Should the government create a law that requires Congress to balance the budget?

[Evangelicalhumanist]

I recall posting "Yes".

To balance a budget spending must match income, yes?
Assume it's balanced. If spending increases, then so
must income, meaning an immediate tax increase.
This is useful because voters will receive immediate
feedback about the effects of spending.
I know I'm repeating myself, but I don't see another
way to say it.

I might consider your approach, but I think I would prefer it to be spread over a number (say 3?) of years -- so serial deficits mandate tax increases to begin paying them down. This would allow for coping with the truly unforseen by "smoothing" the income/spending curves. (Insurance do something like this, legally, by recognizing something called IBNR -- Incurred But Not Reported claims through which they can lower unexpected profit windfalls, and the taxes that go with them.)

 

[Revoltingest]

I might consider your approach, but I think I would prefer it to be spread over a number (say 3?) of years -- so serial deficits mandate tax increases to begin paying them down. This would allow for coping with the truly unforseen by "smoothing" the income/spending curves. (Insurance do something like this, legally, by recognizing something called IBNR -- Incurred But Not Reported claims through which they can lower unexpected profit windfalls, and the taxes that go with them.)

That's practical.
However, I prefer that voters get real time wallet feedback.

 

[Heyo]

That's just it....

If the government had no debt, the citizens wouldn't have any money.

I explained this, but I get that it's hard to understand because it's not very intuitive.

Not only isn't it intuitive, it is also contradicted by the reality.

There is the yearly dispute about the budget. When the government shuts down again, people don't get paid, companies don't get paid, government services are unavailable. That is a real problem that seems to go against the "just print more money" doctrine.

The US doesn't create it's own money, the FED does. The private banks that make up part of the FED scoop off part of the interest the Fed demands from the government. Interest can't be paid with fiat money, it is in real values. Your explanation hides that fact. But we intuitively know that.

The "reality" that is the news tells us every day that money is a scarce commodity. Especially government money. Crumbling roads and bridges - no money to repair them. Not enough low cost housing - not enough money to build more. No functioning health care system - the US can't afford that. We both know that that is a distribution problem, not one of lack of money but it doesn't help your explanation.

 

[EconGuy]

Posted too soon, hold tight....

 

[EconGuy]

Not only isn't it intuitive, it is also contradicted by the reality.

So I admit that my answers are generally written in a way that is meant to speak to people who haven't spent years of hard study. I saw an explanation of gravity the other day that had seven layers of answers from simple, the kind of answer you'd explain to someone in middle school all the way to level 7 where PHD students struggle to fully comprehend. I try to keep my answers at the lower end and if I have a conversation with someone knowledgeable that points out things that I've missed (for ease of understanding), I can turn up the difficulty (on a scale of 1-7, 1 being middle school and 7 being PHD, I probably fall at about a 5ish.....

In order to keep my answers "short" there are many things I have to leave out to keep things flowing (though I'm still guilty of being terribly verbose).

That said, I appreciate your challenging my answers, and we'll go a little deeper.

There is the yearly dispute about the budget.

The debt ceiling? That is a political exercise that is entirely unnecessary

When the government shuts down again, people don't get paid, companies don't get paid, government services are unavailable.

Those are political decisions that are driven by people, in our government who don't understand how our system of money works. Those that do understand can't tell anyone out of fear of being ridiculed.

The US doesn't create it's own money

It absolutely does. If the Federal government needs to pay you, let's say for veterans benefits, the US Treasury issues and instruction that is carried out by the Fed to credit your account equal to the amount the government pays you. The Treasury creates money in this process.

The system of bond sales come after. Creation proceeds bond sales. As such bond sales are not meant to fund the government, rather one method (among many) to maintain the value of the money it creates among other things.

The private banks that make up part of the FED

Here is a piece I wrote about the Fed. It may not address what you said directly, but I think it's important that we agree on how the Fed works.

The Federal Reserve derives its authority from the Congress, which created the System in 1913 with the enactment of the Federal Reserve Act. This central banking "system" has three important features: (1) a central governing board--the Federal Reserve Board of Governors; (2) a decentralized operating structure of 12 Federal Reserve Banks; and (3) a blend of public and private characteristics.

The Board of Governors in Washington, D.C., is an agency of the federal government. The Board--appointed by the President and confirmed by the Senate--provides general guidance for the Federal Reserve System and oversees the 12 Reserve Banks. The Board reports to and is directly accountable to the Congress but, unlike many other public agencies, it is not funded by congressional appropriations. In addition, though the Congress sets the goals for monetary policy, decisions of the Board--and the Fed's monetary policy-setting body, the Federal Open Market Committee--about how to reach those goals do not require approval by the President or anyone else in the executive or legislative branches of government.

Some observers mistakenly consider the Federal Reserve to be a private entity because the Reserve Banks are organized similarly to private corporations. For instance, each of the 12 Reserve Banks operates within its own particular geographic area, or District, of the United States, and each is separately incorporated and has its own board of directors. Commercial banks that are members of the Federal Reserve System hold stock in their District's Reserve Bank. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. In fact, the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments, and maintaining a limited balance in a surplus fund.

There is no stock in "the Fed".

The Fed consists of "agency-like" entities, like the Board of Governors, which members are federally appointed, and who take federal oaths of office.

The Fed also consists of twelve regional banks, which are wholesale banks. They do not make monetary policy. They're banks.

The stock is in the banks. When a member bank buys stock in the Richmond Fed, it's ONLY stock in the regional bank in Richmond.

It gives that bank no say over monetary policy.

Do stockholders get any profits?

No. Like preferred stockholders, they get a guaranteed 6% dividend on paid-in capital. In other words, no matter how much "profit" the regional bank makes, they get the same 6% of their paid- in capital as a dividend.

Banks are also subject to assessments, or cash calls.

Banks cannot trade their stock. They can only sell it back to the regional bank at the same price they bought it.

