Sovereign Currency Rocks

What’s so special about a sovereign, floating rate currency? Until the mid 1990’s few bothered to appreciate its fundamental characteristics. The currency of a sovereign nation can have a profound and positive influence on the nation’s economy.

Our basis for understanding money and budgets is rooted in our knowledge of household, corporate, or state government budgeting as they use the currency of the land. We know that we must earn income or take out loans in order to spend. So it is thoroughly ingrained in our culture to think that federal spending and budgeting should be the same, but it is not. Such thinking is consistent with the time during which the value of the dollar was based on the fixed value of gold, and this thinking is reinforced by archaic rules that have not changed since we went off the monetary gold standard in 1971. One example is the debt limit, which is unnecessary for a sovereign, floating rate currency.

The federal government is the monopoly issuer of the currency, a fiat currency convertible not to gold but only to itself. Neither income in the form of taxes nor loans enable government spending. The government can and does create money out of thin air and spend without fiscal restraint, subject only to the capricious will of Congress.

Taxation, as explained in an earlier blog, is not necessary for the government to spend. It is a means of both reinforcing demand for the currency and avoiding inflation by reducing aggregate demand for private sector spending. It’s as simple as that even though it goes against most people’s thinking including that of most economists, pundits, and all of Congress.

Borrowing, also discussed in another blog, is the means by which the Fed controls the interest rate on interbank loans; and therefore, the rate for short-term treasuries. This is a choice that benefits the banks and bond holders. It would be possible to just pay interest on bank reserves, which has the advantage that reserves, unlike bonds, are not considered debt. The fact that the Fed sets the short-term bond rate explains why countries like ours, the United Kingdom, Australia, Canada, and Japan are not held hostage by the global bond market as are the countries in the European Monetary Union. For us, there is no risk of default on obligations denominated in our own currency absent political shenanigans.

In another previous blog, we tried to dispel the commonly held idea that deficits are bad and surpluses are good. While surpluses are desirable in household budgeting, history shows that national surpluses hinder household saving. Private saving is enabled by national budget deficits. It follows that metrics other than deficits should be used in managing the national budget.

Consider unemployment for a moment. If we monitor production capacity and utilization along with inflation, we might maintain higher employment rates. Currently, we plan on a consistent unemployment rate of 4% to 5% as a hedge against inflation. This is a terrible waste of productivity that holds back growth of our GDP. We might better look at the performance of the economy not an arbitrary budget deficit number. 

We might also look at taxes differently and argue, perhaps, that corporate taxes are not necessary except as an instrument of policy. Corporate sales are closely coupled to aggregate demand, which would be influenced by taxes on households. We can imagine flat rate income taxes, perhaps, in combination with consumption taxes. Taxes could be made much simpler when viewed in this different light.

It amazes me that conventional wisdom continually uses household budgeting as the model for national budgeting, and professional economists never mention the properties of a modern, sovereign currency. My conclusion is that pundits and politicians risk losing their credibility and livelihood if they stray from the wisdom of their communal brain. Perhaps Professor James Galbraith said it better almost a year ago.

Related Reading:

Limitations of The Government Budget Constraint:

Soft Currency Economics

Interest Rates and Fiscal Sustainability

Can Taxes and Bonds Finance Government Spending?

Many thanks to Duane for improvements to this blog.

Refocus on Unemployment and Shared Risk

Everybody in Washington, DC is focussed on the wrong problem. And, I mean everyone from the President, to Congressional Democrats and Republicans alike, to the news media, to jabberwocky pundits. Did I leave out anyone? Oh yes, the President’s Deficit Reduction Commission. It’s as if they were all plugged into the same lame brain. 

Apparently, there was never any doubt that the deficit must be reduced soon. Well, deficits have been an obsession since Nixon got crossways with Congress in 1974, which was only about three years after he took us off the gold standard.

Also, the notion of shared sacrifice has dominated all discussion as some badge of seriousness. No one is considered serious unless they give up argument and accept both the deficit reduction and shared sacrifice mandates.

Meanwhile their common brain is telling these people to be very fearful of what isn’t actually happening. The deficit is causing inflation; it’s not happening nor is it about to happen. It is causing interest rates to rise; it’s not only not happening, it can’t happen. It is causing dollar depreciation; it’s not happening.

