Assuming the following headline is correct, it’s short-term bad news for the economy, but great long-term news:

“CBO: Deficits are falling now, are set to soar later” Courtenay Brown. Neil Irwin, Axios

The federal government’s budget deficit is expected to shrink this year before skyrocketing in the years ahead, the Congressional Budget Office (CBO) said Wednesday.

Why is it short-term bad news but great long-term news? Because this is:

1. 1. Federal deficit spending goes into the economy as an economic growth stimulus.
   2. The federal government has infinite dollars; it never can run short of dollars.
   3. The economy does not have infinite dollars. To grow, it needs a growing input of dollars from the federal government.
   4. Federal spending is funded not by federal taxes but by *federal money creation. Federal tax dollars are destroyed upon receipt by the Treasury.
   5. Federal spending does not cause inflation; shortages of critical goods and services cause inflation. Inflations can be cured by additional federal spending to obtain and distribute scarce goods and services.

*Here is how the federal government creates dollars:

• To pay a bill, the federal government sends instructions (not dollars) to the creditor’s bank, instructing the bank to increase the balance in the creditor’s checking account (“Pay to the order of”)

• When the bank does as instructed, new dollars are created and added to the M1 money supply.

• This transaction is then cleared by the Federal Reserve

Similarly, dollars are destroyed when you pay taxes:

• To pay taxes, you take dollars from your checking account. Those dollars were part of the M1 money supply.
• When your dollars reach the Treasury, they disappear from the M1 money supply. They cease to exist in any money supply measure.

Because the Treasury has access to infinite dollars, there can be no money supply measure for Treasury dollars. Your tax dollars are destroyed.

The federal government collects tax dollars, not to fund spending, but to:

1. Control the economy by taxing what the government wishes to discourage and giving tax breaks for what it wishes to encourage.
2. To create demand for dollars, which must be used for tax payments. This helps stabilize the dollar.
3. To create the impression that federal taxes are necessary to fund federal spending. This discourages the public from asking for federal benefits. 

Restricting federal benefit spending on benefits helps widen the Gap between the rich (who run America) and the rest of us. Widening the Gap makes the rich richer.

Why it matters: America’s reprieve from climbing deficits is only temporary as coronavirus-related government spending wanes and tax revenues increase.

The use of the word “reprieve” is misleading. Climbing deficits are essential for economic growth.

By the numbers: The CBO projects the budget deficit will shrink to $1 trillion this year, down from $2.8 trillion in 2021.

Shrinking budget deficits reduce the amount of money coming into the economy and thereby lead to recessions.

It’s expected to rise to more than $2 trillion in 2032, reaching 6.1% of GDP, up from a projected 4.2% this year.

The deficit as a percentage of GDP is a meaningless number. It has no predictive significance.

Federal debt held by the public is estimated to dip from 100% of GDP at the end of this year to 96% in 2023, reflecting rapid inflation that is causing GDP to expand more rapidly. It’s expected to reach 110% of GDP — the highest ever recorded — by the end of the decade.

A meaningless fact. Whether an economy has a high or a low Debt/GDP ratio tells nothing about the health of that economy. For example:

Top Countries with the Lowest Debt-to-GDP Ratios (%)

1. 1. Brunei — 3.2%
   2. Afghanistan — 7.8%
   3. Kuwait — 11.5%
   4. Congo (Dem. Rep.) — 15.2%
   5. Eswatini — 15.5%
   6. Burundi — 15.9%
   7. Palestine — 16.4%
   8. Russia — 17.8%
   9. Botswana — 18.2%
   10. Estonia — 18.2%

Top Countries with the Highest Debt-to-GDP Ratios (%)

1. 1. Venezuela — 350%
   2. Japan — 266%
   3. Sudan — 259%
   4. Greece — 206%
   5. Lebanon — 172%
   6. Cabo Verde — 157%
   7. Italy — 156%
   8. Libya — 155%
   9. Portugal — 134%
   10. Singapore — 131%
   11. Bahrain — 128%
   12. United States — 128%

The Debt/GDP ratios tell you nothing about the economic health of the nations. The data come from an article by WorldPopulationReview.com, which falsely states:

“Nations with a low debt-to-GDP ratio are more likely to be able to repay their debts with relative ease. Nations whose economies struggle to produce income or which have an oversized debt tend to have a high debt-to-GDP ratio.

This is a perfect example of belief overcoming obvious facts.

The U.S. is Monetarily Sovereign. A Monetarily Sovereign nation has the infinite ability to pay debts denominated in that nation’s own sovereign currency. Such countries have the unlimited ability to create sovereign currency. They never can run short.

By contrast, a monetarily non-sovereign — for instance, a euro nation like Greece, Italy, or Portugal — can have difficulty paying its debts.