Banks cannot buy more or less stock. The Fed tells them, based on their size, how much capital they must pay in to be Fed member banks. No matter how much they are assessed, they have one vote. One share, one vote. Your local bank, if a Fed member, has exactly the same number of votes as Citibank - one.

All profits made by regional banks (less operating costs and the 6% dividend) are surrendered to the Board of Governors, who surrenders them to Treasury (the Fed's books are available on their website).

But doesn't the Fed print money and charge is interest on it?

No.

The Fed prints no money. Currency is printed by the Treasury, who "loans" it to the Board of governors (those profits turned over to Treasury are nominally interest on all Federal Reserve Notes on circulation).

The BoG then sells the notes to the regional banks, who sell them to your bank - for one dollar each.

"Printing money" really isn't monetary policy. Currency is just distributed to respond to your demand at the ATM machine.

"But aren't Fed employees and expenses not paid by the Federal government"?

Sure they are. Federal monetary operations make money. Every year, the Fed turns its profits over to Congress. That's the governments money. The Fed's expenses and payroll are paid with money that would be paid to Congress - in other words, they come out of government's pockets.

Also, nobody disputes that the Postal Service is federally owned, and its expenses are paid exactly the same way.

So is the Fed privately owned?

No.

Not even a little bit. It does function as a "private entity" in very limited circumstances. If a truck owned by a regional bank hits you, you have no case against the government -

Just against the regional bank.

But there are no - count 'en, zero - private owners of the Fed.

Remember, being independent within the government is not the same as being independent of the government.

Some good reading on the topic:

Statement for the Press : Letter to Wright Patman, House of Representatives

 

[EconGuy]

The "reality" that is the news tells us every day that money is a scarce commodity. Especially government money. Crumbling roads and bridges - no money to repair them. Not enough low cost housing - not enough money to build more. No functioning health care system - the US can't afford that. We both know that that is a distribution problem, not one of lack of money but it doesn't help your explanation.

Yes, that's what people are told because they don't understand how our system of money really works. I try in my posts to share what I know about how our system works, but the biggest issue is that people have to unlearn what they've been told. Dollars are scarce only to the extent that the US government makes it so. The problem is that people want growth and jobs and infrastructure, but simultaneously want to reduce the debt and deficit. They've been taught that debt is bad, its a sin, it's immoral. Borrowing more than you or I can pay to fulfill unnecessary wants, that's an issue, the US government selling bonds (what we call debt, is not only not a problem, it's necessary.

Repayment of debt and defects over the long term simply isn't possible in a nation with an enormous trade deficit (trade deficits aren't bad, I'd argue they are good, but failure to understand the consequences is what is bad), that has a goal of growth, has a growing population and technological advances that allow more productivity per person, then debt reduction and deficit reduction are recipes for economic disaster.

Look at the 6 periods in US history when the US government ran significant surpluses. They are ALL followed by depression, with the last surplus (small by comparison to the others) was the seed for the Great recession.

Let’s look at some examples of when there’s a serious effort to reduce the debt. below are all six periods of significant debt reduction in the US….

1804-1812: U.S. Federal Debt reduced 48%. Depression began 1807.

1817-1821: U.S. Federal Debt reduced 29%. Depression began 1819.

1823-1836: U.S. Federal Debt reduced 99%. Depression began 1837.

1852-1857: U.S. Federal Debt reduced 59%. Depression began 1857.

1867-1873: U.S. Federal Debt reduced 27%. Depression began 1873.

1880-1893: U.S. Federal Debt reduced 57%. Depression began 1893.

1920-1930: U.S. Federal Debt reduced 36%. Depression began 1929.

Now correlation does not prove causation, but it does lend evidence to it, especially when it happens every time.

Yet people still believe that repaying debt is good and spending is bad.

Going back to the period from 1998–2001.

The recession began in 2001 and should have been much worse, but the housing bubble artificially propped up markets and when that bubble burst we had the great recession in 2008.

 

[Nakosis]

Most people think that federal government spending works like this:

View attachment 81351

It does not. If it did, money in the economy could never increase.

It works more like this:

View attachment 81352

Where:

I = Investment
G= Government spending
X = Exports

and

S = Savings
T=Taxes
M=Imports

There is no circle. One is an inflow, like a faucet, the other is an outflow, like a drain. If the "tub" in this analogy is the economy, and the best economy is one where the tub is filled right to the top without overflowing, then when I say balance the economy not the budget, this is what I'm talking about. The only two variables here the government is directly in control of, are taxes and spending, the inflow and outflow of dollars. I don't care how many go in or out if the tub level (economic health) is being maintained at what most people might agree is good.


Of course, and that's the point of this thread. To ask people if they think balancing the flow of money in vs money out (a balanced budget) is good. I'm saying that a balanced budget is bad because it ignores the economy for the sake of a number.

Sorry for the delayed response. However I want to take a different tact here.

The problem with this view of the economy you are providing is it doesn't show the creation of debt. In order to fill the tub/reservoir the government first has to go into debt. So there is this other "tub" that keeps getting bigger and bigger. People, individuals, banks hold this debt in the form of bonds. This is money the government is required to payback. What doesn't get paid gets charged interest on. So the US keeps floating this debt by paying the interest of it. An amount comes out of the funds the government has to pay interest on the debt.

Currently this is about 8% but will continue to rise as the national debt rises. As well as the entire debt is still owed by the government.

If you refuse to pay down this debt it will continue to grow taking more money from government funding. So we can't just let the debt keep growing. Eventually it will become unsustainable. The people we are selling the debt to may at some point refuse to buy anymore debt. Probably not for a long time, but the risk is there.

However, more important that this, the debt represents more than just dollars owed.

The government uses this money to pay for goods a services. In this exchange, money represents the work of the people. Since the government has this debt, it takes a portion of the work (goods and services) in the form of taxes out of the economy in order to pay its obligation to the debt holders. So who is actually paying of this national debt is you and me through our labor.

