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    Atypical is offline

    Cheney Was Right About One Thing: Deficits Don't Matter

    Wednesday 27 April 2011
    by: Ellen Brown, Truthout

    Deficit terrorists" are gutting governments and forcing the privatization of public assets, all in the name of "deficit reduction." But deficits aren't actually a bad thing. In today's monetary scheme, in which most money comes from debt, debt and deficits are actually necessary to have a stable money supply. The public debt is the people's money.

    Former Vice President Dick Cheney famously said, "Deficits don't matter." A staunch Republican, he was arguing against raising taxes on the rich; but today, Republicans seem to have forgotten this maxim. They are bent on stripping social programs, privatizing public assets and gutting unions, all in the name of "deficit reduction."

    Worse, Standard & Poor's has now taken up the hatchet. Some bloggers are calling itblackmail. This private, for-profit rating agency, with a dubious track record of its own, is dictating government policy, threatening to downgrade the government's long-held triple AAA credit rating if Congress fails to deal with its deficit in sufficiently draconian fashion. The threat is a real one, as we've seen with the devastating effects of downgrades in Greece, Ireland, and other struggling countries. Lowered credit ratings force up interest rates and cripple national budgets.

    The biggest threat to the dollar's credit rating, however, may be the game of chicken being played with the federal debt ceiling. Nearly70 percentof Americans are said to be in favor of a freeze on May 16, when the ceiling is due to be raised; and Tea Party-oriented politicians could go along with this scheme to please their constituents.

    If they get what they wish for, the party could be over for the whole economy. The Chinese are dumping US Treasuries and the Fed is backing off from its "quantitative easing" program, in which it has been buying federal securities with money simply created on its books. When the Fed buys Treasuries, the government gets the money nearly interest-free, since the Fed rebates itsprofitsto the government after deducting its costs. When the Chinese and the Fed quit buying Treasuries, interest rates are liable to shoot up; and with a frozen debt ceiling, the government would have to default, since any interest increase on a $14 trillion debt would be a major expenditure. Today, the Treasury is paying a very low .25 percenton securities of nine months or less, and interest on the whole debt is about 3 percent (a total of$414 billionon a debt of $14 trillion in 2010). Greece is paying4.5 percenton its debt, and Venezuela is paying18 percent- six times the 3 percent we're paying on ours. Interest at 18 percent would add $2 trillion to our tax bill. That would mean payingthree timeswhat we're paying now in personal income taxes (projected to be a total of$956 billionin 2011), just to cover the interest.

    There are other alternatives. Congress could cut the military budget - but it probably won't, since this option is never even discussed. It could raise taxes on the rich, but that probably won't happen either. A third option is to slash government services. But which services? How about Social Security? Do you really want to see Grandma panhandling? Congress can't agree on a budget for good reason: there is no good place to cut.

    Fortunately, there is a more satisfactory solution. We can sit back, relax and concede that Cheney was right. Deficits aren't necessarily a bad thing! They don't matter, so long as they are at very low interest rates; and they can be kept at these very low rates either by maintaining our triple A credit rating or by borrowing from the Fed essentially interest-free.

    The Yin and Yang of Money

    Under our current monetary scheme, debt and deficits not only don't matter but are actually necessary in order to maintain a stable money supply. The reason was explained by Marriner Eccles, governor of the Federal Reserve Board, in hearings before the House Committee on Banking and Currency in 1941. Wright Patman asked Eccles how the Federal Reserve got the money to buy government bonds.

    "We created it," Eccles replied.

    "Out of what?"

    "Out of the right to issue credit money."

    "And there is nothing behind it, is there, except our government's credit?"

    "That is what our money system is," Eccles replied."If there were no debts in our money system, there wouldn't be any money."

    That could explain why the US debt hasn't been paid off since 1835. It has just continued to grow and the economy has grown and flourished along with it. A debt that is never paid off isn't really a debt. Financial planner Mark Pash calls it aNational Monetization Account. Government bonds (or debt) are "monetized" (or turned into money). Government bonds and dollar bills are the yin and yang of the money supply, the negative and positive sides of the national balance sheet. To have a plus-1 on one side of the balance sheet, a minus-1 needs to be created on the other.

    Except for coins, all of the money in the US money supply now gets into circulation as a debt to a bank (including the Federal Reserve, the central bank). But private loans zero out when they are repaid. In order to keep the money supply fairly constant, some major player has to incur debt that never gets paid back; and this role is played by the federal government.

    Here is why. Private banks always lend at interest, so more money is always owed back than was created in the first place. In fact, investors of all sorts expect more money back than they paid. That means the debt needs to be not only maintained, but expanded, to keep the economy functioning. When the Fed "takes away the punch bowl" by tightening credit, there is insufficient money to pay off debts; people and businesses go into default; and the economy spins into a recession or depression.

    Maintaining a deficit is particularly important when the private lending market collapses, as it did in 2008 and 2009. Then debt drops off and so does the money supply. Too little money is available to buy the goods on the market, so businesses shut down and workers get laid off, further reducing demand, precipitating a recession. To reverse this deflationary cycle, the government needs to step in with additional public debt to fill the breach.
    Last edited by Atypical; 05-01-2011 at 09:09 PM.

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