[dkrich]

Do you really need me to substantiate why it is bad to spend more money than you make? I guess I took for granted that the fundamental laws of economics were understood. I guess that was a mistake.

Everybody agrees that running a deficit is harmful. Most disagreement centers around which, if any, cuts in the budget should be made, and how much those cuts will hinder a recovery while the economy is still weak. The U.S. dollar is the worlds' reserve currency, and for that reason alone the U.S. is able to ignore a deficit for some time. But it is a huge mistake to get used to free money and not try to get finances in order. Greece made that mistake for many years and is now paying a huge price (along with the entire European Union).

National Parks are fine. They've been around a long time and that accounts for a rounding error of the federal budget. The greatest areas of concern are Social Security and Medicare/Medicaid. Of course the defense budget is up there too, and I believe defense spending should be cut. The bottom line is that the Federal Government has grown by leaps and bounds over the past few decades and its addiction to rampant spending is making the country poor. You can debate about what should be cut but no increase in taxes is going to pay for this spending spree we are involved in right now. Greece was forced into draconian austerity measures when there were no other options on the table. I sure hope the U.S. learns something from that fiasco before it travels down the same road.

[nhaehnle]

Once you understand sectoral balances [2], you realize that having a deficit tends to be beneficial. It is not clear how large this deficit has to be (and there are certainly times when a surplus makes sense, though those are very rare). It is clear that in the long run average you really need a budget deficit to have a well-functioning economy.

The reason behind that is actually fairly simple and comes from the sectoral balances, which state that the balances of all sectors in the economy have to add up to zero. So if the non-government sector has a surplus, the government sector must have a deficit, and vice versa.

Private actors like to hold monetary assets, i.e. savings, bonds, and so on. This means that somebody else must hold corresponding liabilities. Will the desire to hold liabilities balance the desire to hold assets within the private sector? This is unlikely at best. If there is no outside source of monetary assets, then those private actors who are successful at accumulating assets will force less successful private actors to go into debt until this debt is no longer sustainable.

The logical way out is for the government sector to provide the required monetary assets, which is only possible via a government deficit.

Even more so, given that nominal GDP will continue to rise by inflation + real growth of the economy, there must be a nominal government deficit. Otherwise, the value of private sector net assets must necessarily decrease over time relative to GDP, i.e. the private sector is squeezed out of its asset position. This wealth-squeezing is certainly going to be contractionary. [3]

Under the current institutional arrangement, an ongoing government deficit means increasing government debt [1]. However, unlike for private actors, there is no sustainability problem for a monetarily sovereign government (this is where your comparison with Greece breaks down - Greece is not monetarily sovereign).

If you are genuinely interested in the topic, you may want to read Bill Mitchell's Fiscal Sustainability 101 series, starting here: http://bilbo.economicoutlook.net/blog/?p=2905. His writing is not the most polished, but it's still probably the best analysis on the internet of what fiscal sustainability even means for a monetarily sovereign government.

[1] Alternative arrangements are possible, but unfortunately, they seem to be one of the taboos in our contemporary society.

[2] http://www.slideshare.net/MitchGreen/mmt-basics-you-cannot-c...

[3] The only way I see to reduce private sector assets without contractionary effects is to go to those assets directly, i.e. tax the wealthy. That does make sense for other reasons as well, such as the accumulation of wealth leading to accumulation of power mentioned in the article. However, taxing the wealthy is not something you can deduce from economics alone - there is always a choice.

[dkrich]

I'm not sure what your background is, but I get the sense that you don't really know what you're talking about.

> The reason behind that is actually fairly simple and comes from the sectoral balances, which state that the balances of all sectors in the economy have to add up to zero. So if the non-government sector has a surplus, the government sector must have a deficit, and vice versa.

This is completely false. There have been many instances throughout U.S. history that the U.S. has run surpluses and the economy has boomed. In fact, the better private industry is doing, the lower the deficit should be. That's because more money is being made, and more taxes are collected. If spending maintains a constant level, then the deficit will shrink. The problem is that the government never keeps spending constant. The more money they get, the more they spend. It used to be that deficits were kept in check, though. The difference between the past and present is that now the deficit is larger than it has ever been in U.S. history, by a very wide margin.

> Private actors like to hold monetary assets, i.e. savings, bonds, and so on. This means that somebody else must hold corresponding liabilities.

Again, wrong. There are assets that equal liabilities, such as bonds or accounts receivable. But as a class, assets do not equal liabilities. If I own a factory worth $50 million, then I have equity worth $50 million. Nobody owes me $50 million for my factory.

> The logical way out is for the government sector to provide the required monetary assets, which is only possible via a government deficit.

Ugh. No. IF a government needed to provide monetary assets such as quantitative easing, there is absolutely no requirement to run a deficit to do so. The government can spend out of its surplus budget (if it has one). Again, a deficit means you are spending more than you are taking in. Keep in mind that most countries can't run deficits in perpetuity. If a country like Brazil had a deficit the size of the U.S. they would go bankrupt. It is only because the U.S. dollar is the world's reserve currency that this kind of irresponsibility is allowed for some time.