The belief that a high Debt/GDP ratio mitigates debt repayment ability All the concerns about the U.S. federal deficit or debt being too high are based on ignorance about government financing.

Clearly, the WorldPopulationReview.com authors of the above article know little-to-nothing about Monetary Sovereignty. 

Details: The CBO is now expecting higher interest rates over the coming years than it did in the last forecast, as the Federal Reserve acts to try to contain inflation. Higher interest rates would strain the nation’s fiscal position further.

America’s fiscal position is clear. It always can pay any debt denominated in dollars. Even if the U.S. federal government didn’t collect a penny in taxes, it could pay off any financial obligation.

Further, the so-called federal “debt” is not the federal government’s debt. It is the total of deposits into privately-owned Treasury Security accounts. 

To purchase a T-security (T-bill, T-note, T-bond), you deposit dollars into your T-security account. The government never touches those dollars. Periodically the government adds to the balance, but it never uses the dollars for anything.

The dollars remain in your account until maturity when they are returned to you. This functions similarly to a bank safe deposit box, the contents of which are not a debt of the bank.

Last July, for example, the CBO projected that the 10-year Treasury yield would average 2% in 2023; now that projection is 2.9%.

In the CBO projections, interest costs alone will pass $1 trillion in 2030.

Translation: Federal interest payments will add 1 trillion growth dollars to the economy by 2030. The federal government, being Monetarily Sovereign, easily can make these payments without collecting taxes.

As this post was being written, another relevant article appeared. It is an excellent example of the economic ignorance that mischaracterizes the federal “debt.”

Biden’s Student Loan Debt Forgiveness Plan Now Estimated To Cost $400 Billion
According to a new report for the Congressional Budget Office, student loan debt forgiveness will likely completely wipe out gains made by the Inflation Reduction Act—and then some.
Emma Camp | 9.27.2022

The “gains” are deficit reductions that the author wrongly believes will benefit the economy and mitigate inflation. They will not, though they will mitigate economic growth and probably cause stagflation.

U.S. depressions tend to come on the heels of federal surpluses.

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

The sweeping student loan forgiveness plan will wipe all the budget savings created by the Inflation Reduction Act—and then some.

Translation: “The sweeping student loan forgiveness plan will add federal dollars to the economy, thereby stimulating economic growth.”

In a letter published on Monday, the Congressional Budget Office (CBO), a nonpartisan federal agency, estimated that Biden’s student loan debt forgiveness plan will increase the cost of student loans by $400 billion.

Translation: ” . . . will decrease students’ loan cost by $400 billion. It will stimulate economic growth by keeping more money in the economy and by encouraging more young people to attend and finish college..”

That’s more than the White House originally projected, and it means that the fiscally imprudent debt relief effort will end up swamping the modest budgetary savings achieved by last month’s passage of the Inflation Reduction Act by more than $150 billion.

Translation: ” . . . it means that the fiscally prudent debt relief effort will end up overcoming the economy’s budgetary losses caused by last month’s passage of the Inflation Reduction Act by more than $150 billion.

. . . the plan is likely to massively increase the national deficit by over $150 billion.

Translation: “. . . the plan is likely to massively increase the economy’s money supply by over $150 billion.”

Student loan forgiveness stands to be a massively expensive project—one that not only erases recent gains in spending reduction but manages to make the problem significantly worse than the status quo.

Translation: “Student loan forgiveness stands to be a massively beneficial project—one that not only erases recent economic losses in income reduction but manages to make the economy significantly better than the status quo.”

The so-called “problem” is the increased federal deficit, which is not a problem at all. It is necessary for a growing economy.

Only one thing could make “the problem worse than the status quo”: Running a federal surplus, which invariably leads to recessions or depressions.

SUMMARY

Federal finances differ from personal, business, and state/local government finances.

Those who bemoan a growing federal deficit and debt do not understand that a Monetarily Sovereign entity can pay any size debt instantly. It does so by creating its own sovereign currency.

Gross Domestic Product (GDP), a measure of the economy, is a measure of spending. A growing economy requires a growing supply of money. By deficit spending, the federal government creates new dollars and adds them to the economy. 

Thus, by increasing the money supply, federal deficits help boost GDP. That is why falling federal deficit growth results in recessions, which are cured by increased deficit growth.

For the above reason, the oft-quoted federal Debt/GDP ratio does not indicate anything about the economic health of a Monetarily Sovereign nation. 

Further, the misnamed federal “debt” is not the federal government’s debt. It is the total of privately owned deposits into Treasury Security accounts.

The next time you read or hear negative comments about the federal deficit or debt, know this: The author of those comments doesn’t understand how U.S. federal finances work — or doesn’t want you to understand.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

MONETARY SOVEREIGNTY