This is where the federal gummint gets the money:
Although most of its members complain about our unsustainable national debt, Congress still borrows money unnecessarily by not rescinding a law that was intended only for proper regulation of the former gold standard regime. That law requires that the US Treasury auction an amount of interest-bearing treasuries at least equal to the annual federal budget deficit. Under the gold standard, to dissuade savers from exchanging their currency for the metal and thus depleting our gold supply, those treasuries provided a better investment than gold. The gold standard regime finally failed when our large trade deficit allowed foreign governments to threaten depletion of our store. Since 1973, we have had fiat currency with a floating currency exchange rate so we have no further need to protect our gold supply. However, the law is still the law and Congress still borrows unnecessarily.
Should the Treasury cease auctioning treasuries? Absolutely not! The ultra-safe, interest-bearing instruments are needed for bank reserves, insurance and pension funds, trade collateral, etc. But, without the gold standard, there is no reason to tie the markets need for treasuries to Congress deficit spending. During World War II, our massive spending, effectively without borrowing, was followed by 35 years of prosperity. Cut the tie! Spend as much as can be safely spent and auction as much as can be safely auctioned - each independently of the other!
Despite the fact that fiat currency lets Congress spend without taxing or borrowing, almost all v**ers wrongly believe that taxpayers provide Congress with income. Only the reverse is true: Congress spending provides taxpayers with income. In fact, to spend, Congress needs no income. The Constitution obligates and enables Congress to spend and specifies no spending or debt limit. The only brake on over-spending and/or under-taxing is the resulting inflation that the Fed, by setting moderate interest rates, would not be able to keep below 3%.
When harmful inflation is not a concern, it is senseless for Congress to avoid deficit spending instead of hiring idle resources to work for our nation. When Congress spending limits tax revenue and tax revenue limits Congress spending, that positive feedback tends to drive our economy toward deflation and recession. This essay opposes that senseless dependency and resulting poverty by proposing rational rules for Congress spending and taxing.
Since we net import goods, we net export money and, to avoid deflation and depression, we must replenish our leaking currency supply. Therefore, our annual federal budget deficit must exceed our annual trade deficit. In fact, we need a large public debt because the reserve currency status of the US dollar gives our economy a valuable trade advantage. The US dollar is a reserve currency only because we have a large debt and because about half of it is owned by foreigners. Foreign and domestic buyers invest large amounts in trade collateral and more than half of them use interest-bearing US treasuries to avoid the cost of exchanging currency and to protect their trade collateral somewhat from inflation. Compared with their profit margins, these costs are very important.
For almost two centuries, Britains pound sterling was the worlds reserve currency and their debt-to-GDP ratio grew to more than three times our current 72% without exciting the false cries of unsustainable debt now raised by a majority of Congress. The majority claims that the debt interest expense will bust the budget when the bond vigilantes drive up interest rates. In fact, those rates are dependent, not on the market, but mainly on the overnight federal funds rate set by the Fed. Any upward drift of interest rates will be limited by arbitragers seeking profit when excessive differences appear between interest rates. The profit motive solves that too!
Public debt will become a problem only if we neglect our infrastructure and fall behind other nations in productivity. Barring a lack of physical resources or foreign wars, the greatest dangers to our economy are rather private debt and either harmful inflation or deflation due to over-spending or under-spending by Congress.
In any case, the taxpayer need not be concerned now about the federal debt because the Treasury profits greatly from auctioning treasuries. For the first half of the 2015 fiscal year, the Treasurys auction receipts exceeded the sum of redemptions plus debt interest expense by over $233 B. (Google the Daily Treasury Statement of April 1, 2015: https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=w&fname=15040100.txt). For comparison, that semi-annual profit is about three times the current full annual Social Security deficit. The public debt is managed every year, not by taxes, but by a virtual bond rollover. Our national debt is not a taxpayer burden that must be reduced!
Ideally, Congress should spend just enough on infrastructure to use all our idle resources and tax barely enough to prevent harmful inflation. The ideal fiscal target for Congress is the onset of harmful inflation with moderate interest rates. To achieve that in practice, the administration would have to schedule infrastructure projects to barely avoid a shortage of resources and Congress would have to regulate inflation by granting or revoking tax rebates. That implies a higher tax level from which rebates could then be granted or revoked, as needed.
In the subtraction: A B = C, adding the same quantity to both A and B will yield the same value of C. Likewise, high spending and high tax rates can produce similar deficits to those produced by low spending and low tax rates but the economic difference can be great. When we had high spending and high tax rates, we built the Hoover Dam and the TVA, permitting the electrification of every American farm, the building of the atom bomb, and victory over Japan. Over the following 35 years, we housed and educated the war veterans, saved Europe with the Marshall Plan, created nuclear energy, built the Interstate Highway System, put a man on the moon, and rearmed.
But now, after three decades of lower income tax rates, we have a crumbling infrastructure because Congress pretends to fear that spending will bring inflation. But since the 2008 collapse, the Fed has strived and failed to raise our inflation rate up to 2%. One index of a nations inflation is its cash on hand (total bank deposits plus circulating currency). Prosperous Switzerlands cash on hand-to-GDP ratio is more than twice as large as ours and its sovereign ten-year bonds now have a negative interest rate! So, Congress could increase spending, especially with almost a third of our adult population not in the work force and many millions more seeking full-time work. Besides, the chief source of inflation is excessive bank lending during prosperity and the only cure for that is effective bank regulation which is fiercely opposed by the same Congress majority. Of course, inflation caused by a lack of resources can only be remedied by imposed rationing or self-rationing of the demanded resources.
NASA and DOD projects should not be the only major investments made by the federal government. With idle resources, Congress could build enough desalination plants to furnish all our water needs. Congress built the TVA and could now fix the 60,000 bridges and the 4,000 dams in critical need of repair. Congress electrified every American farm and could now put solar panels on every American roof to reduce atmospheric carbon dioxide and minimize the importance of the Middle East. Further energy savings could come when almost frictionless trains fly at very high speeds through tubes and make long-haul trucking obsolete. There should be no end to new infrastructure, financed only by Congress. Even to fill potholes, states, counties, and communities cannot bank on their taxpayers v****g for a tax increase, never mind making and keeping us the worlds productivity leader!
China is building infrastructure 24/7, without inflation. Our grandchildren deserve as much as theirs.
© 2015 Marvin Sussman All Rights Reserved. Permission granted only to copy entirely.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Bibliography (books are available from Amazon for about $10):
Austerity, (Oxford University Press) by Mark Blyth, Brown University Prof. of International Political Economy.
Freedom from National Debt (Two Harbors Press) by Frank N Newman, former Deputy Secretary, US Treasury.
Seven Deadly Innocent Frauds of Economic Policy (Oxford University Press) by Warren Mosler, economist. The T***h about the National Debt: Five Myths and One Reality (Harvard Business School Press) by Francis X Cavanaugh, US Treasury economist for over 30 years. NewEconomicPerspectives.org, blog managed by Dr. Stephanie Kelton, Chairperson of the Economics Department at UMKC (University of Missouri at Kansas City) and currently Chief Economist for the Senate Budget Committee.
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