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In a previous post I explained that the USA does indeed have a deficit crisis. The deficit is far too LOW.
Here I’ll explain more, and will show why America MUST have a deficit, if America is to have any economy at all. Anyone who screams that the deficit must be reduced, and that the USA must have a balanced budget, is either a liar or a fool. (Unfortunately that includes most people out there.) Any time you see any article that mentions the “deficit crisis,” or which assumes that the deficit must be cut, you automatically know (not suspect; know) that the article is bullshit. (Which includes 99% of the articles out there.)
Before we get going, let’s pause to smirk at Republicans like Paul Ryan, who scream that the deficit is too high. When Clinton was President, the Republicans (including Paul Ryan) correctly screamed that the deficit was not high enough, and that Clinton’s budget surplus was killing the economy. When Bush became President, Republicans correctly dismissed any concerns about the debt, and about the deficit being too large. When Obama became President, the Republicans did an about-face, saying the deficit was too large.
Thus, Republicans are only deficit hawks when they are out of power. When Republicans are in power, they correctly regard the debt and the deficit as non-issues.
These non-issues are the only gimmick that Republicans have when they want to be elected. Republicans and Democrats both favor imperialism, the 1%, and the endless “war on terror,” plus the “war on drugs,” and so on. Thus, when Republicans want to be elected, the only thing they can use to appeal to the public is to falsely claim that, “The debt and the deficit will destroy us! Elect me so I can save you!” When they are elected, they save the nation by ignoring the debt and the deficit that they had screamed about while running for office.
Today, however, this silly charade has become more than politics-as-usual. It is dangerous, because the Republicans have a new scam. They want to use their deficit-is-too-large hysteria as an excuse to privatize Social Security, and reduce Medicare to a voucher system. As I noted at the end of the previous post, this will be a disaster for Americans whose income is less than $107,000 a year (the Social Security cut-off). It will mean that the USA has even more austerity than Greece and Spain.
One more thing. Hopefully you accept the fact that the USA creates its own money out of nothing, does not borrow its money, and can pay any debt no matter how large. Hopefully you accept the fact that the U.S. government does not run on tax revenue (even though 99% of people think it does). Tax revenue is destroyed upon receipt. (In this video Alan Greenspan correctly tells Paul Ryan that there is nothing to prevent the government from creating as much money as it wants. Unfortunately the video sound is barely audible.)
Finally, I hope you accept the fact that U.S. government finances are completely different from household finances. The government is an issuer of money. You and I are users of money. The government has a printing press. You and I do not. Therein lies all the difference.
If you could print money like the government does, then you would indeed be like the government. You too would have no debt crisis or deficit crisis, and you would not have to “live within your means.” You would not need to borrow. You would not need income. You would not worry about having a balanced budget, or “spending money you do not have.” If you wanted more money, you would create it out of nothing, like the government does.
And if you printed money, and a certain amount of it vanished continually, then you would need to run your printing press all the time. This continual vanishing of money actually happens with the government, as we shall see. It is why we must always have a deficit.
WHY WE NEED A DEFICIT (and a huge one)
The less money in the U.S. economy, the more we have a recession or depression. Money can be removed via taxation, and also be removed by “leaks,” each of which reduces the money supply.
The U.S. economy has two continual “leaks” of money. If the government does not compensate for these leaks by continually creating money out of nothing, then the leaks will drain the U.S. economy of money, and the system will crash, even if the government lowers federal taxes to zero. (Most articles claim that the US trade deficit is financed with debt. Wrong! It is financed by government money created out of nothing, debt-free.)
The two major leaks are (1) the trade imbalance and (2) net savings.
The trade imbalance means that dollars are sucked out of the U.S. economy when the USA buys more imports than the USA sells exports. The disparity between imports and exports are a “leak” from the money supply. In 2011 the total “leak” from the U.S. trade deficit was $559.956 billion. (It was $753 billion in 2006.) That is, the USA imported $560 billion more in goods and services than the USA exported. That $560 billion was taken out of the U.S. money supply (although the imported goods and services bring their own value to Americans).
If the USA eliminates its deficit spending (i.e. does not continually run its printing press) in order to have a balanced budget, then the trade imbalance alone will drain the U.S. economy of $560 billion a year, until there is nothing left.
Republicans understand this simple fact when they are in power, but they deny this fact when they are out of power. They scream that the USA must eliminate its deficit, and have a balanced budget, so that the $560-billion-a-year leak will continue until the USA has no money at all.
When Republicans are in power, they (correctly) define “fiscal responsibility” as ignoring the debt and the deficit. When Republicans are out of power, they (falsely) define “fiscal responsibility” as cutting the debt and the deficit.