We should be concerned about what is happening. Unemployment is still too high and is recovering too slowly. The financial, educational, and sociological consequences will be with us for a generation or more. There is a way out; it was demonstrated 76 years ago with the advent of the WPA (Works Progress Administration). It was a government “jobs” program that touched nearly every town in America. We are still benefitting from the infrastructure built under that project even though that infrastructure is deteriorating.

We should also rethink the shared sacrifice mandate. We have learned that shared sacrifice means cutting benefits for Social Security, Medicare, and Medicaid. Shared sacrifice translates to sacrifice by the elderly, disabled, and sick. Good grief, what kind of a people are we?

Let’s look instead at shared risk. None of us knew as we started out in life how things would turn out for us. Those who fared well can help out those for whom wealth or health did not turn out so well. Shared risk translates to maintaining social safety nets for the disadvantaged by those who have fared well.

Social Security and Medicare are insurance (shared risk) programs not annuities. If one doesn’t need the benefits they go to those who do. Funding for Social Security is a little soft, but can be fixed by raising the upper limit on pay roll taxes. Medicare, an efficient program, suffers not from its own defects but those of the larger health care system. We need to solve the larger problems not cut benefits. 

Let’s overcome the deficit hysteria and the false rhetoric of shared sacrifice and turn to what is really important, unemployment and shared risk. 

Related Reading

Getting America Back to Work...

Don’t Count on Job Growth....

Boehner’s Views on Economy Contradicted...

Financial Sector Balance II

In a previous blog I plucked an equation out of James Galbraith’s “The Predator State” and tried to put it to the test graphically. One of my friends, whose initials are Duane, objected to having the equation in terms of deficits so that a negative deficit was a surplus. Another friend was unconvinced. Apparently my first attempt was a pedagogical flop.

This is a very important top topic even if it is basically bookkeeping. Economists call it macroeconomics. We are concerned with the three sectors; foreign, which is just exports and imports; private, which comprises all domestic households and businesses; and public, which comprises federal, state, and local governments. All the people are in the private sector. This is where business and governments find their labor. Ultimately, households end up with all income, and households contribute the bulk of GDP.

Figure 1. Sectors that contribute to GDP

What follows is a simple derivation of the sector balance equation. GDP is a measure of the market value of all goods and services in the country in a year and can be expressed in, at least, two ways. First we look at it in terms of sources of money in the domestic economy, which we express as follows: 

(1)    GDP = C + I + G + (X - M),

where C is the sales side of household consumption, I is business investment, G is federal government spending. (X - M) represents the net value of exports. 

Alternatively, we can look at uses of income, which gives us

(2)   GDP = C + S + T,

where C is spending side of household consumption, S is total household saving, and T is federal taxes.

Equating (1) and (2) and canceling the C’s we have 

 (3)    S + T  = I + G + (X - M).

After rearranging terms, we have our sector balance equation

(4)     (S - I) + (T - G) = (X - M).   Each term is positive in surplus and negative in deficit.

(S - I) in surplus indicates net saving in the private sector, and net borrowing in deficit. (T - G) indicates public surplus when positive and deficit when spending exceeds taxes. (X - M) is net exports and is in deficit when imports exceed exports.

Figure 2 shows a chart of the terms in equation (4) using data from the Bureau of Economic Analysis. For this chart, I was able to find more appropriate data series than in the earlier post. Clearly, the data validate equation (4) quantitatively.

Figure 2. Sector data from BEA as per cent of GDP from 1960 QI to 2010 QIV

Perhaps the most striking feature of the chart is the consistency with which public deficit (T - G) is reflected in private saving (S - I). It is good for some saving to occur. We like to have a prospering and growing economy with increasing wealth. But, when facing hard times, we run into the Paradox of Thrift. If one household saves it is good for that household, but when every household saves the economy suffers. As households reduce consumption, firms lay off workers, tax revenues fall while unemployment insurance rises leading to increased deficits. We see these effects in the 1973 and 1979 oil crises and the subsequent recessions. And, we see it big time currently.

There is another interesting period in the late 90’s where the foreign deficit (X - M) is growing rapidly and is demanding a deficit on the domestic side of equation (4). Uncharacteristically, during this period the public sector is in surplus and the private sector takes on the role of running a deficit by continued borrowing. 