A larger and larger portion of our labor goes to the banks and other debt holders in the form of interest. Currently 8% of our labor is taken from us and does nothing except enrich these debt holders. 8% of your labor goes to making the rich, richer.

Not only that but the debt itself remains. We the people of the US are obligated to pay off that entire debt with our labor. If we don't, we are obligating our children and our children's children to to pay with their labor for what we are spending for ourselves today. They don't get any benefit from it. We are actually enslaving our future generations to the rich. If we can't even pay the obligation currently being put on us by the US government, how can we expect our children to?

 

[EconGuy]

The problem with this view of the economy you are providing is it doesn't show the creation of debt. In order to fill the tub/reservoir the government first has to go into debt.

Ahhh, here's where the rubber meets the road. A lot of people believe that the government has to borrow dollars in order to have them. I mean, that only makes sense, you and I can't have money before we borrow it, right? But, it's fairly easy to work out why it's exactly the opposite for the government.

Ask yourself, what comes first, money or debt? Since the US government only accepts it's own dollar to purchase the bonds it sells, how can bond sales come before the dollars that are used to purchase them?

In other words, hypothetically, if we wound the economy back to day one, where there were no dollars and no bonds, how could the government sell bonds before it creates and circulates the dollars to purchase them?

Similarly, when the government spends money each year, it creates and spends money first, bond sales come after.

People tend to think of spending and taxes like this:

When in fact it is linear, with a definite beginning, like this:

So each year we see an amount spent in green and taxed in red. Imagine if the government had run a balanced budget at the very beginning, $75 million in and $75 million out. There would be no money. The government's debt forms the basis of the money that we use. Now, I haven't mentioned the banking system or the fact that the government's money, called reserves is only a small fraction of money circulating, so there is more to it, but if this part isn't understood, the banking part won't make any sense.

Going back to the bathtub.

The government creates money first (G) and it sells bonds after. The reason bonds aren't accounted for is because bonds neither add nor remove money from the economy, they simply shift money from "checking" to "savings".

So there is this other "tub" that keeps getting bigger and bigger.

The tub in the pic above represents the economy and to your point, it gets bigger every year because there are more people and technology makes it possible to do more work with the same number of people. This is why the government has to create and spend more money into the tub to keep it full so all the business that wants to get done can get done. If the tub falls to low, that's when we get recessions and depressions though there can be other reasons.

This is money the government is required to payback. What doesn't get paid gets charged interest on. So the US keeps floating this debt by paying the interest of it. An amount comes out of the funds the government has to pay interest on the debt.

Most people think of government debt like this:

When in fact, it looks more like this:

In another post I pointed out that 2/3rd of the "debt" is money the government owes itself or money earned by individual bondholders here in the US. So when the government pays interest on bonds, people in the private sector are earning income. Of course about 1/3 of that interest is paid to foreign debt holders. But, that's a whole other conversation. Most people have no idea how a nation like China comes to hold about $3.2 trillion dollars (about $1 trillion of that is in bonds). Does anyone stop and think why in the world a nation like China would "fund" our debt? Why would they give the US any money at all? The answer is they have to, but that is best left to a new thread.

Currently this is about 8% but will continue to rise as the national debt rises. As well as the entire debt is still owed by the government.

So what? As I showed before, the amount if interest paid on the debt relative to the size of the economy is the same as it was in 1945.

Still less than 2% of GDP. Now, for what its worth I think the Fed raising rates is a mistake. Why? Because the rational is that it's supposed to slow spending by reducing purchases. But few people consider that rates adds money to the economy in for form of interest paid on debt.

Which is why the average person would tell you the economy is bad, while Wall St continues to hit record highs. Why? Because the government is paying billions in interest to bond holders who tend to be in the investor class. It also causes the disparity between the middle and upperclasses to increase.

The government uses this money to pay for goods a services. In this exchange, money represents the work of the people. Since the government has this debt, it takes a portion of the work (goods and services) in the form of taxes out of the economy in order to pay its obligation to the debt holders. So who is actually paying of this national debt is you and me through our labor.

Your right, but like my illustration above, it is the lower and middle classes that, as you say, work. While the government pays interest to the investor class. It's literally welfare for the rich.

If the government wanted to control inflation the solution should have been to increase taxes on the people who are doing most of the spending. Raising interest rates doesn't accomplish the goal the Fed thinks it does. It's just a transfer of wealth from the poor to the rich, as you say, the middle class works and the wealthy get paid interest for holding bonds.

So to be clear, I'm not defending government policy, I'm simply trying to explain that the system of debt does not work the way that most people think.

A larger and larger portion of our labor goes to the banks and other debt holders in the form of interest. Currently 8% of our labor is taken from us and does nothing except enrich these debt holders. 8% of your labor goes to making the rich, richer.

Amen brother. I think we agree more than you might think. The first step to changing this policy is for people to understand that the debt isn't some ticking time bomb that our kids are going to have to pay. That idea is what keeps the middle class down. No, the solution is to tax more on people earning $500k or more, not to repay the debt, that can't happen, but to keep the disparity between the middle class and the wealthy at a healthy level. And right now, when the Walton family has more wealth than 30% of the country.

We the people of the US are obligated to pay off that entire debt with our labor.

No, we don't have to repay the debt. It can and should exist in perpetuity. It is that belief that keeps the wealthy ahead. They want you focused on debt, and interest rates while they lower taxes. Taxes need to increase on the wealthy. Why? Because when just a handful of people can create a hedge fund will trillions of dollars and the goal of that hedge fund is profit, people get hurt and suffer.


There was a time when investment was in things like factories and worker training, but now we have hedge funds buying up trailer parks so they can raise lot rents so that people can't afford to live there and are forced to abandon their homes, homes they paid for, because they cannot afford to move them. That's horrible, but it's the result of a class of people that has so much money they use it to make more, and more.....

If you have Netflix, this is worth a watch....

Addressing Obama's comment. They say that Dems and R's don't agree on anything.

I made this vid to show that D's and R's agree on one thing, and they are all wrong.....

