The following draft is part of a project I'm working on. I thought it might be of interest to some ETers. None of the concepts here are original. If there is anything original here it might be my specific model, interpretations and explanations. I am entirely responsible for any errors in what follows. I would appreciate constructive comments and especially the pointing out of any errors. On the Essential Nature of Deficits, Debt and Taxes The things we commonly say about U.S. Government debt, deficits, and taxes represent an ignorance dangerous at the ballot box. Often heard is "There is so much debt, it can never be paid off!" This is as irrelevant as it is simultaneously both wrong and right. Sadly, our poor understanding of government finances is constantly reinforced by politicians leading us to do some very stupid things. The majority of us go through life believing that our U.S. Government must tax to cover its expenditures, and, if government spends beyond its revenue, it will be forced to borrow the difference. However nothing could be further from the truth. In what follows, I will argue that, a) both taxes and Treasury securities play roles other than what is generally supposed; b) there is effectively no deficit created when the Government spends in excess of its revenue; c) As there is effectively no deficit created there is effectively no debt created. I will also argue that our concerns should be less with deficits and debt and more with a breakdown in taxation. Despite the "national debt" not being synonymous with private sector debt, we will understandably, but quite incorrectly, equate the national debt to private sector debt. Private sector debt represents private sector borrowers' liabilities toward private sector lenders. Similarly, and in the specific case of the United States, the so-called "government debt" also represents government's liabilities toward private sector lenders. This would suggest an equivalency between private and government debt; it's a false equivalency however. Private sector borrowers must expend time and energy to return money owed to lenders, whereas a government can, and does, produce directly the money it needs to repay private sector lenders. Furthermore, whenever the Congress directs the U.S. Treasury to spend beyond what its revenue would allow, it “prints”(1) the money it needs and simultaneously spends it into the private sector. Afterwards it “borrows” back from the private sector the same amount of new money it printed. Let us take a closer look at Government's spending as described in the preceding paragraph. When our Government spends in deficit it simultaneously prints and spends, and the money it spends adds to private sector bank reserves. Afterwards, for purposes that have nothing to do with acquiring money to spend, it auctions Treasury securities in amounts equal to the new money printed and spent into the economy. In doing this, in effect, the Treasury exchanges Government securities for private sector bank reserves. In this process, the new money printed and spent into the economy returns back to the government sector, and in its place Treasury securities appear in private sector accounts.(2) This is what we call government “borrowing.” Recognition of the true nature of our government's opaque sequence of printing-spending followed by exchanging securities for money spent will reveal that Treasury securities are only superficially like private sector debt instruments. The securities issued by the Treasury are, in effect, non-circulating, interest paying, alternative forms of money. This “security money” , as it were, is freely interchangeable with the equivalent (at the time of transaction) of non-interest paying, “regular” money.(3) The money printed amounts to new “outside” (4) money, and the process by which it is created we call “deficit spending.” Without deficits there would be no U.S. money in the economy!!! A general recognition of this would be a good thing, as it would both stem irrational objection to deficits and lead to a correct understanding of ersatz, U.S. debt. It's the size of deficits that matters; not their mere existence. We absolutely must, at least occasionally, produce deficits. On the other hand, the government would not necessarily need to acquire "debt" in order to deficit spend. Indeed, the Treasury does not auction securities to obtain money to spend, but for entirely other purposes. Whereas occasional deficits are essential, because that's how new, outside money gets into the economy, our government wouldn't necessarily have to associate Treasury securities with every dollar of deficit, as is our practice. We could pay off the national debt by simply reversing the exchange of Treasury Securities for newly printed money that took place when the Securities found their way into the private sector in the first place. That would not eliminate deficits, however, so long as we define a deficit as the difference between spending and revenue. U.S. Treasuries are in high demand by central banks around the world as interest-paying stores of U.S. money. It would seem obvious, therefore, that paying off the national debt would result in, among other undesirable consequences, a wreaking of havoc upon our dollar's status as a Reserve Currency. We might, however, pay the debt partially