In the run-up to the election in 2000, there was some argument about what to do with the surplus. Al Gore wanted to put it in a “lock box.” G W Bush bided his time and reduced taxes in 2001 and 2003 in addition to introducing Medicare drug benefits and launching a war. That got rid of the surplus but, perhaps, produced insufficient deficit to overcome the mounting borrowing in the private sector. Overweighted with debt, the private sector collapsed into the Great Recession. Then private saving zoomed to unprecedented levels as did public deficits.

With persistent trade deficits, the public sector, the private sector or both will be in deficit. In the period around 2006, both sectors shared the load. When the private sector is in deficit, wealth is flowing out to the other sectors. Likewise, when the public sector is in deficit, it is feeding the other two.

It is important to realize that sector balance observations do not prove causation, but they are valuable in understanding where money flows under various circumstances. 

Understanding the nature of the sector flows, it is hard to understand why anyone would want to balance the public budget or especially, run it into surplus. Assets would move from the private sector tending to make people poorer.

Related Reading

Saturday Quiz - May 7 Q1

Sector Financial Balances Model...

The CBO’s long-term outlook

Taxes are Necessary but Buy Nothing

It’s counter-intuitive, but it’s correct. Tax receipts buy nothing. We all think we know all about budgets. And, if we have run a household, a company, or a state government, we would probably be correct as those are users of currency. The federal government is the issuer of currency; the same rules do not apply. Indeed, they are for the most part the opposite, which is characteristic of a floating exchange rate currency. 

In a previous post, Gold is Gone, we pointed out that our fiat currency is created by federal government spending to buy goods and services from the private sector. Some of the dollars spent are retrieved by taxation. If, as usual, spending is in excess of taxes, the difference remains in the private sector as savings.

Logically, spending must occur before taxation or there would be no funds to tax. Unlike the family which is fiscally constrained by available resources, federal spending is fiscally unconstrained. It does not need to have income or loans to spend and can spend without limit - not that it should. 

A family must have resources like wages, savings, or loans to provide money to spend. The national government creates whatever it needs. It cannot run out of dollars, “go broke,” or face insolvency. This is much different than countries like Greece and Ireland, which are users of the Euro. Similar to our states, all countries that use the Euro are fiscally constrained. Unfortunately, we are still unnecessarily burdened in our thinking by constraints left over from the gold-standard years when our currency was also constrained.

It would be fair to ask, if taxes are not income for government, why does it tax? There are two reasons.

First, taxation makes our currency legitimate, because it creates a need for people to acquire dollars. We could imagine different locations around the country having their own currency to encourage local commerce. In fact, that is done. Those currencies could be unconvertible fiat currencies or convertible to coal or seashells. But, we “are one nation, indivisible with liberty and justice for all.” As soon as the government uses its coercive power to levy taxes that must be paid in its dollars, the local currencies become fiscally constrained and convertible to dollars. Dollars win.

Second, taxation serves to restrain aggregate demand in the private sector. As the government spends to buy the goods and services it needs, the private sector acquires assets and purchasing power. If the total demand of the private sector and the public sector exceeds the nation’s capacity to produce goods and services, inflation or currency devaluation will follow. Taxation prevents inflation.

Neither taxes nor borrowing, as shown previously, are needed for government spending, which is completely different from households. With that knowledge, we can start thinking of metrics less arbitrary than deficit and debt to evaluate the health of our economy. Unemployment and productivity would be much better metrics. In the face of high unemployment and excess production capacity, deficits are actually not all that important.

Related Reading

The S&P Downgrade: Much Ado about Nothing...

Taxpayers do not fund anything

Soft Currency Economics

Borrowing Does Not Fund the Deficit

There is a persistent misperception that the US must borrow to fund its deficit. In a previous post, Gold is Gone, we pointed out that economic rules have changed since we went off the gold standard in 1971. 

The US now has a sovereign, floating exchange rate, fiat currency that is actually created out of thin air by government spending to acquire goods and services from the private sector (firms and households). Taxation takes money from the private sector and destroys it. If taxation does not equal what was spent, we buy or sell bonds according to whether we are in surplus or deficit, respectively. Accordingly, that leaves the private sector with less or more wealth in savings. This might leave the impression that taxes and borrowing enable spending. Let’s look more closely.

Government spending is accomplished by depositing money in a recipients bank account. This deposit causes an increase in the bank’s reserve requirement.