Regarding the national debt, as we saw in a previous post, this is simply the amount of deposits with the Fed (i.e. the amount of T-bills purchased). They are debts, because they are on loan from depositors, and must be paid back with interest. But they are also assets, because the Fed uses them to run the banking system. The U.S. government does not need or use these deposits (since the government creates its own money), but the banking system does.
The U.S. government is responsible for these debts like an insurance company, but this is no problem, since the insurance company can create enough money to pay any claim. Hence the government has no debt crisis. Anyone who says otherwise is a liar or a fool. The real debt crisis is the public’s debt to banks (student loans, etc).
The second (and far bigger) “leak” of US money is net savings. “Net savings” is whatever money you have left over after you have paid all your expenses (food, rent, mortgage, credit cards, car loan, student loans, etc etc etc), and bought all the consumer goods you reasonably wanted.
Naturally, all of us desire to be net savers if we can be. We want to have something left over after we pay all our bills, buy all our food and consumer goods, and so on. Most of us can’t be savers, since we live from paycheck to paycheck, but the overall economy is filled with institutions that are geared toward net savings. There are pension fund contributions, earnings that compound in pension funds, corporate reserves, IRAs and so on.
Furthermore, corporations have an incentive to retain cash savings when they can. (Apple has $100 billion in savings.) In addition, foreign and domestic investors have $16.1 trillion in savings that are deposited with the Federal Reserve.
All of these savings take money out of circulation. Savings are a form of money, but not a form that is in circulation. It is money removed from the economy until the savings are cashed in. If 15% of your paycheck gets taken away and put into your pension fund, then this is money removed from circulation.
All of these net savings form a giant and continuing “leak” from the money supply. The economy cannot afford to have such a continual leak. Therefore the government continually creates more money out of nothing to compensate for the leak.
Hence the government MUST have a deficit. It MUST create and spend more money into the economy than the government taxes out of it, and the leaks drain from it. If we cut the deficit, then we have no way to compensate for the leaks. The government can tax us (which takes even more money out of circulation), but even if the government pays all those taxes back, it will not compensate for the leaks by even one penny, since the leaks will always continue. Even if the USA had no trade deficit, there would be the leak of net savings.
THE TRADE IMBALANCE DOESN’T MATTER
If other countries want to accept dollars for their goods, and deposit those dollars in Fed accounts by purchasing T-bills, so what? For us, what matters is the quality of our lives. For that, we need jobs. For jobs, we need money, so that we may buy and sell. For money, we need government spending. Banks can't do it. Bank debt is a killer. If a company must borrow from a bank in order to hire people, the company will hire as few as possible.
There is plenty of work to be done in the USA (e.g. repairing the highway and bridge infrastructure) and plenty of people to do the work. We have no shortages of food, technology, materials, or labor. The only shortage is money, which the government can create from nothing. The only reason for the shortage of money is that it is the will of the 1% and their puppet politicians, plus the will of the public, which refuses to see the facts, and insists on obeying their masters. (The liar and the believer are equally to blame. A lie only has power if someone chooses to believe it.)
So if foreigners want to keep accepting our paper for their goods, let them. Will they stop accepting our paper? Unlikely. China is not our banker. We are China’s banker. China can cash out its T-bills at any time, and use the money to buy anything it wants, around the world. The dollar as reserve currency is a convenience for China.
I will go deeper into this trade imbalance topic if anyone challenges me.
BANKS AND THE FEDERAL RESERVE
There is confusion about how banks and the Fed work. In a previous post I mentioned that the U.S. money supply consists of credit and money. What does this mean?
It means that banks and the Fed create money in the form of loans, whereas the government creates money as interest-free money. When you get a $100k loan for a house, the bank marks down its own account (not yours) by $100k, and sends a $100k check to the house seller. The seller puts that check into his own bank, which changes his account to show a $100k credit. Voila: $100k in “money” is created. But the overall bank system depends on you paying back your $100k loan. If you cannot pay it back, then the original bank has a $100k loss. No money comes out of anyone’s pocket (the loss is all on the computer ledgers), but if the losses become big enough, then the bank becomes insolvent. It cannot pay on its own debts to other banks.
Little of this bank money is physical. (Ultimately no money is physical, anywhere in the world.) Instead, it consists of digital notations in computerized ledgers. The small amount of currency that banks keep on hand is to conduct small-scale daily activities.
