An alternative to popular faith
Deficits are necessary. They add money to the economy. A large economy has more money than does a small economy. Therefore a growing economy requires a growing supply of money. Quod erat demonstrandum.
Concern about the federal debt revolves around two beliefs: Someone (often characterized as “our grandchildren”) will have to pay those debts, and large debts cause inflation.
For us citizens, personal debt is concerning, because our debt must be repaid. People go bankrupt when they can’t repay their debts. But, if you owned a magic printing press, and you had the legal right to print as much money as you wished, your debt never would concern you.
Received a bill for a million dollars? No problem. Turn on the magic press and poof!, it’s paid. Unfortunately, you and I don’t own a magic press, so we worry about our debt.
The federal government, uniquely among all U.S. debtors does own that magic printing press. It can pay bills of any size, which is how today, it easily services a gross debt of $12 trillion. Not even during the current recession has any federal check bounced. Not even close.
Still we worry about federal debt as though it were our own. Why? Partly because so many people tell us we owe the federal debt. How silly. Debt is owed by borrowers. We are not the borrowers. In many cases, we are the lenders, the owners of T-securities. The government is the borrower, and we are not the government. There will be no bill collectors on our doorsteps, demanding that we pay our mythical share of the federal debt.
But won’t “our grandchildren” have to pay for the debt through higher taxes? For the past 50 years, tax rates actually have gone down, despite massive deficits. There is no relationship between deficits and tax rates, which are political, not financial, decisions.
What if tax rates were to rise moderately? Let’s do the math. Say in Year One, taxes total $10 trillion and spending totals $11 trillion. Spending exceeds taxes, which causes a $1 trillion debt.
In Year Two, tax rates rise, so taxes now total $11 trillion, but spending rises to $12 trillion, and now the debt has risen to $2 trillion.
How much of Year One’s debt did taxpayers pay? Answer: None. Taxes weren’t even sufficient to pay for Year two’s spending, let alone pay for last year’s debt. The only time taxpayers pay for debt is when taxes exceed spending, i.e a surplus.
That is why surpluses have caused all six depressions in U.S. history. Surpluses, not debt, cost taxpayers money.
The inflation logic is that federal debt increases the money supply (true), which dilutes the value of money (not true). Money value is based not only on supply, but also on demand.
Money supply can increase massively, and still not cause inflation, if demand goes up as much. Demand is determined by risk and reward. Risk is inflation (which is a result, not a cause), so the key to money value is reward.
What is the reward for owning money? One reward is the ability to buy things with it, but in a massive economy like ours, there always are plenty of things to buy. The real reward for owning money is interest. The higher the rates, the more valuable the money. That’s why the Fed raises rates at even the hint of inflation, and that also is why in the past 50 years, there has been no relationship between federal deficits and inflation. None. (See: See Do Deficits cure inflation?
In conclusion, rather than being concerned about federal debt, we should welcome it. Money growth brings economic growth.
Rodger Malcolm Mitchell
For more information, see http://www.rodgermitchell.com