Every bank has a reserve account at the Fed, which requires them to keep some fraction of their deposits in these accounts.  For big banks this minimum is 10%. Also, the banks must keep enough in their reserve accounts to clear the checks presented for payment on any day. Banks earn only about 0.25% interest on these accounts; before 2008 it was zip.

As a instrument of policy, the Fed tries to control demand for loans in the private sector by controlling the overnight Fed funds interest rate. This is the rate at which banks can borrow money to cover loans made at profitable rates.

Because they make little profit on excess reserves, banks try to keep them at the required minimum. A day's activity at any one bank can leave it with an excess or a shortage. Overnight the banks have a scramble to acquire needed reserves or dump excesses, which they do by loaning funds to one another in the money market.  

If the government is running a deficit, there will usually be excess reserves in the system, because deficit spending puts assets into the private sector. There is no way that the banking system can, by itself, get rid of excess reserves, so the forces of supply and demand will drive the interest rate on reserves to the minimum rate. To keep the overnight rate up, the Fed drains excess reserves by selling bonds at somewhere near its target rate. Buyers will be eager to buy bonds having yields better than the minimum rates, so bond sales never fail.

We do not borrow to fund the deficit; we sell bonds to maintain the Fed funds rate. That is a big difference between our floating rate currency and that of fixed rate currencies like those of Greece and Ireland. Such countries are vulnerable to default on their securities and face high interest rates in the global market. We are not vulnerable to default, because we can always meet commitments made in our currency.  That is, unless we do something politically stupid like not raising the debt ceiling, an archaic rule left over from the gold-standard days.

The above is for normal times. Currently, banks are reluctant to lend and the private sector would rather save than borrow. Consequently, the Fed funds rate sits at the minimum. The Fed can’t control something that isn’t happening.

Related Reading:

The S&P Downgrade

Saturday Quiz Answers & Discussion Q4

A Modest Proposal for Ending Debt Limit Gridlock

Ryancare

It's time to be really frightened.  At last, we see the true stripes of the modern Republican Party. After, giving tax breaks to the rich, busting the unions, and giving tax advantages to big business; they will attack the deficit by reducing benefits for the elderly, the sick, and the poor.  Privatizing Social Security and vouchering Medicare will be good for Wall Street and the insurance companies but not for the would-be beneficiaries.  

Rep Paul Ryan states that his "Plan for Prosperity" will pay off the debt.  That may sound good to some, but we know that it doesn't stand up to simple accounting. As long as the we run a foreign trade deficit, dollars will be going out of the country.  Those dollars will come from either the government sector or the private sector.  If the government does not run a deficit those dollars shipped abroad will come from the private sector. That is, wealth will be drained from the private sector excluding, of course, Wall Street and the insurance industry.  Is that what we mean by "prosperity?"

The Ryan budget is both inhumane and stupid.  It further enriches the rich at the expense of the disenfranchised and doesn't pass the simple test of basic accounting.

Related Reading:

Sector Financial Balance

Health Care - We Can Do Better

Today is the first anniversary of the Affordable Care Act (Obamacare).  It will not take full effect until 2014 and even then will only begin to chip away at health care costs and the number of people uninsured.  Our health care system has a long way to go.

We still spend way too much on health care, do not cover everyone, and have poorer medical outcomes than other industrialized countries.  The chart below tends to substantiate the position of the United States relative to its peers in the OECD (Organization for Economic Co-operation and Development) states.  

In the chart we see that generally life expectancy increases with per capita spent on health care.  The outstanding exception is the United States that spends almost twice as much as most other states but surpasses only the lowest few in life expectancy.  These data strongly suggest that the United States does not deliver health care effectively or sufficiently.

Life Expectancy (years) vs Per Capita Health Expenses ($US) from publicly available OECD data.  Data Labels removed for legibility are Belgium, Finland, Iceland, Ireland, Netherlands, and Sweden, which are in the $3000 to $4000 cluster.

Over time, if the ACA does its job, health care costs will come down and more people will be covered.  But, the improvements will be minimal even after five years and may never allow us to catch up with our international peers.

Conservative Washington Post columnist Charles Krauthammer, an ACA opponent makes the following criticism that we might consider to be praise.