> Under the current institutional arrangement, an ongoing government deficit means increasing government debt [1]. However, unlike for private actors, there is no sustainability problem for a monetarily sovereign government (this is where your comparison with Greece breaks down - Greece is not monetarily sovereign).

Being monetarily sovereign has nothing to do with it. There are a lot of sovereign countries, Canada, Japan, Korea, that could not run budget deficits in perpetuity. Again, the U.S. is a special case. They hold the world's reserve currency. The moment that changes, then interest rates will spike and inflation will explode. Nobody will want to hold the dollar, so everybody will sell it. That will cause the value to plummet. In fact, the fact that Greece is not monetarily sovereign is precisely why they were able to borrow so much money in the first place. They borrowed from U.S. banks for years. You know why U.S. banks lent to them? Because they hold the same currency as Germany, Italy, and the rest of the EU. If they were still using the Drachma, they couldn't get a loan to buy a used car.

Do you understand that there is no necessary connection between the U.S. printing money and GDP? You seem to believe that somehow the federal government knows how much money to create and this balances perfectly with private industry. That is wrong. The U.S. government, and only the U.S. government can freely print its own money to pay its debts. This has led to an enormous spike in the deficit in the past ten years as politicians have shown no desire to cut spending. They prefer to kick the can down the road. But eventually debts have to be paid. If there is not an unforeseen increase in GDP to pay for the deficit, then it is going to come to a head at some point.

[nhaehnle]

First, I am not sure whether you are perhaps confusing the US with the US government? The current account balance is not the same thing as the budget balance. There have been very few times in history when the US government has run a surplus, so you may be confused about that.

In fact, the better private industry is doing, the lower the deficit should be. That's because more money is being made, and more taxes are collected.

That's true, but the causality only runs in one direction. People seem to believe that if the US government attempts to cut its deficit now, that private industry will be doing better as a result. That notion is ridiculous. The causality works only in the other direction.

The difference between the past and present is that now the deficit is larger than it has ever been in U.S. history, by a very wide margin.

So you get big numbers. Big deal. Big numbers alone do not inherently indicate a problem.

It does make sense to investigate them. However, if there is a problem, then the big numbers themselves are very unlikely to be the root cause. If you stop at the high budget deficit and say "we need to reduce that number, no matter what", you are very likely to make a mistake because your analysis of the situation is incomplete. And no, hand-waving and pointing at incompetent politicians is not a complete analysis of the situation.

There are assets that equal liabilities, such as bonds or accounts receivable. But as a class, assets do not equal liabilities. If I own a factory worth $50 million, then I have equity worth $50 million. Nobody owes me $50 million for my factory.

This is why I used the adjective "monetary" in monetary assets.

IF a government needed to provide monetary assets such as quantitative easing, there is absolutely no requirement to run a deficit to do so.

You are confusing purely monetary operations with fiscal operations. Quantitative easing is purely an asset swap, it does not change the net asset position of the private sector. The only way for the government to provide an increase in net assets to the private sector is by spending more than it taxes. That's a simple mathematical fact from accounting.

Keep in mind that most countries can't run deficits in perpetuity. If a country like Brazil had a deficit the size of the U.S. they would go bankrupt.

A monetarily sovereign government cannot go bankrupt even when it runs a sustained deficit. It may cause inflation, and it may cause the country to run excessive net imports, which would cause their currency will drop relative to other currencies. But that's not bankruptcy.

Japan (which you mentioned later) is actually a good example of all this. Their government debt is beyond 200% of GDP, without any signs of financial trouble even at the distant horizon. The exchange rate of the Yen does not drop. The reason for this is simple: despite the persistent government deficits, Japan is not a net importing country.

In general, I have the impression that your thinking is a bit muddled. For example, you write: The U.S. government, and only the U.S. government can freely print its own money to pay its debts. ... But eventually debts have to be paid.

Yes. By printing money. The US government always "pays its debts" by "printing money". In fact, both US treasuries and US dollar bills are just different types of debts of the government. They differ in maturity and coupon. So the US government "pays its debt" by exchanging one type of debt against another type of debt. Big deal.

If you really thought things through, you would realize that the solvency of the government is not the issue. If there is an issue, then it lies in the potential of inflation that is caused by the accumulation of large amounts of assets in the private sector. If there are large amounts of non-moving financial assets, then there is the potential of a (non-sustained) burst of inflation if/when those assets suddenly start moving simultaneously.

But that is not a function of the size of government debt - it's a function of the size of those assets. If you are truly worried about this issue, then the correct reaction would be to look for ways to eliminate those assets, and cutting government budget spending certainly isn't going to help there. You'd have to tax those assets away, or preempt the inflation by creating inflation yourself, for example using additional government spending that ends up in the pockets of people that do not have large accumulation of assets.

You can also just do nothing. Inflation by a sudden movement of existing private sector assets is a very rare event (think end of the Second World War), and in any case, it is a one-off event. Some people will be unhappy, sure, but at the same time, the burst of spending is good for the economy, will create jobs, etc., so I think the danger tends to be exaggerated by the people likely to lose the most (the rentier class and those who believe they are in it).