Now watch closely: all printed dollars come from the government. A bank may own the cash in its vault, but the government prints the actual dollars. What this means is that when you or the bank have a cash dollar, it came from the government, which created and spent that money, and has not yet taxed it back. Therefore all of the cash in circulation is part of the deficit. When you cut the deficit, you not only kill the bank system, you remove cash dollars from the economy. You kill both the credit aspect of the money supply and the cash aspect. Everyone loses.
TOWARD A BETTER WORLD
Some people think that all of the money in the US economy is lent by banks. Such people are 85% correct, in that 85% of the money supply consists of bank loans going back and forth, being issued, traded, and paid off. When a bank loan is paid off, it “kills” that bank money.
However the other 15% of the money supply comes directly from the “public” (i.e. the Congress and Treasury) which does not borrow it, but creates it out of nothing, and spends it into the economy. This is necessary to compensate for the “leaks” described above. Banks can’t do it. A bank loan is not “net savings.” It is a debt.
Generally speaking, though, we are strangled with debt, because of the 85-15 ratio noted above. This ratio is why banks have too much power. Too much of our economy depends on banks. All of the money supply created by banks carries interest (whereas government-created money carries no interest). Hence our debts keep compounding. This is the only true “debt crisis.” It does not affect the government, which creates money from nothing.
In a better world, the situation would be reversed. Instead of 15% our money supply coming directly from the government, interest-free, it would be 85% of our money. The government would continue to create it out of nothing, and dole it out as the economy needs. The money supply and inflation would be controlled by taxation, or else by letting the Fed play with interest rates to maintain the overall demand for (i.e. faith in) dollars. School tuition would be free for every student who maintains at least a C average in exam grades.
This would entail massive deficit spending, but this is no problem as long as the government monitors inflation and the money supply.
Some people wish that the money system were under pubic control, not private control. In reality, the system is already under public (i.e. Congressional) control, but not enough, since 85% of the money supply is under bank control. Still, the Fed must ultimately do what the Congress wants. In this video, Bernanke says, “Of course, we’ll do whatever Congress tells us to do.”
HOW MUCH DEFICIT SPENDING IS ENOUGH?
In a better world, how much interest-free deficit spending from the government would we need? Answer: just enough for the economy to sustain Social Security and Medicare, pay for school tuition, and create enough jobs to employ everyone who is willing and able to work. Not enough to cause inflation. These figures can be made fairly precise. There is no need for an arbitrary limit to the size or duration of the deficit.
Politicians (especially Republicans when they are out of power) issue demands that are arbitrary and political. They want to lower the deficit to…well…whatever. But when Republicans get into power, they correctly say (as Dick Cheney did) that large deficits don’t matter. (This is now changing, since even if Republicans get into power, they will continue to maintain their debt-and-deficit hysteria as an excuse to hand Social Security and Medicare to their masters in Wall Street. As part of this scam, Republicans refer to Social Security and Medicare not as social programs, but as “entitlement programs.”)
Would we ever need austerity? (Less spending and more taxes?) Perhaps, but only to avoid inflation. I do not favor this method. I favor using interest rates to control inflation, as the Fed does now. Taxes rob us of money. Interest rates maintain demand for (i.e. trust in) dollars, thereby warding off inflation.
THE GOD OF AUSTERITY
Politicians say we must have “shared sacrifice,” meaning the 99% must share (i.e. sacrifice) even more of their money to the 1%.
Ironically this propaganda works, since most people cherish the concept of “sacrifice.”
All religions demand sacrifices (human, animal, financial, time, or effort). It is sacrifice that makes religion “real.” When you sacrifice, you do the “right thing” as defined by religious leaders. Attending church services, reciting prayers, donating money, keeping kosher, building cathedrals, celibacy, prescribed garments, travel to Mecca – all are sacrifices dictated by religions. Fail to sacrifice, and you will be punished with hell and ostracism, even torture and murder.
It is sacrifice that gives religion its power. Forcing people to sacrifice is what builds obedience to tyranny. Power comes from teaching that those who do not share these beliefs and sacrifices are evil.
Today, the 1% has taught people throughout the world that sacrifice for the 1% is not only necessary and beneficial, but morally good. And for the 1% and for religions alike, no amount of sacrifice is ever enough. The more you give, the more is demanded. Europeans experience this with austerity. Meanwhile U.S. politicians falsely claim that “We are broke. The god of austerity is not pleased. You must sacrifice more. Always more.”
The “god of austerity” is the 1%, just as the “god” in the Hebrew Old Testament was religious leaders.
Because of this sacrifice-is-good mentality, the masses cling to phrases such as “There is no such thing as a free lunch” (except for god -- i.e. the 1%). Therefore most people reject the facts as not only too easy and too obvious, but morally wrong. “No taxes? No debt? Free money from the government? That’s evil!” (Unless the free money goes to the 1%).
