So-called federal “debt” isn’t real debt. It is the net total of all deficits, i.e., the net difference between all federal income and outgo.
Because, by law, the federal government does not run a negative balance in its basic checking account (The Treasury General Account), it offsets the bookkeeping “debt” by accepting deposits into Treasury Security accounts (wrongly termed “borrowing”).
This is nothing more than a technical bookkeeping convention. The government does not actually use those deposits to pay its bills. Instead, it creates new dollars, ad hoc, to pay all creditors.
The T-security deposits remain where they are, safe in their accounts. That is what makes them the safest place to deposit unused dollars.
The fundamental purpose of T-securities: To provide an absolutely safe place to store unused dollars, and this safety adds to the stability and worldwide acceptance of dollars.
If the dollars were used, their safety would be compromised, and the fundamental purpose of T-securities would be lost.
There is a widespread belief that deficit spending causes inflation. No evidence exists for that belief. It simply is an article of faith supported by . . . faith.
Here is a comparison of federal deficits (which total to federal “debt”) vs. inflation.
There have been many periods of high federal deficits that correspond to low inflation. There also have been many periods of low deficits and high inflation. This effect could not exist if federal deficit spending caused inflation.
So what does cause inflation?
All inflations are caused by shortages of critical goods and services, the most important of which is oil. The oil price, which is reflected in supply and demand, affects the prices of almost all goods and services.
An oil shortage affects manufacturing costs, agriculture costs, shipping costs, and heating costs. Oil prices affect inflation dramatically:
The other significant driver of inflation is food, which also is affected by supply and demand:
The need for food does not vary significantly. The price of food is affected by supply and production costs.
The supply of food primarily is caused by weather and disease. Production costs especially relate to oil prices which affect shipping, planting, harvesting, and other manufacturing costs.
Finally, lest someone argue that federal deficit spending causes oil prices to rise, we offer the following graph:
There is no historical relationship between federal deficit spending and oil prices. The highs and lows of each do not correspond.
The resistance to federal deficit spending primarily is based on two false premises:
–That our Monetarily Sovereign government somehow could run short of its own sovereign currency, and
–That federal deficit spending causes inflation
Wrong and wrong.
The real reason for complaints about federal deficits is different: Most deficit spending supports the middle- and lower-income groups (Medicare, Medicaid, Obamacare, and the many anti-poverty initiatives).
The income/wealth/power Gap between the rich and the rest makes the rich rich. The wider the Gap, the richer are the rich. Without the Gap, no one would be rich; we all would be the same.
So the rich, who run America, want to widen the Gap by reducing Medicare, Medicaid, and other deficit spending.
To widen the Gap, the rich spread the disinformation that deficit spending causes inflation. And that mantra has become accepted knowledge by the media, politicians, and economists.
And it simply is wrong.
- There is a strong historical relationship between the price of oil (which reflects supply/demand) and inflation
- There is a strong historical relationship between food prices (which reflect oil prices, weather, and disease).
- There is a strong historical relationship between oil prices and food prices.
May we please, at long last, put to bed the unsupported notion that federal deficit spending causes inflation?
Replace it with a factual basis that inflation is caused by shortages, most often shortages of oil, which lead also to shortages of food and other goods and services.
Shortages actually can be cured by federal deficit spending to acquire or produce the scarce goods and services. For example:
- The shortage of oil can be reduced by federal spending to advance the use of renewable energy sources.
The shortage of labor can be reduced by lowering labor costs: Federally funded Medicare for All, the elimination of the FICA tax. and federal support for job training.
The shortage of food can be moderated by government support for better farming practices.
Federal deficit spending is necessary for a healthy economy. Trying to cure inflation by recessing the economy is a fool’s mission, but that is exactly what Congress is trying to do.
In the science of economics, let us finally accept fact over intuition.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell Search #monetarysovereignty
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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.