Originally Posted by
Dr.No.
I don't think it is a coincidence that a lot of the people/sites whom you have linked to have basically gotten nothing right (in terms of the economy and predictions) over the past eight years (going back even further with the exception of a stopped clock).
The debt is equivalent to private savings. If the private sector wants to save net financial assets, it has to either run a surplus with either the foreign sector (trade deficit) or the government sector (budget deficit). In our current situation, with a ~500 billion dollar trade deficit, if the private sector wants to just break even, the federal government has to run a deficit of ~500 billion dollars. When it doesn't, you see a reduction in net financial assets of the private sector. That's what happened prior to the dot com crash and the financial crash.
On top of that, the federal government can't really go broke;
it issues the currency and can always pay the bills. From a legal standpoint, Congress can forbid the treasury from doing so; there are statues in place, for example. But that is only from a legal standpoint and not from a "technical" standpoint. There is nothing technically preventing the US government from running unlimited deficits.
There are only real constraints. When the US government spends money, it is buying (bidding on) the productive capacities of the private sector. For example, when the government wants to build a tank, the private sector needs to find the factory space, building materials, labor, infrastructure, etc. to support that project. Those are resources that cannot be used to build air conditioners or microwaves, or whatever.
That same production cannot be used by someone else.
However, there is often "spare capacity" lying around, and the private sector is able to generate new production very effectively.
To the extent that government spending is met by this new capacity, all is good (great, in fact, as the private sector has to hire people to meet that capacity). To the extent that government spending is competing with already-maximized resources from the private sector, you will get price inflation. At that point, if inflation is to be reined in, the government has to cut its spending or remove the ability of the private sector to bid on that capacity (taxation).
So when it comes to debt, deficits, and government spending, the question should never be "where will we find the money" or "can we afford this?" It should be if the government spending will cause inflation; if there is enough spare capacity in the economy that the government can tap into with its deficit spending.
Connect With Us