down. This would increase the ratio of regular, outside money to what I have called "security money", i.e., U.S. Treasury securities, in the economy. Excess money in the economy could still be drained by taxing, but only Congress has the power to do so. The best the Fed can do along these lines is to sidetrack regular money by converting it into its non-circulating “security money” form. This is what happens when the Fed sells Securities from its inventory. How did the Fed acquire Treasury securities in the first place? It did so by reversing the process that sent them into the private sector. That reverse process amounts to a partial paying off of the "national debt"!!! How is it that government can do this? It's made possible because we have wisely given our government a franchise we do not allow the private sector to possess: The ability to both create and regulate a supply of outside money for use in the private sector economy. Our current Treasury practice is to tie Treasury securities, dollar for dollar, to deficits. These deficits, however, have already been effectively eliminated by “printing” of new money. (As used here, the words “already” and “effectively” are critical to a correct understanding of the proceeding statement: “already”, because by the time Treasury securities are auctioned the spending linked to them has already been “paid” for by creation of new money. By definition, a “deficit” is “the difference between revenue and spending.” So our printing of these differences does not technically eliminate deficits, however it “effectively” eliminates them, as though the definition of “deficit” were instead “the difference between revenue and spending not funded by printing.” (In current practice, this difference is zero. ) Once securities are auctioned to private-sector, primary dealers they can end up in accounts all over the world. They can also end up on the books of the U.S. Government's Federal Reserve, which is the Treasury's banker. The statute which gives independent monetary decision making to the Fed covers up what is otherwise a family relationship between Treasury and Fed, with perhaps minor elements of incest. The Model used here acknowledges that from the viewpoint of aggregate, effective money flow between the private sector and government, the two agencies, Fed and Treasury, can be consolidated. When deficit spending occurs, the sequence of events is effectively: a) The Congress orders the Treasury to spend in excess of its revenue; b) The Treasury spends and simultaneously the Fed credits the Treasury's reserve account so the Treasury's checks never bounce; c) The Treasury auctions securities in dollar amounts equal to its net overdrafts, and therefore equal to the net of new money effectively “printed” by the Fed when it covered Treasury overdrafts. After the fiscal year ends, the Treasury's net overdraft for the year will be the net deficit for that year, and Treasury Securities equal to that amount will have been, or will be, auctioned to the private sector, returning to the government the equivalent amount of money printed when the Fed covered the associated, net Treasury overdraft. From the foregoing we see immediately that Treasury securities can not have been issued for the purpose of financing deficit Treasury spending, because the borrowing occurred after the spending, and the spending was covered by printing of new money. This raises an obvious question: If Treasuries are not issued to finance spending, then why issue them? What can be their purpose? When the Treasury auctions securities, money is removed from private sector bank reserves and corresponding securities appear in private accounts as a non-circulating form of interest paying money. Obviously, Treasury securities could be an important monetary policy tool of the Fed, and they are. By buying and selling Treasuries, the Fed can increase and decrease bank reserves. Another use for Treasury securities is as interest paying stores of money useful to various government trusts, and to private sector individuals and financial entities throughout the world. Consider also that in 1944, as part of the Bretton Woods accord, The United States effectively obligated itself to supply Treasury securities to countries using the U.S. Dollar as a reserve currency. Although the gold standard has been abandoned, the use of the Dollar as a reserve currency lives on as a legacy of the accord. Countries using the Dollar for trade convert their excess exchange account balances to interest paying U.S. Treasury securities. Being the supplier of the Reserve currency comes with large benefits to the U.S., but also well understood obligations to foreign Central Banks. Now let us return to the assertion that “without a deficit there would be no money in the U.S. economy”. Deficits add to, and taxes reduce, outside money in the economy. When more money is spent into the economy than is removed by taxes, the difference first appears as new “outside” money in the private sector economy. Imagine now an economy with no money in it. The government can not tax, but it can “print” money and spend it into the economy. That spending will be deficit spending. A little reflection will convince anyone that all “outside” money in the economy originates from deficit spending. Surpluses, on the other hand, reduce