US gov't runs $1.3 trillion budget deficit in 2011

geochem1st

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Well you usually bring it when you post, so I look forward to your response. You are one of the educated posters in here, so I always look forward to what you have to say.

Better late than never for a reply :)


First some key concepts:

The US government like all sovereign governments that issue it's own currency can always spend more than it earns – continuously and indefinitely – because the concept of “earning” is redundant. Unlike a household or a corporation, the sovereign government doesn’t need to earn to spend. That is a fundamental part of having a fiat currency system. In contrast, this is NOT the case in Greece, or any other Euro zone country, because they are users of their currency, not issuers (which is done the by European Central Bank). Plus the US debt that is financed by bonds is payable in US dollars... we have no foreign debt, which distinguishes us again from the Greek scenario, or the Wiemar Republic which is often brought up.

The US Federal Government might hide behind institutions (like debt-issuance mechanisms) and rhetoric (like we are running out of money, as our President often writes) but the operational reality is that behind all these smokescreens – the US government is not revenue-constrained.

Which is NOT to say that the government can spend without limit. There are real constraints on how much currency a country can safely issue. The government as monopoly currency issuer has the sole prerogative and corresponding sole responsibility to provide the correct amount of currency to balance spending power (nominal aggregate demand) and goods for sale (real output capacity). If the government issues currency in excess of capacity, demand will rise relative to the goods and services available, and inflation will occur due to a glut of money. If the government falls short in maintaining this balance, recession and unemployment result, due to a glut of goods and services. The government attempts to achieve the correct balance through fiscal policy (currency issuance and taxation) and monetary policy (interest rates), based on data and its analysis in terms of sectoral balances.

However, with high unemployment and massive underemployement we are nowhere near capacity.

The empirical argument is IMO the most persuasive. Not only has the government always run deficits, but the media has always been worrying ineffectually about a deficit crisis that never happens. Another fact is that we will never pay off the debt. A zero balance debt has only happened once in US history, for a brief time in 1837, it won't happen again.

So in practice, taxes do not fund government expenditure. That doesn't imply that we don't need Federal taxes as many jump to that conclusion, it just means that Federal taxes perform the task of taking cash out of the total money pool.

I am not a fan of quantitative easing, and I beleive the monetarists at the Federal Reserve are screwing things up.

If the Federal Governments spending is decreased dramatically, with corresponding tax cuts to have a balanced budget, what does that do for paying down our debt? Nothing... as only surpluses are capable of doing that. Studies have shown that when there is a government surplus, with in a very short time its spent actually increasing government spending.

We are in a down economy with wars going on. One has to think about the effects of drastically cutting federal spending. Is the private sector prepared to employ all who will be unemployed by these cuts. No. Unemployment is currently high, and only consumer demand will increase hiring. So wouldn't it be prudent to have those that are working, paying local taxes, and buying to still be able to do those things that are currently supporting our economy? When things improve and we are on an up cycle, by all means cut back the the government but now it would damage any hope for a decent recovery we have.

Deficit spending gives a great deal of fexibility to our government in a very unstable world environment, which is why we have had deficits for the overwhelming majority of our history. It is why we have moved to a fiat monetary system for even more flexibility. If spending is to be reduced we need to consider what our long term policies in many arena's should be and what our position in the global scenario should be, not just domestic issues.
 

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