(Cross-posted at charliehiphop.com)

The United States Government IS NOT Like Your Family

What if 46 cents of every dollar you spent was borrowed?  You'd quickly find yourself bankrupt.  Presently, 46 percent of every dollar the U.S. government spends is borrowed, and you will hear conservative simpletons decry this fact loudly, often saying something like, "If it were my family (or my business), I'd be in deep trouble."

Well, the federal government of the United States of America is not your family or your business.  It is your business in the sense of not being "none of your business," but it's not your business in terms of how its finances work.  The main difference between the government and you is that the government can create money out of thin air.  

"But... inflation!!!" they will protest.

Yes, additional dollars in the money supply degrade the value of the dollar somewhat, but the value of the dollar needs to degrade for economic growth to occur.  To simplify, imagine a macro-economy with just two players -- you and me -- and $100 of total money supply.  You and I trade goods and services and use the $100 to keep score.  If no more money enters the money supply, neither of us has any incentive to do any more than we absolutely need to do.  Neither one of us will introduce a new product or service because we know that the stagnant money supply will just mean that dollars will flow from some other enterprise, making it less profitable.

Enter the third player: the big, bad gubmint.  The gubmint pumps ten extra dollars into the money supply each year.  Now both you and I have an incentive to chase those.  Let's say that, between us, we produce an extra five dollars worth of goods in that year.  Oh noez!  Inflation of five percent!  That's bad, right!?!

Well, no, it's not bad because we also got five dollars worth of extra production in total.  The economy has grown even as the value of a dollar has gone down.  I can't get a Hershey's bar for 25 cents like I could when I was a kid, but then, I can get a flat-screen television.  You can't have growth without inflation, or at least there is a lot less incentive to innovate and create in such an environment.  

But that wasn't really my point.  Let's get to that.

The government can and should borrow money.

In modern history -- you know, the Golden Age of the U.S.A.  -- around 20-25 percent of GDP is comprised of spending by the U.S. government.  That did tick up a bit during the Great Recession, but it's still within the range.  If the government borrows half the money it spends (which it doesn't quite), it means that 12 percent of GDP is borrowed, which is quite reasonable.

If a business borrows 12 percent of the money it spends, it's not a death sentence.  If your family borrowed that much, it would be perfectly normal, especially if you bought things like houses and cars that you paid back over a long period of time.  But, you see, the government doesn't even have those constraints.  If it borrowed 100 percent of the money it spent, it wouldn't matter as long as the bond market sustained it, which it would since the U.S. government is constitutionally mandated to pay its debts.

When the government puts that extra 12 cents of borrowed money into the economy every year, it is growing the money supply and creating incentive for growth.  (And, bear in mind, it's not even that high.)  The key is to not grow the money supply to such an extent that innovation and ambition can't keep up.  We can live with a little inflation as long as the economy is growing.  

Of course, in an ideal world the government's books would be balanced such that none of the extra money was borrowed and the money supply grew interest-free.  That's what the founders had in mind when they delegated the creation of money to Congress.  We do not live in an ideal world.  As things stand, the government has to borrow a significant percentage of what it spends.

Finally, a word to those dumbasses who think the government should not spend money...

"My money is mine!  The government has no right to it!"

You do realize who creates your money, right?  You remember your Jesus quotes, all the stuff about the dude whose picture is on the coin and rendering unto him what is his, right?

If you don't want to live with government and taxation and all the civilized things those things provide, by all means, move to Somalia or hunt and gather out in the back woods.  Just stay off our roads, out of our markets, and please PLEASE don't breed because your children will just burden our schools and health care system.  

Uncle Sam, please keep borrowing until the economy turns around!  And collect more revenue from those who benefit most from living in our great society!


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