They are all wrong and everything I've said, backed with sources and evidence proves it.

The debt as a ticking time bomb is a lie that goes back 80 years. At what point are we going to realize that the debt is not what we're being told?



-Cheers

 

[Heyo]

Ahhh, here's where the rubber meets the road. A lot of people believe that the government has to borrow dollars in order to have them. I mean, that only makes sense, you and I can't have money before we borrow it, right? But, it's fairly easy to work out why it's exactly the opposite for the government.

Ask yourself, what comes first, money or debt? Since the US government only accepts it's own dollar to purchase the bonds it sells, how can bond sales come before the dollars that are used to purchase them?

In other words, hypothetically, if we wound the economy back to day one, where there were no dollars and no bonds, how could the government sell bonds before it creates and circulates the dollars to purchase them?

Similarly, when the government spends money each year, it creates and spends money first, bond sales come after.

People tend to think of spending and taxes like this:

View attachment 81573

When in fact it is linear, with a definite beginning, like this:

View attachment 81574


So each year we see an amount spent in green and taxed in red. Imagine if the government had run a balanced budget at the very beginning, $75 million in and $75 million out. There would be no money. The government's debt forms the basis of the money that we use. Now, I haven't mentioned the banking system or the fact that the government's money, called reserves is only a small fraction of money circulating, so there is more to it, but if this part isn't understood, the banking part won't make any sense.

Going back to the bathtub.

View attachment 81575

The government creates money first (G) and it sells bonds after. The reason bonds aren't accounted for is because bonds neither add nor remove money from the economy, they simply shift money from "checking" to "savings".


The tub in the pic above represents the economy and to your point, it gets bigger every year because there are more people and technology makes it possible to do more work with the same number of people. This is why the government has to create and spend more money into the tub to keep it full so all the business that wants to get done can get done. If the tub falls to low, that's when we get recessions and depressions though there can be other reasons.


Most people think of government debt like this:

View attachment 81576

When in fact, it looks more like this:

View attachment 81577

In another post I pointed out that 2/3rd of the "debt" is money the government owes itself or money earned by individual bondholders here in the US. So when the government pays interest on bonds, people in the private sector are earning income. Of course about 1/3 of that interest is paid to foreign debt holders. But, that's a whole other conversation. Most people have no idea how a nation like China comes to hold about $3.2 trillion dollars (about $1 trillion of that is in bonds). Does anyone stop and think why in the world a nation like China would "fund" our debt? Why would they give the US any money at all? The answer is they have to, but that is best left to a new thread.


So what? As I showed before, the amount if interest paid on the debt relative to the size of the economy is the same as it was in 1945.

View attachment 81578

Still less than 2% of GDP. Now, for what its worth I think the Fed raising rates is a mistake. Why? Because the rational is that it's supposed to slow spending by reducing purchases. But few people consider that rates adds money to the economy in for form of interest paid on debt.

Which is why the average person would tell you the economy is bad, while Wall St continues to hit record highs. Why? Because the government is paying billions in interest to bond holders who tend to be in the investor class. It also causes the disparity between the middle and upperclasses to increase.


Your right, but like my illustration above, it is the lower and middle classes that, as you say, work. While the government pays interest to the investor class. It's literally welfare for the rich.

If the government wanted to control inflation the solution should have been to increase taxes on the people who are doing most of the spending. Raising interest rates doesn't accomplish the goal the Fed thinks it does. It's just a transfer of wealth from the poor to the rich, as you say, the middle class works and the wealthy get paid interest for holding bonds.

So to be clear, I'm not defending government policy, I'm simply trying to explain that the system of debt does not work the way that most people think.


Amen brother. I think we agree more than you might think. The first step to changing this policy is for people to understand that the debt isn't some ticking time bomb that our kids are going to have to pay. That idea is what keeps the middle class down. No, the solution is to tax more on people earning $500k or more, not to repay the debt, that can't happen, but to keep the disparity between the middle class and the wealthy at a healthy level. And right now, when the Walton family has more wealth than 30% of the country.


No, we don't have to repay the debt. It can and should exist in perpetuity. It is that belief that keeps the wealthy ahead. They want you focused on debt, and interest rates while they lower taxes. Taxes need to increase on the wealthy. Why? Because when just a handful of people can create a hedge fund will trillions of dollars and the goal of that hedge fund is profit, people get hurt and suffer.


There was a time when investment was in things like factories and worker training, but now we have hedge funds buying up trailer parks so they can raise lot rents so that people can't afford to live there and are forced to abandon their homes, homes they paid for, because they cannot afford to move them. That's horrible, but it's the result of a class of people that has so much money they use it to make more, and more.....

If you have Netflix, this is worth a watch....

Addressing Obama's comment. They say that Dems and R's don't agree on anything.

I made this vid to show that D's and R's agree on one thing, and they are all wrong.....

They are all wrong and everything I've said, backed with sources and evidence proves it.

The debt as a ticking time bomb is a lie that goes back 80 years. At what point are we going to realize that the debt is not what we're being told?



-Cheers

It still sounds as if there is no real value in the debt.

Let's shrink the government a bit - and the country also:
We have a little town and the mayor wants to build a town hall. Without any money, he'd have to convince all the people to get shovels and pikes and build it.
He could also pay the local building company with money he created and tax the people to get the value that that money represents. If there was no real value behind the money, the builders wouldn't start working. So the people would have to give real values (goods and labour) to the building company for them to build the hall. Money just makes that process a bit in-transparent.
Now add a banker. The mayor goes to the bank and lends money for interest. The process is similar, the people pay the builders for a town hall. But now they also have to have to pay the banker who just did a little book keeping.

In a small town that might even work but in the real world, through all the in-transparency, all the real values get redistributed and some people get much more than their labour is worth it. When the people realise that after the deal they have worked hard to help build the town hall and their life hasn't changed much except there is now a town hall they can be proud of and the mayor, the builder and the banker now live in mansions, they'd suspect that something went wrong.

