If federal deficits are bad, why do we run deficits to cure recessions?

While Trump’s and the Republican ascendency in power may be a disaster for American democracy, such as it is, a few tiny glimmers of financial sunlight peek through the darkness.

For the purposes of this post, we’ll ignore the astounding parallels between Trump and Hitler while focusing on the few near-term benefits.

Here are a few excerpts from an article in USA TODAY:

Stocks soared on news of Trump’s election. Bonds sank. Here’s why. Story by Daniel de Visé, 

As Donald Trump emerged victorious in the presidential election Wednesday, stock prices soared. As the stock market rose, the bond market fell.

Stocks roared to record highs Wednesday in the wake of news of Trump’s triumph, signaling an end to the uncertainty of the election cycle and, perhaps, a vote of confidence in his plans for the national economy, some economists said.

On the same day, the yield on 10-year Treasury bonds rose to 4.479%, a four-month high.

A higher bond yield means a declining bond market: Bond prices fall as yields rise. While stock traders rejoiced, bond traders voiced unease with Trump’s fiscal plans.

Trump campaigned on a promise to keep taxes low.

It will be great news for the economy if he keeps that promise. Federal taxes are recessive. They remove dollars from the private sector and transfer them to the federal government, where they are destroyed.

Taxes are paid with dollars from the M2 money supply measure. When they reach the Treasury, they cease to be part of any money supply measure. Effectively, they are destroyed. Destroying M2 dollars is recessive.

Because the federal government can infinitely create dollars at the touch of a computer key, a money supply measure of federal dollars would make no sense.

No matter how many tax dollars you send to the federal government, the federal money supply measure will always be the same: infinite. That is because the U.S. government, unlike state and local governments, is Monetarily Sovereign.

It is 100% impossible for the federal government to unintentionally run short of its own sovereign currency, the dollars it created from thin air in the early 1800s.

Former Fed Chairman Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency. There is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The United States can pay any debt it has because we can always print the money to do that.”

He also proposed sweeping tariffs on imported goods.

This will be bad news for the economy. Import tariffs are federal taxes. Like all other federal taxes, they are paid with M2 dollars that are destroyed when they reach the Treasury. Destroying dollars is recessive.

Worse, tariffs increase consumer prices, which means they add to inflation.

Even worse, tariffs invite retaliatory tariffs. They also reduce exports, which are part of the Gross Domestic Product.

Economists predict a widening deficit in Trump presidency Economists warn that Trump’s plans to preserve and extend tax cuts will widen the federal budget deficit,which stands at $1.8 trillion.

Contrary to popular wisdom, widening the federal budget deficit is good news for the economy. It means the government is pouring more growth dollars into the economy than it is taking out.

Tariffs, meanwhile, could reignite inflation, which the Federal Reserve has battled to cool.

To summarize, import tariffs have two bad outcomes: They increase inflation and remove growth dollars from the economy.

Their ostensible purpose is to protect U.S. industry. A far wiser approach would be to cut federal taxes on businesses and support designated businesses with federal cash and favorable laws.

One example is federal farm subsidies, which boost farm profits without increasing consumer costs.

For bond investors, those worries translate to rising yields. The yield is the interest rate, the amount investors expect to receive in exchange for lending money: in this case, to the federal government. 

Technical point: Because the federal government has the infinite ability to create dollars, it never borrows dollars. Though corporate bonds do represent corporate borrowing, federal bonds do not represent federal borrowing. The same word has two different meanings.

These bonds represent dollars deposited into T-bond accounts for safekeeping. The government never touches the money; it remains the property of the depositor. The purpose is to provide a save place for money holders to keep unused dollars.

The Chinese, for example, would be loath to store their billions of unused dollars in private banks.

In the current economic cycle, bond investors “might perceive there to be more risk of holding U.S. debt if there’s not an eye on a plan for reducing spending.

False. There is no spending-related risk for storing dollars in T-security accounts. The dollars always are 100% safe. This is diametrically the opposite with private sector bonds, which do suffer repayment risk.