And here's what makes it so politically seductive: The end result is the liberal dream of universal and guaranteed coverage -- but without overt nationalization. It is all done through private insurance companies. Ostensibly private. They will, in reality, have been turned into government utilities. No longer able to control whom they can enroll, whom they can drop and how much they can limit their own liability, they will live off government largess -- subsidized premiums from the poor; forced premiums from the young and healthy.

It's the perfect finesse -- government health care by proxy. And because it's proxy, and because it will guarantee access to (supposedly) private health insurance -- something that enjoys considerable Republican support -- it will pass with wide bipartisan backing and give Obama a resounding political victory.

Although ACA didn’t come into being on such a triumphant note nor with nationalization, it could be a start.

Across the country, we use regulated or publicly owned utilities to deliver water and electric power to everyone at reasonable prices.  We should be able to follow that example and deliver health care to everyone at reasonable cost.

In his book, “The Healing of America” (The Penguin Press, New York, 2009), T. R. Reid identifies three models for delivering health care.

The Bismarck Model began in Germany during the nineteenth century under the auspices of Prussian Chancellor Otto von Bismarck.  It has lasted through two world wars and German reunification, because the people demanded it.  As in the US, the program is funded by employers and employees through payroll deductions and health services are provided through private insurance companies.  

The big differences are that the insurance companies are non-profit, everyone is covered, and cost control is accomplished through regulation of medical services and fees.

Other countries using this basic model are Japan, France, Belgium, and Switzerland.

The Beveridge Model was founded through the persistent efforts of one William Beveridge, who was the motive force behind the National Health Service in the United Kingdom.  So popular is the NHS that when Margaret Thatcher privatized almost everything in Britain, she never considered touching it.

This model is funded through taxes, and typically the government owns the facilities and hires the medical staff.  Medical services are available to everyone, and there are no medical bills.  Patients register with a physician’s surgery, and the doctor gets a fee whether or not the patient visits the doctor.  So, there is a built-in wellness incentive.

Other countries that employ this model are Italy, Spain, and most of Scandinavia.  This form of the dreaded “Socialized Medicine” is found also in the US Veterans Administration.

The National Health Insurance Model is a hybrid of the above two models.  The health care providers are private, but the government acts as a single-payer insurer that collects premiums and pays the medical bills.

Canada is the best known country that uses the NHI system.  Taiwan and South Korea also have adopted it.

These models prove that a heath care system can work when the emphasis is put on care rather than profit.

Of course, the default is an Out-of-Pocket model that applies to Cambodia, rural areas of China and India as well as all those still uninsured in the US.

We can hope that our ACA will converge, sooner rather than later, on a system similar to  those that have succeeded in other OECD countries.   

In Defense of Social Security

Social Security is a prime target of deficit hawks because it is some 20% of the federal budget.  Unfortunately, some of the deficit doves have also bought into the idea that Social Security should be cut.  We can expect that after any reductions in discretionary spending this year, Social Security will be an even larger portion of the budget next year and so, a bigger target.

Social Security is not a government spending program that directly purchases goods and services.  Instead, it is a transfer program that reallocates money from one consumer (wage earner) to another (recipient).  Properly managed this transfer consumes no net government resources and should be sustainable indefinitely.  For its entire existence since 1937, Social Security has been self supporting albeit with some adjustments along the way.  Only minor adjustments are needed to continue self-sustainability. 

To some conservatives such reallocation constitutes confiscation.  Consequently, they try to emaciate the program by associating it with the deficit.  It should be an issue argued on the basis of morality and national values.  Because the old will always be with us, they will, in any event, have to be cared for in one way or another.  

Social Security has been effective and popular, because it spreads the pain of providing for the old among a large wage-earner community not just those who have aging family members and possibly no family wealth.  To progressives this is an appealing view; to conservatives not so much.  

Social Security is a pay-go program meaning that payroll taxes on current wage earners support current recipients.  It is well known that in the future there will be fewer wage earners to support more retirees.  This is a tractable problem as long as the economy continues to grow.  Currently, Social Security takes up about 4.5% of GDP, and projections shown in the following chart indicate that it will peak at about 6% in 2035 and remain there through 2085.  A shift of 1.5% of GDP into Social Security is well within the means of this great country.  

Social Security and Medicare Costs as Percent of GDP

Because Social Security taxes are regressive, adding a small progressive touch would be sufficient to address any shortage of funding.  Social Security taxes are imposed primarily on those with lower wages, but only on that portion of wages under $106,800, and not at all on capital gains.  So, the rich win by having wages above the upper limit and by having a larger fraction of income as capital gains. 