 

[Nakosis]

Ahhh, here's where the rubber meets the road. A lot of people believe that the government has to borrow dollars in order to have them. I mean, that only makes sense, you and I can't have money before we borrow it, right? But, it's fairly easy to work out why it's exactly the opposite for the government.

Ask yourself, what comes first, money or debt? Since the US government only accepts it's own dollar to purchase the bonds it sells, how can bond sales come before the dollars that are used to purchase them?

In other words, hypothetically, if we wound the economy back to day one, where there were no dollars and no bonds, how could the government sell bonds before it creates and circulates the dollars to purchase them?

Similarly, when the government spends money each year, it creates and spends money first, bond sales come after.

Money and debt come into existence at the same time. One doesn't exist without the other. That is how it works.

People tend to think of spending and taxes like this:

View attachment 81573

When in fact it is linear, with a definite beginning, like this:

View attachment 81574


So each year we see an amount spent in green and taxed in red. Imagine if the government had run a balanced budget at the very beginning, $75 million in and $75 million out. There would be no money. The government's debt forms the basis of the money that we use. Now, I haven't mentioned the banking system or the fact that the government's money, called reserves is only a small fraction of money circulating, so there is more to it, but if this part isn't understood, the banking part won't make any sense.

There exists money already in the economy. The money that government spends comes firstly form tax revenue. It is only after spending in excess of the tax revenue that new money gets created by selling bonds(debt). If we only spent the tax revenue, yes no new debt/money would be created.

You are showing how it has been dealt with recently. that doesn't mean it is the way it has to be or should be dealt with.

Going back to the bathtub.

View attachment 81575

The government creates money first (G) and it sells bonds after. The reason bonds aren't accounted for is because bonds neither add nor remove money from the economy, they simply shift money from "checking" to "savings".

No that's wrong. Money and debt come into existence at the same time. Money has no value without debt. The bond creates the money and the money creates the bond. You don't want you account for the debt because when you do you can see the flaw in your POV.

The tub in the pic above represents the economy and to your point, it gets bigger every year because there are more people and technology makes it possible to do more work with the same number of people. This is why the government has to create and spend more money into the tub to keep it full so all the business that wants to get done can get done. If the tub falls to low, that's when we get recessions and depressions though there can be other reasons.

Not really. The government doesn't have to create and or spend more money. It's not necessary but it may have good reason to do so.

Private banks also have the ability to create money. The government could spend only the tax revenue it receives and let private banks handle money creation.

Most people think of government debt like this:

View attachment 81576

When in fact, it looks more like this:

View attachment 81577

In another post I pointed out that 2/3rd of the "debt" is money the government owes itself or money earned by individual bondholders here in the US. So when the government pays interest on bonds, people in the private sector are earning income. Of course about 1/3 of that interest is paid to foreign debt holders. But, that's a whole other conversation. Most people have no idea how a nation like China comes to hold about $3.2 trillion dollars (about $1 trillion of that is in bonds). Does anyone stop and think why in the world a nation like China would "fund" our debt? Why would they give the US any money at all? The answer is they have to, but that is best left to a new thread.

They don't have to but since the US dollar is part of the world economy it is beneficial for them to buy this debt. However, regardless of who owns it, the debt remains to be accounted for.

So what? As I showed before, the amount if interest paid on the debt relative to the size of the economy is the same as it was in 1945.

View attachment 81578

Still less than 2% of GDP. Now, for what its worth I think the Fed raising rates is a mistake. Why? Because the rational is that it's supposed to slow spending by reducing purchases. But few people consider that rates adds money to the economy in for form of interest paid on debt.

Which is why the average person would tell you the economy is bad, while Wall St continues to hit record highs. Why? Because the government is paying billions in interest to bond holders who tend to be in the investor class. It also causes the disparity between the middle and upperclasses to increase.


Your right, but like my illustration above, it is the lower and middle classes that, as you say, work. While the government pays interest to the investor class. It's literally welfare for the rich.

Yes, the rich are getting richer by the government creating new debt. The middle class and poor are funding this by their labor.

If the government wanted to control inflation the solution should have been to increase taxes on the people who are doing most of the spending. Raising interest rates doesn't accomplish the goal the Fed thinks it does. It's just a transfer of wealth from the poor to the rich, as you say, the middle class works and the wealthy get paid interest for holding bonds.

So to be clear, I'm not defending government policy, I'm simply trying to explain that the system of debt does not work the way that most people think.

It doesn't work in the way you think either at least in the sense of not worrying about debt creation.

Amen brother. I think we agree more than you might think. The first step to changing this policy is for people to understand that the debt isn't some ticking time bomb that our kids are going to have to pay. That idea is what keeps the middle class down. No, the solution is to tax more on people earning $500k or more, not to repay the debt, that can't happen, but to keep the disparity between the middle class and the wealthy at a healthy level. And right now, when the Walton family has more wealth than 30% of the country.

Why? Why tax them when according to you, the government can simply help the middle class and poor by creating more debt?

No, we don't have to repay the debt. It can and should exist in perpetuity. It is that belief that keeps the wealthy ahead. They want you focused on debt, and interest rates while they lower taxes. Taxes need to increase on the wealthy. Why? Because when just a handful of people can create a hedge fund will trillions of dollars and the goal of that hedge fund is profit, people get hurt and suffer.

If we don't have to repay this debt then why tax the rich? To just punish them for being rich?

There was a time when investment was in things like factories and worker training, but now we have hedge funds buying up trailer parks so they can raise lot rents so that people can't afford to live there and are forced to abandon their homes, homes they paid for, because they cannot afford to move them. That's horrible, but it's the result of a class of people that has so much money they use it to make more, and more.....

Yes there is an excess of money created by government spending. A majority if which gets funneled to the already wealthy.

If you have Netflix, this is worth a watch....

Addressing Obama's comment. They say that Dems and R's don't agree on anything.

I made this vid to show that D's and R's agree on one thing, and they are all wrong.....

They are all wrong and everything I've said, backed with sources and evidence proves it.