The 10-year Treasury bond is considered a benchmark in the bond market. The yield on those bonds “began to climb weeks ago, as investors anticipated a Trump win,” The New York Times reported, “and on Wednesday, the yield on 10-year Treasury notes jumped as much 0.2 percentage points, a huge move in that market.”

This all was mere speculation, having nothing to do with real risk. Bond traders anticipated that other bond traders would think there was more risk, so they acted accordingly. It was a lemming-like approach to trading — trying to do what everyone else was going to do, before they did it.

Long-term bond yields are rising because “many investors expect that the federal government under Trump will maintain high deficit spending,” according to Bankrate, the personal finance site.

The federal government could double or triple its spending without accepting one additional dollar in deposits. Federal spending is not contingent on non-existent federal “borrowing.”

In a broader sense, bond investors worry that “we’re living beyond our means in the United States, and we have been for a very long time,” said Todd Jablonski, global head of multi-asset investing for Principal Asset Management.

This is utter nonsense. The U.S. federal government has infinite “means.” It cannot run short of dollars.

Former Fed Chairman Ben Bernanke: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. It’s not tax money… We simply use the computer to mark up the size of the account.”

Over the long term, Jablonski said, investors “fear that the United States’s creditworthiness is not as impeccable as it was once considered to be.” As the federal deficit grows, investors take on greater risk, and they expect to be paid a higher interest rate for loaning money to the government.

That is absolutely untrue. In 1940, when the federal debt (deposits) totaled only $400 Billion, pundits called it a “ticking time bomb.”

Exactly the same language has been used every year since. Today, after 84 years of hand-wringing, the pundits still make the same claim about our $30 Trillion debt, and we are no closer to insolvency than we were then.

This is part of the Big Lie in economics, where even respected economists continue to make the same “Earth-is-flat.” statements.

Perhaps it is taught in high schools or discussed over drinks. I can’t say, but it seldom is questioned. Strange.

If you would like to watch economists stutter, ask them:

“If federal deficits are bad, why do we run deficits to cure recessions?”

Neither Trump nor Democratic presidential candidate Kamala Harris offered a convincing plan to reduce the deficit on the campaign trail, economists said.

Politicians don’t reduce the deficit because it involves two steps—both economically bad: tax increases and/or spending reduction. Both are recessionary.

Harris promised to raise taxes on the wealthiest Americans and corporations as a source of new revenue.

Raising taxes on the wealthiest Americans has some value, but not for revenue generation. The beneficial purpose would be to narrow the income/wealth/power Gap between the rich and the rest.

Trump, by contrast, pledged to extend and even deepen his previous tax cuts. Trump has made a case that economic growth and job creation would naturally boost revenue.

Trump is correct on both counts. Deepening tax cuts benefits the economy, though he probably would again deepen them for the rich, thereby widening the income/wealth/power Gap, a terrible outcome.

Depending on the details, revenue might be boosted, but that would be bad for the economy.

The bond market may not be convinced. “If there’s a Republican sweep of House, Senate and the presidency, I expect the bond market to be wobbly,” said Jeremy Siegel, finance professor at the Wharton School of the University of Pennsylvania, speaking to CNBC on Election Day.

Yes, the bond market might be “wobbly” (whatever that means), not for functional reasons, ut rather because the Jeremy Siegels of the world predict wobbliness.

In Summary:

1. The federal government is uniquely Monetarily Sovereign over the U.S. dollar. It cannot unintentionally run short of dollars.
2. The federal government does not borrow dollars or owe so-called “debt.” The dollars deposited in T-security accounts are wholly owned by depositors, whom the government pays merely by returning their dollars.
3. The purpose of federal bonds is not to provide the government with spending money. The purpose is to provide a safe place for dollar holders to store unused dollars. This stabilized the value of the dollar.
4. Federal deficit spending and “debt” are not a burden on the government or taxpayers, nor are they a risk to depositors.
5. Economic growth requires federal deficit spending, which adds growth dollars. When deficits are too low, we have recessions, which are cured by increased deficits.

Rodger Malcolm Mitchell

Monetary Sovereignty

Twitter: @rodgermitchell

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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

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