Trump's desire to reduce the deficit. Can someone explain to me how this is a good thing?

@Tijuana


Government is a driver of the economy.
In the UK it is the driver of 50% of the economy. It is the biggest driver of the economy in the country.

Compare your total tax take to total GDP and you will see that your government is the biggest spender out there. Probably the single biggest spending organisation in the world. Oh yeah, it's driving the economy.

Not all of it, but way more than anything else.

Think "the military industrial complex". All government driven. And so on.
Real money, real jobs, real products made. Real services delivered.

 

Would the psychological factor be different if dollars increase in value versus dollars decreasing in value?

 

Of course it confers social benefit. Money provides a medium of exchange that allows a large economy to operate. The money supply *should* be related to the amount of wealth in the economy. As capital investment creates more jobs, higher productivity, and more economic output the wealth of an economy increases. The money supply should grow in lock step in order to match the economy.

If you shrink the money supply then you restrict capital investment and thus economic growth. If you grow the money supply faster than the economy generates wealth then you get inflation which undercuts the value of the money.

 

Since government has to extract taxes from the private economy in order to have something to spend then how can it be a driver of the economy?

If the government takes a dollar out of my pocket and puts it in someone else's pocket via "government spending" exactly what benefit was provided to the economy? I could have spent that dollar in the economy just as well as the other guy the government gave it to!

 

I didn't suggest we shrink the money supply.

How?

 

Sure, because when dollars increase in value my employer has an incentive to reduce my pay. Since debt payments are non-negotiable, I'd fear that a rise in the value of the dollar would result in a decrease in pay and a resulting increase in debt.

In an economy with a small amount of inflation, debt payments shrink and average incomes rise over time.

 

The government doesn't take your dollar and give it to someone else. The government collects money and destroys it. The amount of money it destroys it removes from its negative balance (the debt), then it spends, usually, more than it destroys.

The real issue is who is being taxed, not the amount of the tax.

I'd support no taxes on any family making less than $400k You'd see a massive spike in demand and a resulting spike in employment. As labor became increasingly scarce, average wages would rise supported by an increase in spending.

 

The inquiring minds wants to know

 

Sure. Purchasing power is a zero-sum game. Higher government spending means more money being drawn away from other expenditures.

This can be a good thing. I happen to think it is. I would support a major streamlining of our welfare system and a number of intelligent cuts to our military capability, but overall I don't view American Federal expenditure as especially problematic, because it really doesn't way that heavily on our economy.

That doesn't mean it couldn't, in theory, which seems to be your suggestion.

And I certainly see no reason to believe that a deficit is a good thing. Eventually, all of that purchasing power that is accruing outside of the United States will start to change directions, which will harm the purchasing power of average Americans as foreigners bid prices up.

 

This is what happens when money is based on faith and the major players in the game CAN NOT lose. You ask why is paying down deficit good? Well..

We have to go back to the great depression. During the great depression there simply wasn't enough money to go around. That and the Fed and Congress sat and did nothing basically. So most of the major governments of the time moved away from the Gold standard. Thus creating debt as to have more fluidity in the market. The governments had to loan money from their "Reserve" banks.

So you ask why is paying off the debt a good thing? Well, for one it is a psychological and emotional boost. Lots of people just do not want to work today. They may not be able to clearly state why. I think this has much to do with that.

Secondly, sooner or later this will come back to bite us. Deficit spending when ,it reaches a certain ratio to GDP, will bite us. After WWII US debt was at $2.87 trillion, the highest ratio it's ever been; 113%. Now if we count our debt to GDP ratio currently it's at about 109%. You can say well 30% of that is foreign owned! Yes... but you still have to account for that in the value of your currency. Nor can our economy repeat the US economic rebound after WW2.

What the Fed is trying to do now is slowly bleed money back into the economy. While keeping inflation as low as possible. Wanna know why both parents have to work now? Because it's no longer about raising the value of the dollar, it's about keeping it at a low value to pay off the debt and keep fluidity in the global markets.

Thirdly let's not lie to ourselves. This is all make believe and a self imposed system in which we thrust ourselves into, and one that our next generations never voted on.

This is why we must pay down the deficit.

 

The government does indeed also drive the private sector economy. It does so by taxation and regulation. Essentially, by bullying. By being the biggest fish in the pond.