The debt as a ticking time bomb is a lie that goes back 80 years. At what point are we going to realize that the debt is not what we're being told?

-Cheers

Sorry, I don't have Netflix.

Debt is debt. It means somebody owes somebody something. It has to be repaid or defaulting on which means somebody's financial worth will disappear. I'm betting it is unlikely to be the rich.

 

[EconGuy]

Money and debt come into existence at the same time. One doesn't exist without the other. That is how it works.

Agreed, that's what I've been saying all along. The government creates dollars and spends them into the economy and records the money it creates as debt. Every dollar/ debt is created as a debt asset pair.

It's simple double entry accounting.

But bond sales come after and as a result bonds don't fund the government, it's government money creation that makes it possible to purchase bonds. Look, take the time to research, don't take my word for it. The government creates a budget, it creates money and spends it, then it sells bonds after. It has been this way since the government stopped redeeming dollars for gold in 1934.

There exists money already in the economy.

That's true, there was money in the economy prior to the shift of our fiat economy. But, let me ask you, the M3 money stock in the US was $589 billion in 1970, today the government's debt is $32 trillion. How can you borrow $32 trillion from $589 billion? Remember that M3 is ALL money, including bank money.

It isn't possible unless the government can create money ex-nihilo. You can't borrow $32 trillion from less than $600 billion.

You are showing how it has been dealt with recently. that doesn't mean it is the way it has to be or should be dealt with.

Quite right, I'm not saying that this is how the money system should work, simply trying to explain how it does work.

The money that government spends comes firstly form tax revenue.

Again, spending comes first, then taxes. Taxes don't fund spending at the Federal level (at state level, yes, but at the Federal level no. You cannot borrow $32 trillion dollars from the $589 billion that was in the economy in 1970 when fiat began.

And if you're tempted to say the money comes from foreign sources, that wouldn't explain it either. The US government only sells bonds in US dollars. The money that foreign sources use to purchase bonds comes from US dollars earned from exports from other nations (we import there exports and they import and we export our dollars). In other words, that's our money.

How do you think that the government of China got $1 trillion US dollars to buy bonds? Understanding this is key.

No that's wrong. Money and debt come into existence at the same time. Money has no value without debt. The bond creates the money and the money creates the bond. You don't want you account for the debt because when you do you can see the flaw in your POV.

Again, I don't disagree, the problem in your thinking is that you think that the government can sell bonds without first creating and circulating the money into the economy to buy them.

A fiat economy can start with nothing, create dollars and purchase goods from the private sector which puts the dollars into circulation to pay taxes and buy bonds. Then after the money is in circulation it taxes and sells bonds as a way to maintain the appropriate level of scarcity of the dollar.

Private banks also have the ability to create money. The government could spend only the tax revenue it receives and let private banks handle money creation.

This is where things get complicated. You are correct in saying that banks create money, as a matter of fact the overwhelming amount of money in the economy is create via the banking system. However the money created in the banking system is limited by reserves which is money created by the government. Banks cannot create money without acquiring reserves.

Also, just like the government creates a debt asset pair banks create debt asset pairs as well.

Yes, the rich are getting richer by the government creating new debt. The middle class and poor are funding this by their labor.

While I think we can agree that the system favors the very wealthy, saying that the poor are "funding" though labor is an interesting thing to say. People need and want jobs and jobs consist of labor. There's nothing inherently wrong with the government creating money and purchasing the things it needs from the private sector.

t doesn't work in the way you think either at least in the sense of not worrying about debt creation.

So what is the consequence of debt creation? So far all you've said is labor, which are jobs. Again, nothing wrong with people working. So what's the issue?

Why? Why tax them when according to you, the government can simply help the middle class and poor by creating more debt?

The purpose of taxes....

1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
3. To express public policy in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.

And, as I said, taxes also prevent people from getting so wealthy they can form small groups that control hundreds of billion if not trillions of dollars and manipulate markets and government in a way that hurts the average person.

To your point, the government can create debt (to itself) and fiscal assets (to the private sector) and use them to purchase things that are needed, healthcare, educations, infrastructure. But the wealthy have you convinced that debt is the problem so you fight against your own best interests.

If we don't have to repay this debt then why tax the rich? To just punish them for being rich?

See above.

Yes there is an excess of money created by government spending. A majority if which gets funneled to the already wealthy.

That's a problem of policy, not the system. If more people understood the system, they could support representatives that could do more in the public interest. Instead we have politicians demanding debt repayment. To what end? What get's better when debt is repaid? Tell me.

It means somebody owes somebody something.

The government creates debt from nothing, ex-nihilo, when debt is repaid it returns to nothing. The government sells bonds as an alternate to taxation. Why? Because taxation removes money from the economy, when dollars are held as bonds they aren't being spent. The Government could sell fewer bonds and tax more.

If you don't believe that, tell us, where do net new dollars come from?

But you really need to understand how the trade deficit influences the debt.

When we spend money on foreign goods that's money that's no longer circulating in our economy. Right now there's approximately $6 trillion US dollars held by foreign interests. That's 6 trillion dollars that's not circulating in our economy. If we didn't recreate every dollar remove from our economy that is currently held by foreign interest we'd have $6 trillion dollars less circulating in the US economy. We'd be in a deep depression.

It has to be repaid or defaulting on which means somebody's financial worth will disappear.

Few things, The government, so far this year as repaid $126 trillion dollars in debt. The debt is repaid every single day.

If you mean the debt has to be paid down, Why?

And the US government will never ever default on it's debt (unless it chooses to). Remember the US government creates dollars, it can create all the dollars it needs to pay debt.

Now don't misread what I just said. I'm not suggesting that there won't ever be consequences to blindly creating dollars and repaying debt, just that one of those consequences will not be the government defaulting (unless stupid politicians who don't understand our system of money choose to).

The bond creates the money and the money creates the bond. You don't want you account for the debt because when you do you can see the flaw in your POV.

