Saturday, November 20, 2010

Myths about the Deficit, Part 2

Part 1 can be found here.

Myth #2) Government deficits leave a debt burden to our children, or put in another way, deficits today mean higher taxes tomorrow.

In reality, debt or no debt, our children get to consume whatever they produce.

This is difficult to explain in terms understandable to a non-economist, but I'll try anyway. No matter what our government's debt is, our children get to use what they produce. When the government spends, it just adjusts the numbers in bank (checking) accounts. When it taxes, it does the same. When it sells bonds or Treasury securities it does the same except that bonds or securities earn interest, just like a savings account. When the security comes due, it 'transfers' the funds from the savings account to the checking account.

So our $13 trillion debt is nothing more than our savings account at the Fed, whether its owned by us, or banks, or the Chinese, or whoever. Government spending and taxation does influence distribution, but deficits will not cause us to go bankrupt and will not leave a burden to our children.

If deficits cause inflation and currency depreciation, then our children's dollars will have less purchasing power, but they still get to consume whatever they produce. They won't be any poorer or have to pay $40,000 to pay off their portion of the debt.

On the other hand, unemployment and underused factory equipment are detrimental to our children. We are losing output that could benefit us and future generations because of too little spending.

It is important to remember that all debt is someone's liability and another person's asset. When the government takes on liabilities, then that means someone else has an asset. As individuals or businesses we can't take on liabilities without limit, but the government can because it has power over its own currency. This can lead to inflation, but again, inflation is NOT a concern right now. We just set a record for the lowest core inflation measurement since it began in 1958.

The burden we are putting on our children's generation is not the debt, but the lack of employment, output, and the increasing income inequality gap.


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