the money created to buy real goods and services not pour money into the street. Inflation occurs not from too much money but a lack of productivity or natural resources. Government can always buy what is for sale in US dollars including labor.

While the deficit hawks implore the government to live within its means, deficit owls know better. They implore government to live up to its means. The productive capabilities of the USA are legendary. Still, we fail to employ all who want a job and fall into the neoliberal trap that anything worth doing is worth doing for profit. So, we denigrate public service and let people suffer and die from lack of housing and health care.

Understanding how our fiscal system works allows us to realize much greater production and more equitable distribution of our nation’s vast wealth.

Don’t worry about the national deficit coming home to roost

 I submitted this to the Raleigh N&O on August 28. Not my best effort, but is was timely.
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In response to Professor Campbell’s commentary in The N&O on August 18, I would like to set the record straight on the growing national deficit coming home to roost. It won’t.

The national deficit is the annual amount of money spent by the federal government that is not taxed back from the private sector. Thus, it remains in the private sector. By law the US Treasury must sell securities to soak up those dollars not taxed. Treasuries not sold at auction will be bought, by law, by designated private Primary banks. Treasury auctions never fail.

China gets into the act, because it has a lot of US Dollars from our purchases of Chinese stuff. It can choose to hold those dollars in its account at the US Federal Reserve (Fed) or invest them in the US economy. Often, China chooses to buy interest bearing treasuries, so it holds some $1.2 trillion in US securities.

If China decides to dump those securities, it can sell them to anyone. To accommodate China the Fed might buy the securities back. When the Fed started Quantitative Easing in 2008, it showed that it can buy US treasuries from anyone without upsetting the economy. It expanded its balance sheet to $4 trillion in treasury and private assets and the same amount in reserves without causing inflation predicted at that time.

According to the Daily Treasury Statement, as of August 28, the Treasury had redeemed $7.9 trillion and issued $8.3 trillion in treasuries in the month. China’s operations would hardly rattle the system.

If the Fed buys the securities back, China is in the same position as before it bought the securities, $1.2 trillion on deposit at the Fed. Then China has the problem of finding buyers of the currency to invest in other countries.

The problem is China’s not ours. Our national deficit is nothing more than a harmless tally of the amount of money not taxed back after federal government spending. We need to beware of inflation not the size of the deficit. As for the interest on the national debt, it is set by the Fed and is income mostly to the domestic private sector.
Dan Metzger, is a retired physicist and writes about money matters. He lives in Cary, NC.