The Government “Debt” Flim Flam

golden eggIs government’s “debt” really a problem, and shouldn’t the federal budget balance? No, but vulture capitalists love creating an artificial crisis to promote public policies that would otherwise never pass on their merits. Such “debt” is obviously not a problem. Why? Unlike Greece, which has to beg the European Central Bank for euros, American government has the legal right to create literally unlimited dollars, so it can never be insolvent. It will run out of dollars when the Bureau of Weights and Measures runs out of inches.

Concerned about inflation? Even that is unlikely now. Inflation occurs when an economy’s capacity, or some critical commodity like oil, is at its production limits, and when unemployment is low. In other words: not now.

Deflation followed America’s Central Bank (“the Fed”) issuing $16 – $29 trillion in 2007-8 to fix the same financial sector whose frauds crashed the economy. Funding social safety nets and state revenue sharing requires far fewer dollars.The Fed’s current policy, “Quantitative Easing,” bids up financial asset prices, again, a remedy for deflation. We need QE for Main Street, not Wall Street.

At its core, the phony budget crisis conflates government “debt” and household debt. For households, debt is undesirable and surplus is desirable, but households use currency, they don’t create it. Currency-creating governments have exactly opposite desires.

Since 1776, the U.S. significantly reduced its “debt” seven times, eliminating it entirely from 1835 – 1837. Economist Randall Wray notes that ”every significant reduction of [government] debt has been followed by a depression…. [Even] our less serious downturns have almost always been preceded by reductions of federal budget deficits.”  Household budget surpluses don’t cause depressions.

Why does this happen? As a legacy of commodity-backed money, when government wants to spend $10,000,the Fed adds a $10,000 credit to its checking account and simultaneously creates an equal amount of government “debt,” so government “debt” is actually a mirror image of the financial assets in the non-government economy. The complete equation is: Government “debt” = non-government financial assets + net exports (which are negative now).

Before the Great Recession, households took on record levels of debt–300% of GDP, far more than government. Repaying that household debt impairs consumer demand now, so withdrawing financial assets from the private sector would lessen demand even more, worsening the recession.

The vulture capitalists who profit from deflation have funded a decades-long campaign to conceal these facts. They profit not only from buying things at distressed sales, but from a privatizing public property when states and localities, who don’t create money, are in trouble. Chicago already sold its parking revenue to Bear Stearns for 10¢ on the dollar, and German banks suggest the Greeks mortgage their ports and the Parthenon. Sacramento proposed selling its parking revenue for 50¢ on the dollar, and headlines warn of school, utility and road privatizations to come as the predatory flim flam persuades more people government “debt” is a problem even though the federal government can create dollars at will.

So before we get too anxious about government “debt,” let’s remember that it’s completely different from household debt. No compelling reason exists to reduce it, and a private sector that is de-leveraging needs the financial assets “fiscal responsibility” proposes removing from the economy. Let’s not shoot ourselves in the foot, shall we?

For more, see Randall Wray’s presentation about currency, or  this presentation about the Fiscal Cliff by Stephanie Kelton on CSPAN.From Randall Wray’s presentation here, quoting a publication of the St. Louis Fed (a bastion of right-wing, monetarist economics): “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills.

mark dempseyIn this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets.”

In short, government can never run out of dollars; it can never be forced to default; it can never be forced to miss a payment; it is never subject to the whims of the “bond vigilantes.”

Mark Dempsey

Posted: Sunday, 18 November 2012

Published by the LA Progressive on November 18, 2012
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About Mark Dempsey

Mark Dempsey is a former Realtor and member of a Sacramento County Planning Advisory Council who tries to maintain his sanity and still live in Sacramento County -- described by a former Supervisor as the county most under the influence of development interests in the
state. This was not a contest we would have liked to win.