Good News: U.S. Government Posts $44 Billion Deficit In October 2016
*U.S. fiscal year budget deficit widened to $44 billion last month.
*This is good news for the economy as fresh water has been added to the circular flow of income.
*As the monopoly issuer of the USD, only the government can increase the total money supply and it has now done
The U.S. budget deficit widened to $44 billion for October 2016. This time last year the gap was $187 billion, and $587 billion for the year. See my report about that here.
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 or need a loan or a debt haircut, or bankruptcy. 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, it is another ball game altogether and not well understood.
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 U.S government is the monopoly issuer of the USD, it is the referee at the football match and we in the private sector are the players and we want to win as many points as possible and they cost the referee nothing to award, he should award as many as we deserve.
The government's deficit is the private sector's surplus and that is a simple fact of accounting. If the national debt is $20T it is because $20T of business was transacted in that year and could not have been transacted without it.
The $44B injection from the government sector into the private sector last month was an increase in the overall money supply and will result in economic growth or at worse inflation. (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 $44B. 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. When the government runs a surplus the money is not "saved" in the same way as it is in the private sector, the Treasury simply lowers the amount in a column on a spreadsheet and the money ceases to exist. The GDP in that year fall by exactly that amount.
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.
Below is an excellent chart from the Calafia Beach Pundit taken from his article the $3 Trillion Dollar Gap.
In his article the author identifies quite rightly a $3T gap in real GDP. This gap is exactly how much larger the government deficit needs to be in order for the economy to resume its historical GDP growth trend. In order to achieve full employment and an optimized economy the deficit needs to be bigger still.
Remember, the deficit equates to the number of dollars in circulation. If in a year $20T of business is transacted then there needs to be exactly that amount of dollars in circulation and they have only one source and that is the government as the monopoly supplier of the currency.
You know when the deficit is big enough when everybody that is willing and able to work has a job that they are willing and able to do.
At present we have 4.9% official unemployment, this is relatively low. We also have a lower participation rate and in recent years the definition of unemployment has been massaged to make it appear lower than it really is. One could double the official rate to get a more accurate picture of the real situation. In addition we have a lot of people they are under employed and are willing and able to do more than they are at present. It is not their fault the job opportunities are simply not there because the economy is underfunded. It is like a swimming pool with not enough water in it for everybody to have a swim, we need the pool manager to put some more water in and enlarge the pool to allow more people to take part. Water falls free from the sky and money can be created free at the stroke of a keyboard at the U.S Treasury. The analogy holds.
So what can we expect to happen now?
- It is a fact of accounting that the U.S. circular flow of income has grown last month by $44B. This will result in more employment of real resources of all kinds from people through to capital. Aggregate demand must rise.
- If the money has not been spent on productive capacity 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. The hard work of every single participant in the economy backs the USD and that is far more valuable and dynamic than gold.
- If the money has not been spent on productive capacity, 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 in exchange for theirs. There would be more real resources behind every dollar in existence. At present the USD is rising and this is a good sign. I cover that here. It is all linked.
- 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 service 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 democratically targeted inflation, currency and employment rates. Then politicians would then be hand wringing over these rates rather than the size of the national debt which is really only the amount of dollars in circulation at any one time and by its very nature can never go away.
- 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 effortsand are calling for governments to help with growth via fiscal policies. Fiscal policies mean spending money into the economy on real productive capacity 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. When private banks buy treasuries with the excess reserves they have been given all they are doing is moving the money from their checking account at the Federal Reserve to a savings account at the Federal Reserve. It does not equate to more loans to Main Street. The private banks pay 0.25% on the reserves in their checking accounts and then use this money to buy treasuries earning 2% and thus make a 1.75% risk free return. There is an argument that by raising the reserve rate to more than 0.25% will encourage the banks to find alternate investments such as lending to Main Street. The reality is that a banks loaning ability is not limited to the reserves that it holds, a bank's ability to lend is only limited by the number of credit worthy borrowers it is able to lend to and who want to lend. Loans create deposits in the accounts of the borrowers and the bank then goes to the discount window at the Fed and the amount of the loan is generated in the banks reserve account at the Fed and the money comes into being.
- 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. The level of water in the swimming pool becomes lower and less people can participate that are willing and able to do so, they want to swim but the water is not there, it is not their fault it is the fault of the pool manager not doing his job. We have a new pool manager now let us hope that he is a good one and not too stingy with the water.
"Honey I shrank the economy". As the chart shows Clinton's plan was to drain all the money out of the economy. "It's the economy, stupid".
The Clinton administration ran a much celebrated surplus in the late 1990's as did the Coolidge administration in the 1920's. Both successfully shrinking the money supply, letting water out of the swimming pool, until the economy tanked. The Clinton era surplus led to the dot com crash and the Coolidge surplus led to the Great Depression.
Good that we are not shrinking the economy at the moment with similar policies. What we need are wise deficit owls, not doves and hawks bickering among themselves.