outside money in the economy. That's why running repeated surpluses can drive an economy into recession, and ultimately deflation, as happened when the Wilson administration caused a recession by trying to pay off WWI debt too rapidly by taxing to produce repeated surpluses. Ironically those who say, “We can never pay off the debt” are right, but for the wrong reason. Technically, we could buy back the Treasury securities held by the private sector. Economists have expressed conflicting views on what the result of that would be. [See S. Kelton, (2021)] Japan, for example, in recent years, bought back about half its public debt without serious negative consequence. The Japanese Yen however is not used for worldwide foreign trade nearly to the extent that the U.S. Dollar is. Paying off our U.S. debt would undoubtedly strain the Reserve currency system used by much of the world. It would also cripple the Fed's ability to regulate the ratio of bank reserves to Treasuries in the private sector. Were all private sector Treasury securities bought back, the Fed could still sell from their inventory, however the Fed's Treasuries inventory is small compared to the inventory of regular U.S. Dollars in the world's economy. The forgoing considerations are all reasons why even though we could buy back all outstanding Treasury debt, we must not. Government debt, when thoroughly examined, is revealed to be very different from private sector debt. In fact it is not really debt in the way we know it in the private sector. To emphasize this I sometimes refer to U.S. Government debt as “ersatz debt”. Debt and deficits are inherent features of our fiat money system. As long there is economic growth we should expect debt and deficit to increase over time. An important question is what are the parameters that determine an acceptable rate for the increase? Although real government debt and deficits have been effectively eliminated by “printing”, we can not afford to be cavalier about federal spending and taxation.(5) We must spend wisely and efficiently and limit spending on wasting assets while not being afraid to deficit spend heavily on investments that will reap future productivity gains or important intangible societal benefits. Deficit spending at a rate our economy can absorb without inducing unacceptable inflation implies sufficient growth in productivity to accommodate the spending. As debt is linked to deficits, we should expect our ersatz debt to grow as long as our economy grows. On the other hand , we must not let our debt grow more rapidly than can be justified by long-run productivity gains. Rather than being especially concerned about debt and deficit, our concern should be focused on the revenue side of the fiscal equation. It seems we may be dangerously close to a fatal breakdown in the tax system. We don't need to tax in order to spend, but we must nevertheless tax sufficiently for other reasons. Our U.S. Dollar is the world's reserve currency. Therefore, private sector Treasuries represent an obligation to expand the quantity of outside money in a future world economy. We must tax sufficiently to maintain this future obligation in bounds consistent with sound, long range monetary practice. As interest paid of Treasuries is a part of non-discretionary spending, we can not afford to let interest liability crowd out critical non-discretionary spending in a future economy. History has taught us that extremes in wealth distribution are destabilizing. Therefore we must also tax sufficiently to maintain societal stability and preserve our democracy which will otherwise be threatened by acceleration of wealth disparity. We know that growing wealth disparity is an inherent feature of capitalist economies which produce returns on capital that exceed the overall, economic growth rate. Held within bounds, this is a desirable feature of capitalism that feature serves society well. Taxation is a tool to maintain wealth disparity within bounds, but we must use this tool wisely, which will of necessity require that the wealthy bear the greatest individual tax burdens for the same reason Willy Sutton robbed banks --- because that's where the money is! We are certainly not taxing to spend, and we must not tax to make the wealthy poor – they will remain rich. Instead we should tax to maintain our money's value and to maintain a stable society that is broadly beneficial. Rather than illogically concentrate our wealth on a few who might eventually end up, if the lessons of history are any guide, “hoisted with their own petard”(6), we must take care to see to it that our collective national wealth is shared broadly according to merit. This is the route to preservation of opportunity, which provides the incentive to work hard, play by the rules and prosper. Footnotes: (1) “print” refers to creation of new “outside” money[vide infra footnote 4]. This would typically take the electronic or physical form of entries in accounts. The model being used may be described as consisting of a vertical line with all parts of government, but no people, on one side of the line, and the private sector, including all the people, on the other side. Everything on the government side, which includes the Treasury and Federal Reserve, is consolidated. From the point of view of this consolidation model, it matters not