The 1% are accustomed to life being easy. The 99% are uncomfortable with that notion. And, just as religious piety often is strongest among the least educated, so too is the belief in sacrifice for God (i.e. the 1%) the strongest among the least economically knowledgeable.
Hence the masses believe that it is normal and right that they suffer, while the 1% have life handed to them. This is “the will of god” (i.e. of the 1%). The masses accept the austerity that punishes them for the sin of not being wealthy, and rejects what I say here. Hence they remain slaves. (But righteous slaves.)
Deficit hawks are liars, but more annoying are “deficit doves” like Paul Krugman, Robert Reich, Ben Bernanke, and others. “Deficit doves” say yes, we must cut the deficit, but not right now. We must wait until the economy recovers, and then cut the deficit (so we can kill the recovery).
“Deficit doves” do this in order to appeal to the 1% (we must cut the deficit) and the 99% (we must not cut Social Security or Medicare right now).
Behold their self-contradiction. If cutting the deficit is good, then why not cut it now? What difference would it make to wait? If massive cuts will hurt the economy, then why won't small cuts hurt it? If cuts will hurt the economy now, then why won’t they hurt the economy in the future?
(I know Krugman’s bullshit well. He would disagree with everything I say in this post.)
THE WONDROUS CLINTON SURPLUS
A budget surplus means a less-than-zero deficit, which is even worse than a balanced budget with a zero deficit. It means that the government taxes more money out of the economy than the government spends into it. Unless this is reversed, the result is always a depression. The USA has had seven formal depressions, each preceded by a budget surplus. The biggest surplus of all was from 1927-1930, which triggered the Great Depression.
The 1990s were comparatively recession-free until President Clinton dramatically increased taxes. The Congressional Budget Office reported budget surpluses of $69 billion in 1998, $126 billion in 1999, and $236 billion in 2000 during the last three years of Clinton's presidency. Thus, Clinton sucked $426 billion out of the economy. That money was destroyed. It vanished. This was in addition to the money sucked out (but not destroyed) by the twin “leaks” of the trade imbalance and net savings.
Republicans correctly complained as trillions in net savings evaporated. (People and corporations had to dip into their savings in order to keep up with the taxes.)
When Bush took office, he faced a looming depression, so he hired Paul Henry O'Neill as his Treasury Secretary, and told O’Neill to correct the building crisis. However O'Neill had no experience in banking, and did not understand national finances. He favored continuing the surplus. When Bush and Cheney complained, O'Neill started attacking them publicly. Therefore Bush fired O’Neill on 31 Dec 2002, replaced him with Lawrence Summers, and instituted massive tax cuts. Bush’s mistake was to think his wars would create a command economy, like the USA had during WW II, which he thought, would ward off any depression. Instead, what prevented a depression was the housing bubble, which made Americans feel rich from 2003-2008. When the bubble popped at the end of Bush’s second term, the 1% exploited it to crush the masses with austerity. As a result, we have a depression after all.
Today the same Republicans who complained about Clinton’s elimination of the deficit are now screaming that we must eliminate the deficit by cutting social programs and “broadening the base” (i.e. raising taxes on the middle and lower classes). The dream is to privatize Social Security, and give it to Wall Street, which will ensure that the 1% continue to get richer, while the USA never emerges from its current depression.
At this point the only thing that will save us is massive (and genuine) stimulus packages, i.e. increased government spending, i.e. an increase in the deficit. (The idiot Ron Paul thinks this will worsen the depression.) Banks and the Fed cannot save us. Banks only deal in debt, and they are not lending anyway. Corporations cannot save us. They have a scarcity of customers, and so they sit on a mountain of profits, afraid to hire people. China cannot save us, since China’s purchases of T-bills sit in Fed accounts, unused. Besides, Europe is dead, and the BRICS nations are now slipping into a recession.
No, only government spending can save us. The government deficit is our private surplus. A government surplus is our private deficit. Government red ink is our black ink.
Unfortunately we can’t have government spending, since the truth is taboo. Any Congressman who speaks it will be removed. Everyone wants to “cut the deficit.” Even Obama says, “We have no money,” so that his masters in the financial economy can remain dominant over the real economy. Since we “have no money,” we must rely on Wall Street, which wants all the money for itself.
Increased government spending does not mean “bigger government.” It simply means more money in the hands of average people, so that we may escape from the depression.
If you reject what I say in this post, that’s your choice. But if you see the truth of it, and you try to share it with others, be advised.
You will be hit with even greater anger than you encounter when you explain that the holo-hoax is a lie.