The measure of an economy is money. A large
economy needs a larger supply of money than does a small
Therefore, a growing economy needs a growing supply of money.
All money is a form of debt. Therefore, a growing economy requires a growing supply of debt.
U. S. Federal Debt is the safest, most controllable form of debt. The federal government, alone among borrowers, never will default.
Thus, there is no
federal debt or deficit problem, and a
balanced federal budget leads to a
recession or a depression.
The US Federal Debt Clock
So called "federal debt clocks" are common on the Internet. A huge one even hangs on the side of a building in New York City. These ubiquitous clocks purport to show not only the size of the federal debt, but how much of the debt "you," the taxpayer, your children and grandchildren owe.
These clocks are a popular source of misleading information. Neither you nor your children nor your grandchildren owe even one cent of the federal debt. The only entity that owes a debt is a debtor, in this case the federal government. You are not the debtor. You even may be the creditor, if you own any T-bills, T-notes or T-bonds.
The only dollars you ever owe to the government are tax dollars, and there is no relationship between federal debt and taxes. Many times in history, tax rates have gone down while the debt went up. Clearly, taxpayers do not owe taxes that are not levied.
Are the federal government budget, the
U.S. federal debt and the federal budget deficit really too high?
Does a growing
U.S. federal debt harm the economy or help it?
Please review the following chart:
The red bar shows the annual percentage change in
Total U.S. debt(U.S. federal debt, state and local government debt, plus personal and corporate debt). The green bar shows
the annual percentage change in GDP.
The blue bar shows the annual percentage change in U.S. Federal Debt. Annual figures can be found at http://www.federalreserve.gov/releases/z1/current/z1r-2.pdf.
The chart shows that changes in Total U.S. debt parallel changes in GDP. When
Total U.S. debt
grows quickly, the economy prospers. When
Total U.S. debt
grows slowly, the economy lags. The reason: Debt and money are synonymous terms. All money is a form of debt.
Total U.S. debt
is a measure of money in our economy. A growing economy requires a growing supply of money, which means a growing economy requires a growing supply of Total U.S. debt.
Given the following facts about debt and GDP, what conclusions can we draw?
1. Changes in
Total U.S. debt parallel changes in GDP. The greater the increase in
Total U.S. debt, the greater the increase in GDP.
2. U.S. federal dept is one component of
Total U.S. debt.
3. Every depression in U.S. history, including the Great Depression,began with a decrease in the federal budget deficit. Every recovery began with an increase in the federal budget deficit. The most recent recession began with the Clinton federal budget surplus and ended with the Bush federal budget deficits.
4. The federal government can service a debt of any size, because it has the unlimited ability to create money (debt). For the same reason, neither the federal government, nor any of its agencies, can go bankrupt.
5. There is no historical relationship between the federal budget deficit and inflation.
6. There is no historical relationship between interest rates and GDP growth.
Total U.S. debt includes household debt, business debt, state and local governments and US national debt. All U.S. debt is money, and there is no difference between the debt/money you create when you borrow, when a company borrows, when the state and local governments
borrow and the debt/money the federal government creates when it
borrows. All are money.
Popular wisdom holds that increasing the money supply causes
History shows that is not correct. As you can see in the above graph, there is no relationship between changes in
total U.S. debt (money) and a loss in value of money
The value of money is determined by supply and demand. So, although it is true that increasing the money supply without interest rate control would lead to
inflation, an increase in demand will prevent and cure inflation. What increases demand? An increase in interest rates.
In short, deficit spending will not cause
inflation if we increase interest rates, thereby increasing the demand for money. We have the power to prevent
Given these data,
are unnecessary and can be eliminated.
2. FICA is unneeded to support Medicare and Social Security, which as federal agencies, cannot go bankrupt.
,our children and our grandchildren do not, and never will, pay for the federal budget deficit. That is why the U.S. federal debt was able to rise from under $1 trillion to more than $9 trillion, with no increase in
rates and no danger of
4. Prediction: If the federal budget deficit continues to decline, as it now is (here in 2007), we will enter a recession or a depression.