Additionally, over the last three decades incomes for the rich have increased much faster than the rest.  Between 1980 and 2008, the top 10% (families with earnings above $109,000) enjoyed an income increase of 41% while the bottom 90% have seen only meager increases.  The kicker is that these income increases have been in capital gains or in wages above the maximum of $106,800, so they have escaped Social Security taxes.  The following chart is from Emmanual Saez.

Social Security should not be part of any deficit debate.  As long as Social Security  depends on the efforts of lower wage earners, it is an insult to the middle class to decrease their benefits and protect lower taxes for the wealthy.   

Related Reading
Social Security and The Federal Deficit (pdf)
Robert Samuelson Wants to Take Money From Seniors...
Liberal Fallacies: Protecting Social Security From its "Friends"

New Conservatives Defy Public Sentiment

There is no economic argument that our federal deficit spending is too high.  The only arguments offered consistently are the homey falsehood that the government must balance its budget just like households and that the debt is really, really big.  Neither the falsehood nor an aversion to big numbers is a valid argument.

There must be another reason, and it is being revealed day by day in Wisconsin where Gov. Scott Walker subordinates the rights of citizens to establish a monarchal political agenda.  What we see is oppression of dissent, oppression of workers’ rights, establishment of crony government, and give aways of public assets.  A similar circus is unwinding in Ohio.  If these represent the face of the new conservatives, can we please have the old ones back? 

A national poll taken by the Pew Research Center, Feb 2-11, 2011, shows that people steadfastly prefer increases in Education, Veterans’ benefits, Health Care, Medicare, and others as shown in the chart.  Certainly these people know that many states have budget crises the worst of which can be helped at federal expense, yet their sentiment is clear.  

In addition, a March-1st New York Times/CBS News Poll reveals that 40% would prefer increased taxes over other measures to balance a state budget.  Further, 60% oppose taking away collective bargaining rights, and 56% oppose cutting pay and benefits of public employees.

People may not know that these budget crises at both the state and national levels are exaggerated to advance a political agenda that we citizens would otherwise not accept.  It would be better to have an emergency tax on those who still have income, than  jeopardize our future by neglecting important investments to prosper in it. 

Debt Interest Then and Now

This morning I was reminded of the government deficits and interest payments during the Reagan administration.  Then the deficits were running about 4% of GDP and interest rates were 8 to 10%; now those rates are 10% and 0.25%.  So, as a fraction of GDP we now have at least a factor of 10 advantage over the earlier time.  For fun, I ran the following chart to compare these numbers over history.

Fed funds rate (%) and Federal Deficit as percent of GDP

Currently we are getting a pretty good deal on our "borrowing" compared to the Reagan era (1980-1988) and not worse than the Bush era (2000-2008).

But, you might say that those rates won't stay that low forever.  You would be correct only because nothing is forever.  The Fed controls rates and will keep them low for years or until employment has recovered substantially.

Then you may argue that if the interest rate is not high enough, no one will be willing to buy our bonds.  Then I would have to point out that deficit spending creates its own demand for Treasury bonds.  James Galbraith makes this point as follows:

So long as U.S. banks are required to accept U.S. government checks -- which is to say so long as the Republic exists -- then the government can and does spend without borrowing, if it chooses to do so. And if it chooses to issue Treasuries to meet the demand, it can do that as well. There is never a shortfall of demand for Treasury bonds; Treasury auctions do not fail.

He discusses it again in an interview with Ezra Klein.

Too much government spending may lead to inflation.  Currently, at our high levels of unemployment, inflation is not as much of a threat as deflation.  That threat is increased by recent increases in commodity prices and the unrest in the Middle East that is causing increased oil prices.  Ordinarily such increases would be considered inflationary.  Now they are deflationary.  The argument is that oil prices will increase the prices of food and many other things.  However, labor does not have the leverage to obtain increased wages, and firms are not experiencing the demand that would allow them to increase prices.  It follows that people will have to do with less discretionary spending and firms will have lower profit margins.  These are deflationary indications.

Clearly, we have greater problems than debt interest.  The best way to fight deflation is with a bit of inflation.  That would indicate more deficit spending.

Oh no!  A different story leads to the same conclusion.  Cutting deficits now is wrong.