The U.S. budget deficit widened to $587 billion for the fiscal year 2016 on slower-than-expected revenues and higher spending for programs, including Social Security and Medicare, the Treasury Department said on Friday.
Why is this good news?
The first question that comes to most people's mind is why is this good news, deficits are bad are they not? In a household or business, yes, they are, as it means you are spending more than you are earning and at some stage will run out of money. The government is, however, not a household or a business; it is a unique creature that can issue currency, no other entity can legally do this.
The government of a currency issuing sovereign nation such as the U.S.A has the privilege of printing its own money. The U.S. government can print money and buy anything that is for sale in USD. It can never run out of money in the same way that a referee at a football match can never run out of points to award for kicking goals.
The government's deficit is the private sector's surplus and that is a simple fact of accounting.
The $587B injection from the government sector into the private sector is an increase in the overall money supply and will result in economic growth or at worse inflation, if it is not matched by a corresponding increase in the output of real goods and services.
The government has given the economy enough money to grow the circular flow of income by a further $587B. If the government had run a surplus it would have reduced the circular flow of income by the amount of the surplus because the private sector held the surplus as savings and these would have been drained out and lost.
The Treasury Department also says that tax revenues are down (slower than expected) which means that more money has been left in the private sector rather than being needlessly drained out.
The national debt is a record of how much money the government has injected into the circular flow of income. If the government had no debt there would be no money in circulation. It is no different to the score at a football game and is merely a record of how many points the referee has awarded during the game. It is a record of how much money is in circulation and how large the circular flow of income is. The bigger the better.
So what can we expect to happen now?
- It is a fact of accounting that the U.S. circular flow of income has grown by $587B. This will result in more employment of real resources of all kinds from people through to capital. Aggregate demand must rise.
It is the nature of the spending that makes the difference. Was the money spent on employing real resources to make productive capital that in turn made the economy larger and more productive, things such as education, health, transport infrastructure, communications. Or was the money spent on non-productive items such as guns, bombs, tanks and large standing armies that consume real resources while not adding to them?
- If the money has not been spent on productive real resources then some inflation can be expected. If the money has been spent wisely then inflation will not result, money will retain its value even though there is more of it in circulation because the asset backing behind the currency has risen with it.
- If the money has not been spent on productive real resources, then a decrease in the currency exchange rate can be expected. If the money has been spent wisely a change in the exchange rate will not result and in fact the exchange rate may rise in line with the increase in the productive capacity of the country as expressed to the outside world by the value of its currency. There would be more real resources behind every dollar in existence.
- If the money were created in the usual way by issue of a bond to commercial banks at interest, then the national debt has risen by that amount and an ongoing debt services charge has been added to future federal budgets and the private banking sector has enjoyed an exorbitant free lunch for lending the government its own money at interest. This is the same principle as if you had your neighbor lend you your own money and paid him interest for lending it to you. One would do this if one did not trust oneself or had been duped. Government spending does not need to be funded this way, it is a choice, a check and balance against spending too much. The right level of spending could also be achieved through the U.S. Treasury directly, within the constraints of the targeted inflation, currency and employment rates. Then politicians would be hand wringing over these rates rather than the size of the national debt.
- Politicians hand wringing about the size of the national debt in the media and calling for a deficit reduction and return to a balanced budget and surplus. (This sounds good but is the opposite of what is required because it shrinks the money supply and the circular flow of income and reduces the economy's ability to grow). At present central banks across the world have admitted that they have reached the end of their monetary stimulus efforts and are calling for governments to help with growth via fiscal policies. Fiscal policies mean spending money into the economy on real resources and not simply adjusting interest rates and increasing private bank federal reserve accounts with which private banks buy treasuries and speculate on foreign currency, but tend not to lend out as intended.
- While the circular flow of income is increasing the chance of an economic recession is much lower. Generally, a recession cannot take place during a real expansion of the circular flow of income. The government is the source of all money, generally recessions are caused by the government running budgetary surpluses that contract the circular flow of income, less money in circulation must result in unemployment of real resources of all kinds, both people and capital. Deflation also results as each dollar gains in value for the simple fact that there are less in circulation.
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