Why federal deficits are necessary.

You often read and hear warnings about the federal “debt” and “deficit.” Let me assure you that you do not owe any part of the federal “debt, ” and your taxes will not be raised to pay the federal “debt.” You have seen articles where the so-called “debt” amounts to a certain number of dollars per American taxpayer, implying that the federal “debt” is your debt. It isn’t. You don’t owe it, and you will never pay it. In fact, that thing called “federal debt” isn’t federal and isn’t debt. The federal “debt” is two separate things united by law. It is the total of federal deficits and the total of outstanding Treasury securities, united semantically but not in reality. The Federal government pays its bills from the “General Fund,” known as “America’s checkbook.” You should understand what money is and isn’t. Money isn’t paper, gold, silver, or any other physical thing. Money is nothing more than numbers on a balance sheet that, by law, lists money. If, for instance, you keep money in a bank, that bank does not have any physical entity called “money.” All of your money is merely numbers on the bank’s balance sheets. Many laws, primarily federal but some state and local, determine these numbers. Ultimately, in America, federal laws reign supreme over how the numbers are handled. The U.S. is Monetarily Sovereign. It is sovereign over the U.S. dollar. It can do anything it wishes regarding the dollar. It can (and does) create and destroy dollars at will and give them any value it chooses. There were times when dollars were valued at a certain amount of silver, and others were valued as amounts of gold. Today, dollars “float free.” They have market value, and the government can change this at will. Dollars exist because of federal laws. We do not mine, grow, or build dollars. All dollars are just balance sheet numbers. Congress and the president determine the numbers on the federal government’s balance sheets. If, for instance, the Social Security Trust Fund (which isn’t a real trust fund), holds about $2.7 trillion. Assume that Congress and the President wanted it to have $5 trillion. Congress simply could vote that the trust fund would now hold $5 trillion, and presto, there would be $5 trillion in the trust fund’s books. There would be no need to borrow, tax, or do anything else but pass a law, and the dollars would suddenly exist. So long as Congress doesn’t lose the ability to pass laws, the federal government and its agencies can never unintentionally run short of dollars. The federal government creates dollars by passing laws, which it can do endlessly. It destroys dollars by accepting payments. To pay your taxes, you or your employer probably withdraw dollars from checking accounts. These dollars are part of the “M2 money supply measure.” The M2 dollars are sent to the IRS or the U.S. Treasury. When they reach the Treasury, they cease to be part of any money supply measure. The Treasury already has the infinite ability to create dollars, and no money supply measure describes an infinite supply. When any amount is added to infinity, the total still is infinity, so adding any number of tax dollars to the Treasury’s supply is not different from adding $0 to the Treasury’s supply. Incoming dollars simply cease to exist. Effectively, they are destroyed. Because federal taxes cease to exist upon receipt, they cannot fund federal spending. The federal government creates all the dollars it spends ad hoc, which means that the payroll tax (FICA) does not fund Social Security or Medicare. Like all other federal agencies, those agencies are funded by laws created by Congress. Being Monetarily Sovereign, The federal government does not borrow dollars. The so-called “federal debt” isn’t federal; it isn’t debt and does not come from borrowing. It is merely a record of dollars flowing in and out. It isn’t federal because the dollars are owned by owners of individual Treasury Securities. It isn’t debt for the same reason. The owners never lose ownership of the dollars, and the federal government never touches those dollars. They remain the property of T-security holders. The so-called “debt” is simply an accounting number.ng number.under Congressional control. Congress could easily pay off the debt simply by passing a law adding $35 trillion to the Federal Reserve’s books. Or it could pass a law adding $70 trillion to the books, thereby giving the Fed a huge surplus. This is what happens when the “debt” increases or decreases: Because of timing and data definition factors, the Federal Reserve presents federal “debt” in at least three different ways. No method is “better” than the others, and all three demonstrate parallel changes. A recession (vertical gray bars) is usually defined as a reduction in gross domestic product (GDP), employment, and consumer spending. The graph demonstrates that:

1. Recessions (the vertical gray bars) occur following a period of reduced debt growth.
2. Recessions are cured during a period of increased debt growth.
3. In most years, there was some debt growth (2000 was a notable exception) but not enough for sustained economic growth.

This makes mathematical sense because GDP = Federal Spending + Non-Federal Spending + Net Exports. Increased federal Spending adds dollars to the economy, and adding dollars increases non-federal spending. When faced with the algebraic certainty that decreased federal dollar input yields recessions and increased federal dollar input cures recessions, Libertarians and other anti-deficit, anti-debt proponents switch to agreeing—but now claim that federal debt growth causes inflation. Their reasoning is that adding dollars increases demand, which, with all other things being held equal, would cause prices to rise. The problem with that philosophy is that when the federal government adds dollars to the economy, all other things are not equal. When demand increases, the economy responds quickly by increasing production to meet the demand. Here is the same graph as above, but with the addition of inflation (purple line):   You see no relationship between changes in federal debt and inflation. The reason is that historically, inflations and hyper-inflations have been caused by supply issues, not by demand issues. When the supply of certain products, notably oil and food, is reduced, the economy cannot reduce demand to meet the new lower supply. We can’t quickly eat less, heat and cool our homes less, and/or drive less. So prices increase. The most recent severe inflation was COVID-related. We had shortages of food, oil, computer chips, metals, transportation, labor, and other needs. The problem was not one of increased demand or caused by federal spending. It was a supply-related shortage, which is the norm. Increased federal spending to cure the shortages helped us escape that severe inflation. THE BOTTOM LINE Despite widespread beliefs that federal spending should be reduced and causes inflation, those beliefs are diametrically wrong. Reduced federal spending causes recessions. And federal spending to prevent and cure shortages prevents and cures inflation. Today, the federal government, laboring under false beliefs, is causing havoc by doing precisely the wrong things: Cutting staff to reduce spending. While that may be an appropriate approach for a private sector, monetarily non-sovereign entity, it is exactly the wrong path for a Monetarily Sovereign federal government. Not understanding the difference is a sign of economic ignorance and an approaching recession, if not a depression.   Rodger Malcolm Mitchell Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell; MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell; https://www.academia.edu/

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A Government’s Sole Purpose is to Improve and Protect The People’s Lives.

MONETARY SOVEREIGNTY