5. For the U.S. to prosper, the federal government budget deficit must increase substantially, pumping money into the economy.
rebates aimed at stimulating the economy were part of President Bush's $1.35 trillion in tax cuts in 2001. They were credited with helping to make the recession short and mild.
When the Federal Reserve became concerned about slow GDP growth, it lowered the interest rates banks had to pay when they borrow. The stated purpose was to increase bank borrowing, that is, to increase the supply of money in the economy.
This was felt to be a prudent approach, because it did not increase the Federal budget deficit. The danger is, of course, banks can go bankrupt if they borrow too much.
The Fed has a faster, safer, more controllable way to increase the supply of money in the economy: Encourage Congress and the President to cut taxes and increase deficit spending.
The effect of adding debt/money to the economy, whether by households, businesses, local governments or the federal government, is identical. The economy
responds exactly the same, no matter where the money comes from.
Actually, there is one difference, and it is an important one. You, businesses, state and local governments can go bankrupt if you borrow more than you can service. The federal government cannot go bankrupt, nor can any of its agencies.
So the Fedís action was the least prudent way to add money to the economy, because it encouraged riskier action by banks.
The above graph shows that U.S. federal debt growth does not always parallel Total U.S. debt growth, though over a period of years they tend in the same direction.
Important: Often the economy does not respond immediately to an increase or decrease in the Federal budget deficit, because other elements of the Total U.S. debt and economy happen to work in opposition. That's why changes in total debt and changes in GDP growth, though closely parallel are not perfectly parallel.
Let us review a familiar example. The complexity of our economy can be compared with the complexity of the weather. The single most important determinant of temperature is the amount of sunlight. In Chicago, the amount of sunlight (length of day and angle of the sun's rays) increases from late December through late June.)
If there were perfect correlation between sunlight and temperature, every day in March would be warmer than the preceding day. Obviously, that is not true, because of other factors, such as wind, clouds, fronts, precipitation, etc. Despite the unpredictability of daily temperature, no one denies that sunlight is the primary factor affecting temperature. What if we chart a very long period -- the 135 years 1872 through 2006 -- and see whether sunlight really does determine temperature.
This chart shows the average daily temperature range, the high temperatures and the low temperatures for 135 consecutive years in Chicago. That is a long time -- surely long enough to reveal whether sunlight does cause temperature. And, in fact, we do see a tendency for late March to be warmer than early March.
But we also see the lack of a smooth curve, even with a data base of 135 years. The hottest day occurred on March 29th, not March 31st. The coldest day occurred on March 5th, not March 1st.
Although the average warmest day was March 31st, as expected, the second average warmest day was March 24th, a full week earlier. Despite receiving more sunlight for 134 years, the six days, March 25th through March 30th, averaged cooler than March 24th.
Does this prove sunlight does not determine temperature? Of course not. It proves only that despite the obvious trend, other factors affect temperature in specific years and even over many years.
In short, GDP can increase, when the Federal budget deficit decreases, because household or business borrowing has increased. There have been times when the Federal budget deficit has remained static or even fallen, while GDP has risen.
There even have been times when Total Debt and GDP have not moved in parallel. This has given the false impression that debt growth is not necessary for GDP growth.
However, just as the trend lines for sunlight and temperature are generally parallel, so to are the trend lines for Total Debt and GDP growth.
All of the above leaves us with three facts:
1. Debt/money growth is necessary for
2. The safest, most controllable form of
debt growth is U.S. government debt growth.
3. This can be accomplished via tax cuts
and spending increases
Associated Press: Jan 13, 2007
Tax rebates aimed at stimulating the economy were part of President Bush's $1.35 trillion in tax cuts in 2001. They were credited with helping to make the recession short and mild.
What do these data tell you? 1817-1821:
U. S. Federal Debt reduced 29%. Depression began 1819.
U. S. Federal Debt reduced 99%. Depression began 1837.
U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
U. S. Federal Debt reduced 57%. Depression began 1893.
U. S. Federal Debt reduced 36%. Depression began 1929.
1998-2001: U. S. Federal Debt reduced 9%. Recession began 2001