Oh, the debt! Oh the humanity! Oh the BULLSHIT. But it has penetrated so deeply into the public narrative that even most thoughtful progressives have fallen into the trap. Diary after diary on this site bemoan the debt in cautious terms, stipulating its presumed dangers, a looming threat but for some future date when the economy is healthy again. That's when we should inflict the next injury, not now! Meanwhile the T-baggers scream hysterically that the debt burden is already crushing us and robbing our children of their future. That the debt we are leaving for our children to pay is the moral outrage of our time.
Really? And the evidence for all of this is what, exactly???? Ipse dixit? Some person with a recognizable name says it's so? This is no longer economics, it's religion. It is the abandonment of thought and reason to the mentality of the stampeding herd. It is the embrace of lemminghood. It is the modern disaster of Theoeconomics.
Let's take a little quiz to see how deeply we've fallen into Theoeconomics' rhetorical traps. These are all simple True or False questions:
1. Like households and businesses, the government must finance its spending out of income or through borrowing.
2. The purpose of federal taxation is to finance government spending.
3. The Federal Government borrows money from the private sector to finance budget deficits.
4. The government takes pressure off of interest rates by running surpluses thus leaving more funds available for private sector investment.
5. Persistent budget deficits will produce inflation and higher interest rates for future generations.
6. Current budget surpluses will build the necessary reserves to cope with the future needs of our aging population
All of these statements are FALSE, as "experts" on both sides of the political divide know and admit. So, if you answered any of the questions True, you are operating under real misconceptions about how the economy actually functions. A number of good publications and blogs could help. Great discussions of questions similar to these can be found in Warren Mosler's Seven Deadly Frauds of Economic Policy(link to free pdf). This is a very informative 117 pages, but more abbreviated discussions are also available. New Economic Perspectives is an excellent source, the MMT Primer there should be required reading, and the Money and Public Purpose blog here at DK has many insightful contributions.
Godley on the US economy: "Without an expansionary fiscal policy, real output cannot grow for long."For the last several decades we have had persistent trade deficits reflected in the diagram by money flows from the private sector to the foreign sector (right side of triangle). This has been partially offset by a surplus in capital accounts reflecting payment to and from foreign entities (bottom of triangle). Nevertheless, annual net flows to foreign accounts amounts to $500-$600 billion. The largest transfer between sectors is the government's deficit spending, which is an annual net cash flow of $1.1-1.4 trillion into the private sector. But note that, if the government's deficit spending were not greater than the trade deficit, the private sector could not be in surplus. For the economy as a whole, that means money becomes more scarce, savings decline and borrowing increases. Consumption declines, jobs are cut and we're back in the old shitter again. But these days that seems to be everybody's favorite plan. The lusted after "Grand Bargain" is really what William Black calls a "Grand Betrayal." But voices of reason are shouted down because, "OMG, we're bankrupting ourselves, there's no more money!"
OMG is right! Roll your eyes, too, because that is complete bullshit. The government is the issuer of the currency. These hysterics are acting like the last 41 years never happened and we're still chained to the gold standard. Don't they remember that Nixon dumped the gold standard in 1971 because it was robbing us of our sovereignty and our wealth? Until then the US, the most powerful nation on earth, behaved as if it were a pauper. We convinced ourselves of a need to back our promises with gold rather than the sovereign might and integrity of our nation. And we were getting royally screwed for our troubles.
At the time, the value of a dollar was set to 1/35th of an ounce of gold (they described it as gold selling for $35 per ounce - cart pushing horse). If you were anyone BUT an American, you could take $35 to the gold window and demand your ounce of gold, and you would get it. It's what the United States Government promised, and the 14th amendment mandates that we keep such promises. After leaving the gold window you could take your ounce of gold out on the street and sell it for $42 - a tidy 20% profit. Gold was selling (to foreigners) like hotcakes and fortunes were expanding rapidly. President Nixon saw the hemorrhaging and solved the problem by closing the gold window and abandoning any fixed rate of exchange.
The dollar became a true fiat currency, a far more powerful tool than the earlier gold certificates, but, ultimately, one too subtle for our nation's leaders to grasp, a laser scalpel in ham-handed fists. That's why even though everything changed, nothing changed. That is why we continue to behave as though we were still on the gold standard. That is why we place unwise and unnecessary monetary restraints on fiscal policies for the public good, and why we bend to the false premise that our government could ever be short of cash. WE - THE NATION - CAN NEVER BE SHORT OF CASH. WE CAN CREATE CASH WHENEVER WE NEED IT.
You must wonder, then, if the government just creates money at will, how can the currency have any value at all? Look at our economy; it's no secret that it runs almost entirely on credit. Overall, comparatively few transactions are conducted with actual cash. In the private sector, loans create deposits so real money is not generally required except as the unit of account, a measurement, a score. The one place you have to come up with real money is when you have to pay government for taxes and other liabilities. You have to come up with NET dollars for that. The government does not want your IOU. They have already issued their own IOU's - called dollars - and they want those back so they can physically or virtually tear them up, just as any issuer of an IOU would do.
Then, if we let the government just print money, won't we end up being like the Wiemar Republic or Zimbabwe with runaway hyperinflation? Get real - neither Wiemar nor Zimbabwe were in control of their currency or their economy. Here's a different way to think about it. Did you ever go to a buffet? Sure, some idiot people are stupid enough to gorge themselves and spend the rest of the evening either puking or wishing they could puke. But you don't have to be stupid. You don't have to shove another plateful down your throat just because it's there. And you don't have to deficit spend when the economy is full. Full employment, maximized use of productive capacity. Those are the conditions under which excessive deficit spending would produce inflation. That is controlled by policy choices for spending (the gas pedal) and taxation (the brake pedal). It's not that hard!
To conclude, our money was once constrained by limits imposed by the quantity of our gold reserves. Once the dollar was unshackled from gold, our monetary system was no longer constrained except by the poor judgement of our leaders. In no case is the solvency of the United States or any mandated federal program ever in question. The government can ALWAYS create the dollars necessary to pay its dollar-denominated obligations, subject only to a political will. Sadly, that will is dominated by a Calvinist sentiment and a denial of economic science. It is a religion masquerading as economics, and it is a prescription for misery and failure.