All too often we hear about how our current Budget Deficit are "unsustainable". Conservatives in this country use "unsustainable" budget deficits to attack social programs and other investments by the federal government. It's a very scary sounding phrase that can cajole people to give up popular government programs. Like so many other conservative talking points, it has no basis in reality.
As it turns out the opposite is true. It's budget surpluses that the federal government will find "unsustainable". The reason for this starts with one basic fact. All money is created as a debt.
Since all money is created as a debt, it means that for you to be obtain money, either you, or someone else must go into debt. If, at the end of the year, you find that you have 20$ and don't owe anyone twenty dollars, then someone else, somewhere is now twenty dollars in debt and has no cash to show for it. In other words, your dollar savings, is another's debt. if 300 million people save one dollar, then one person must go into debt 300 million dollars. One person who could do this is the federal government. So if the entire private sector wants to save money, the federal government can be the entity that goes into debt. In fact, the total savings of the private sector cannot go up unless the federal government goes into debt.
By total savings, I mean that if you add up how many dollars everyone has and then subtract the total amount everyone owes. Since all money is created as a debt, this will net to 0 dollars. However, if you pull out just one entity, say the federal government’s treasury, then you can say that one entities debt must equal the others savings because eventually it all must equal zero. That’s why federal debt equals private saving. In fact, I understand that most economics students learn this their first year of study. Macroeconomics 101 teaches that government deficits = private savings. This doesn’t appear to be a secret.
A couple caveats about this. I’ve used the term “private sector” pretty broadly here. I’ve taken it to mean everybody except the federal government. Most people further divide up the private sector into foreign entities and then domestic private sector. It still doesn’t change the fact that for these groups to save money, then the federal government must run a deficit. Again, this is something economists already know. They learn it as a math equation: federal net income + foreign net income + private domestic income = 0.
Another caveat is that this only works for total dollars in the economy. Some people try to dispute this concept be getting other assets mixed up with money. An example might be that someone might be in debt, but they have a house that is worth the amount of their debt. That is a good thing because it increases their net worth, but it does not increase the amount of actual money that they have. Somebody else, like the federal government, will have to go into debt for that person’s amount of money to go up.
So what is the point of all this? The point is that if we want the private sector to save money, we must be prepared to let the federal government run budget deficits. It is the only way that the total savings of everyone in the country can go up. It also means that for anyone calling on the government to balance it’s budget, they are also calling for everyone else to start spending every dollar that they make.
Now let's come back to our conservative talking point about unsustainable budget deficits. Progressives best response is usually, "we'll balance the budget later" or "nuh uh". Instead flip the question to the private sector. "Which would you rather have the private sector saving money, or going into debt? Because we're all(on average) going to go into debt if the government runs surpluses". Another followup is "Which, I ask you, is more sustainable: A private sector that is sinking further and further into debt, or a private sector that increases it's savings every year?"
The information in the diary is heavily influenced by a concept known as Modern Money Theory. It's a relatively obscure "post-keynesian" economic school of thought that starts with basic facts like "government can create all the money it wants" and ends with a way we could have both stable prices(i.e. low inflation) and truly FULL employment in this country. So if that sounds like a really good thing to do, or you just want to learn new ways to demolish false conservative talking points, I highly encourage you to follow me as I do more diaries on Modern Money Theory.
If you can't wait for me, then I suggest you check out these sites that have more information.
Warren Mosler's Blog and Website
Some scholarly papers at the Center for Full Employment and Price Stability
Also, please follow the MMT tag here at DailyKos. I am not the first Kossack to have stumbled upon MMT.