whether money on the government side resides on the Treasury's or the Federal Reserve's books, or for that matter whether it exists at all when it is on the government's side. All that matters in the model is whether money is on the private sector side, or not. According to the model, outside money doesn't acquire existence until it is printed on the government side and simultaneously appears in the private sector; thus one should think of printing and spending not as separate operations, but as occurring simultaneously. (2) MMT economists consider Treasury Securities to be another form of money;an interest paying form as it were. Thus they regard the Treasury's sale of Securities as the exchange of one type of money for another. (3) According to this point of view, the best way to view the Treasury's sale ofSecurities is not as a borrowing but as an exchange of one form of money for another. Afterwards, the Fed can, according to its monetary policy, regulate the ratio of the two forms money in the economy by buying and selling Treasury securities on the secondary market. (4) ”Outside money” is the money the government creates and spends into theeconomy. Any money that passes between the government and the private sector is "outside" money. Taxes are outside money. Treasury securities are outside money. Deficits represent the creation of outside money. On the other hand, the money created temporarily via bank loans (credit) is "inside" money. Outside money provides the seed for inside money. Without deficits to originate outside money there would be no inside money. There would be no money at all! If we speak of M2 , a common measure of the money supply, it is dominated by inside money created within the credit cycle. Demand determines how much credit is present. Monetary policy influences demand. Without outside seed money, however, there would be no credit cycle! (5) Recognition by MMT economists that private sector debts and deficits do nothave a government sector equivalent, and that the government effectively eliminates debt and deficits by printing money it needs in excess of revenues is often misinterpreted as meaning the government can spend unlimited amounts without economic consequence. MMT does suggest inflation can be contained via fiscal policy, however this requires there be limits to government spending. [S. Bernanke, pg 364 (2022)] (6) Hamlet, Act 3, Scene 4. References: Wray, L. Randall, “Understanding Modern Money”, 198 pgs, Edward Elgar (1998). Bell, Stephanie, “Do Taxes and Bonds Finance Government Spending,” J. Economic Issues, 34 603-620 (2000). Mosler, Warren, “Soft Currency Economics” 94 pgs ,Valance Economics (2012). Kelton, Stephanie, “The Deficit Myth”, 329 pgs , Public Affairs (2021). Tankus, Nathan, “The Federal Government Always Money-Finances Its Spending: A Restatement,” June 2020 https://nathantankus.substack.com B. Bernanke, “21st Century Monetary Policy,” 480 pgs, W.W. Norton (2022).
Regardless of how much you write it does not change the fact that governments don't print money. Even if their central banks finance the government by printing and buying treasuries then this stokes inflation as we are seeing now. One can't spend more than one earns, the excess must be borrowed and either repaid later by spending less than earning or by declaring bankruptcy. It's really that simple. Nowhere do you explain how it could otherwise work, and how could you, there are no other options. You remain delusional.
DEBT not deficits is the issue economically sane people have. Debt in whatever form and by whomever takes it on has to be repaid .... at some point.
Of course dot.gov can print the way out, like Trump bailed out the market after circuit breaker broke three times. Fiat money is the heart of the modern economy. A country can declare bankruptcy to wipe out the as much as it can, including the US. Dollars will be discredited and people will suffer for a while. In absence of food and energy crisis, people won't die.
Care to explain how this is supposed to work? Most US treasuries are held by Americans. So, you plan on wiping them all out? Because all those funds trading and investing in US treasuries are funded by retiries and ordinary folk. How would you feel if someone told you tomorrow that your 800,000 dollars in your IRA or broker account is written down to zero, zilch. People would take their shotguns and rifles and stage a revolution. Good luck with that.
Ovethrow the government, hang the men in the office for one. French did it. Your retirement money has nothing to do with how the goverment is run. In fact, your retirment balance keep growing precisely because of money printing, big chuck of it went to science and technology research. We are just very lucky to live in peace after WW2. Think about your grandparent generation, got nothing to eat and nowhere to live. Think about before internet, let alone trading online.
Debt is on the balance sheet, deficit is on the income statement. But moey is money, regardless how you write.
Well, what I wrote makes the claim that they are, in the current practice, dollar for dollar related. In other words, the Treasury auctions securities in principle amounts equal to the size of deficits. So under that assertion a dollar of deficit would result in a dollar of debt. Or "ersatz debt" as I claim above.