That's false, the Treasury spends money by instructing the Federal reserve to credit the accounts of the people that it wants to pay. Bond sales and taxes come after, not before.

As far as accounting for the debt, what is it I have to account for?

 

[EconGuy]

It still sounds as if there is no real value in the debt.

Debt makes the system of money we have possible.

That said, debt isn't something that has to be repaid like you're told. The debt level is relative to the money we need in the economy to do the business the economy wants to do.

Let's shrink the government a bit

Why?

Further....

Here is year-over-year expiators for government salaries.

As a matter of fact, total salaries as a percentage of government spending is one of the lowest in the world.

What is it that needs to shrink?

We have a little town and the mayor wants to build a town hall. Without any money, he'd have to convince all the people to get shovels and pikes and build it.

The federal government is different than the state as states cannot create money like the Federal government.

 

[Copernicus]

If you have Netflix, this is worth a watch....

Addressing Obama's comment. They say that Dems and R's don't agree on anything.

I made this vid to show that D's and R's agree on one thing, and they are all wrong.....

They are all wrong and everything I've said, backed with sources and evidence proves it.

These two links do not work for me, although I do have Netflix. RF seems to block access to them. What should we search for on Netflix and Youtube to visit the videos?

 

[EconGuy]

These two links do not work for me, although I do have Netflix. RF seems to block access to them. What should we search for on Netflix and Youtube to visit the videos?

The One Percent (2006) ⭐ 6.9 | Documentary

1h 16m

www.imdb.com

 

[lewisnotmiller]

I'll say up front that I'm against this idea. If you think it's a good idea explain the benefits that you think make it worthwhile.

-Cheers.

I'm for much better fiscal responsibility and a drive to balanced budgeting.
But I think making it a law robs the nation of needed flexibility.

I get that politicians have proven somewhat irresponsible in dealing with that responsibility, but I think there is more that can be done around independent oversight and transparency of reporting that wouldn't have the negative unintended consequences I'm foreseeing.

We squeaked out a budget surplus this year, after 15 years in the red.

Australia forecasts first annual budget surplus in 15 years

The Australian government has forecast the nation’s first balanced annual budget in 15 years but warns that economic pressures such as persistent inflation will sink the country into deeper debt. Treasurer Jim Chalmers announced Tuesday that a $2.8 billion surplus was forecast for the fiscal...

apnews.com

 

[lewisnotmiller]

.
P.S.: Many experts will tell us that government debt can't be compared to private debt and that government debt is a good thing. Those "experts" are also working for (or have been) big banks.

It is different to private debt, though. Simple example is that a massive reduction in infrastructure maintenance spending will allow you to more easily balance your countries budget. And the short term damage is possibly low enough that there is no obvious causative impact.

That doesn't make it a good idea, even economically, let alone in terms of being a steward of the nation.

 

[EconGuy]

We squeaked out a budget surplus this year, after 15 years in the red.

So, I was was not sensitive to my Australian friends when I asked the question. I was asking specifically about the US.

I would need to spend some time studying the economy in Australia before I felt comfortable opining on the situation there.

One chart that says a lot is a chart called the sectoral balance. I've pointed out a number of times in this thread that debt creates debt assets pairs in equal amounts. When the government's of the US, Canada, Australia, England and Japan, all sovereign money nations that allow their currency to free float.

Compare that to the US sectoral balance.

Regardless of where nation get's money, from deficit spending or exports, the fact is, in the end it all balances out.

In the US, post covid we see a huge spike in government spending, yet internationally, the US has seen moderate inflation, and much of that was driven by profit taking by companies.

 

[Copernicus]

The One Percent (2006) ⭐ 6.9 | Documentary

1h 16m

www.imdb.com

Thanks. I did figure out that I could put my post to you in edit mode and then switch to BB code to extract those URLs.

I really appreciate all of the effort you are making in this thread to educate us about how fiat currency works. It is not intuitive, so your diagrams and metaphors really help a lot. Unfortunately, people need to have a gut feeling for it, and we use the wrong metaphors when looking at the way wealth is created. You have an interesting way of putting things. When you say that the role of government with a fiat economy is to balance the economy, I take that to mean steer the economy to find a kind of balance between supply and demand for goods and services. The key point to remember is that one person's spending is another person's income. But the problem is that it's easy to understand small pieces of how the economy works but find it difficult to grasp the overall picture--a bit like trying to weigh a bunch of frogs that won't all sit still on the scale. I wish I had another lifetime to study subjects like economics.

 

[Nakosis]

Agreed, that's what I've been saying all along. The government creates dollars and spends them into the economy and records the money it creates as debt. Every dollar/ debt is created as a debt asset pair.

It's simple double entry accounting.

But bond sales come after and as a result bonds don't fund the government, it's government money creation that makes it possible to purchase bonds. Look, take the time to research, don't take my word for it. The government creates a budget, it creates money and spends it, then it sells bonds after. It has been this way since the government stopped redeeming dollars for gold in 1934.

That's not the way it works according to every source I look at including directly from the US Treasury web site. If the Fed wants to inject money into the economy it does so by buying US treasuries. If it wants to take money out of the economy, it does so by selling these treasuries. Nothing gets "printed" this is just credits or debits which gets added to the system.

That's true, there was money in the economy prior to the shift of our fiat economy. But, let me ask you, the M3 money stock in the US was $589 billion in 1970, today the government's debt is $32 trillion. How can you borrow $32 trillion from $589 billion? Remember that M3 is ALL money, including bank money.

It isn't possible unless the government can create money ex-nihilo. You can't borrow $32 trillion from less than $600 billion.

Again the Fed adds credits to the system by purchasing US treasuries. This is still ex-nihilo. This is just how they go about it. Although the Fed has no money to pay for this. They just have the ability to magically create credits in bank accounts.

Quite right, I'm not saying that this is how the money system should work, simply trying to explain how it does work.

Ok, nor how it needs to work. It is not necessary for the US government to continually increase debt.

