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.