Again, spending comes first, then taxes. Taxes don't fund spending at the Federal level (at state level, yes, but at the Federal level no. You cannot borrow $32 trillion dollars from the $589 billion that was in the economy in 1970 when fiat began.

Until the Fed puts credits into the account, you have nothing to spend. Since the Fed can "magically" create credits (by purchasing US treasuries), how much you start with is irrelevant.

How do you think that the government of China got $1 trillion US dollars to buy bonds? Understanding this is key.

Trade?

Again, I don't disagree, the problem in your thinking is that you think that the government can sell bonds without first creating and circulating the money into the economy to buy them.

The government doesn't create credit, the Fed does by purchasing US treasuries from an account which has no money in it.

A fiat economy can start with nothing, create dollars and purchase goods from the private sector which puts the dollars into circulation to pay taxes and buy bonds. Then after the money is in circulation it taxes and sells bonds as a way to maintain the appropriate level of scarcity of the dollar.

This is where things get complicated. You are correct in saying that banks create money, as a matter of fact the overwhelming amount of money in the economy is create via the banking system. However the money created in the banking system is limited by reserves which is money created by the government. Banks cannot create money without acquiring reserves.

Also, just like the government creates a debt asset pair banks create debt asset pairs as well.

Ok, I suppose you are confusing the Federal Reserve with the government, which is not entirely untrue. However the US government itself without the Fed, which is a private entity, cannot create money. When the US government wants funding in addition to taxes, it sells treasuries to whoever. Including the Federal Reserve. Whereas everyone else needs dollars as you pointed out to purchase these treasuries, the Fed doesn't.

So when the US government wants to spend more money than it takes in through taxes it goes into debt by selling US treasuries which it is legally obligated to pay off.

While I think we can agree that the system favors the very wealthy, saying that the poor are "funding" though labor is an interesting thing to say. People need and want jobs and jobs consist of labor. There's nothing inherently wrong with the government creating money and purchasing the things it needs from the private sector.


So what is the consequence of debt creation? So far all you've said is labor, which are jobs. Again, nothing wrong with people working. So what's the issue?

The issue is that the workers are not creating enough value through their labor to cover government spending so they are obligating future generations to pay for a debt they didn't create.

The purpose of taxes....

1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
3. To express public policy in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.

Yes, to pay for all of this.

And, as I said, taxes also prevent people from getting so wealthy they can form small groups that control hundreds of billion if not trillions of dollars and manipulate markets and government in a way that hurts the average person.

That's not working so well is it. Might as well scrap the idea of using taxes to keep people from getting wealthy. This is some weird socialist idea which comes from a misunderstanding of how the economy works. Maybe if we had a government who's leadership chose to be accountable from it's spending like Obama said.

To your point, the government can create debt (to itself) and fiscal assets (to the private sector) and use them to purchase things that are needed, healthcare, educations, infrastructure. But the wealthy have you convinced that debt is the problem so you fight against your own best interests.

It's not a problem for me since I won't be the one paying it off.

That's a problem of policy, not the system. If more people understood the system, they could support representatives that could do more in the public interest. Instead we have politicians demanding debt repayment. To what end? What get's better when debt is repaid? Tell me.

The deficit gets better. The money the the government is obligated to pay is reduced/eliminated so future generations will not have to be taxed for our spending.

If you don't believe that, tell us, where do net new dollars come from?

From the Federal Reserve creating credit through the purchase of US treasuries.

But you really need to understand how the trade deficit influences the debt.

When we spend money on foreign goods that's money that's no longer circulating in our economy. Right now there's approximately $6 trillion US dollars held by foreign interests. That's 6 trillion dollars that's not circulating in our economy. If we didn't recreate every dollar remove from our economy that is currently held by foreign interest we'd have $6 trillion dollars less circulating in the US economy. We'd be in a deep depression.


Few things, The government, so far this year as repaid $126 trillion dollars in debt. The debt is repaid every single day.

View attachment 81596

If you mean the debt has to be paid down, Why?

View attachment 81597

Yes, this is kicking the can down the road policy. Obligating future generation to pay for what we spend today. Fine if you are ok with letting your children pay for your debt.

And the US government will never ever default on it's debt (unless it chooses to). Remember the US government creates dollars, it can create all the dollars it needs to pay debt.

Now don't misread what I just said. I'm not suggesting that there won't ever be consequences to blindly creating dollars and repaying debt, just that one of those consequences will not be the government defaulting (unless stupid politicians who don't understand our system of money choose to).

People have to be willing to purchase the debt. If people stop being willing then the US government will have no choice but to default.

That's false, the Treasury spends money by instructing the Federal reserve to credit the accounts of the people that it wants to pay. Bond sales and taxes come after, not before.

To pay for this deficit, the federal government borrows money by selling marketable securities such as Treasury bonds, bills, notes, floating rate notes, and Treasury inflation-protected securities (TIPS). The national debt is the accumulation of this borrowing along with associated interest owed to the investors who purchased these securities. As the federal government experiences reoccurring deficits, which is common, the national debt grows.
Fiscal Data Explains the National Debt

Ok, if you won't believe me, maybe you'll believe the US Treasury.

As far as accounting for the debt, what is it I have to account for?

Government spending.

 

[Nakosis]

I recall posting "Yes".

To balance a budget spending must match income, yes?
Assume it's balanced. If spending increases, then so
must income, meaning an immediate tax increase.
This is useful because voters will receive immediate
feedback about the effects of spending.
I know I'm repeating myself, but I don't see another
way to say it.

Not a terrible idea to makes the voters directly responsible for government spending. However the idea is to give the government flexibility in bad times. Like the spending to develop the corona virus vaccine and cover some of the cost of distribution couldn't have happened under a balanced budget law.

However it shouldn't be the SOP of the government. Borrow money in the bad times. Pay it back in the good times. Not a continued increase in spending to make the voter happy and secure your reelection. So IDK, yes it will make the voters more accountable but it would also limit the government's ability to respond to national disasters,