This control is not absolute. And in capitalist societies, we make a conscious effort not to let the government control critical industries to avoid Marxist take overs.

So it might not be a "wealth creator" It might not be focusing on wealth creational industry, but it still controls and directs the economy in a big way. A bigger way than any bank or mega-corp for example. It is still the biggest economic driver world wide.

Economics doesn't distinguish between good and bad investment. Can't recognise counter productive endeavours. Of poor value services. all it can measure is the flow of money from one person to another. and more money flows through the government hands than anywhere else in the economy. In America's specific case, more money flows through the government hands, than anywhere else in the world.

 

Spending perhaps not. Federal regulation, very definitely. The banking crash was caused but US federal regulation. It became US law that all banks must make sub prime loans.
So it does affect us. I lost half of all my life savings because of it.

 

A car must have petrol in it before it will work.
But petrol doesn't drive the car, I do.

I understand the relationship between wealth creation and wealth redistribution. But the economy is both of these things at the same time.
Is all transactions. Not just transactions involving the means of production.
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The government has very real power over the economy. It decided what gets spent where.
It tells the private sector what to do and taxes them and they do it.

Benefits provided to the economy by government taxation.
Long list, I won't bother with them all.

They build roads. This facilitates trade, reduces costs enables people to work farther afield.
They provide and train police. Who stop your warehouse getting robbed. Provide a safe environment for you to prosper.
They build and staff schools to educate you. So that you can make money with your skills! Rather than just being an illiterate subsistence farmer.

And so on.

So they produce safe environments. Produce educated people. Produce weapons of defence and forces of defence.


Now I get where you are coming from. I get that they are at worst parasitic and at best symbiotic in their economic relationship to we in the private sector.
But they are the big dogs here. They say where the money goes and anyone who doesn't like it goes to jail.
No matter if you are private sector. When they tell you to pay, you pay.
They drive the economy. They do have that control.

 

There is an element of faith when accepting something that has no intrinsic value and trust that it will be a claim on things of real value. But it's not just "faith". If you learned that you were poisoned and you needed something only I had as a cure and I told you that you need 1000 units of currency, and I would pay those units of currency, that I create with a pen and a piece of paper, and I paid them to you for working for me, what are the value of the dollars that I create?

Would my currency be worthless? Strictly speaking yes, but to you, they would be invaluable.

In the same way, US dollars have more than value simply based on faith as long as you wish to avoid the punishments that result from non-payment of taxes.

I'd like to address this but I'm not sure who the governments are in this statement:

"The governments had to loan money from their "Reserve" banks."

The US government does not "borrow" money from the Fed.

I can agree that when people see the deficit numbers decline or even go into surplus as they did under Clinton, it may result in a positive outlook, but the reality of the harm that a surplus does to the economy cannot be overcome by people's feelings.

That's ideological speak....

Japan has been running debt to GDP over 200% for years.....

And yet the best years in recent memory occurred after the massive flood of deficit spending, which in turn drove innovation, manufacturing and low unemployment. People were saving 1 out of every 4 dollars at the time.

The Fed doesn't "push money into the economy".

Paying down the deficit will remove money from the economy, reduce demand, increase unemployment and that will lead to defaults and undermine the banking system.[/QUOTE]

 

Grown ups have to actually pay their bills.

 

Japan's economy is not a model I wish to follow. Endless decades of austerity. The lost generation. Working their arses off to pay for other peoples debts. Lives crushed by endless civic duty. No time even to breed. Must go to work, must do it for Japan.
Work sleep work, work sleep work. Die.

Paying down the deficit doesn't reduce demand.

Demand is infinite.

The demand for resources in return for nothing is an infinite demand.
It can never be met, never be reduced.

Supply however is limited. the amount of goods available to supply is = production.

And this has not changed either. So supply is the same and demand is the same. The only question is, who gets it?

And the answer is... not the guy who isn't going to pay for it. Not the guy with desire to increase his deficit. I don't lend to him.
I lend to the other guy. The guy who doesn't have a deficit. The guy who makes returns on his investments and not losses.

So a president of a country that has a deficit, that wishes to borrow more, saying "I wish to increase the deficit" (Yannis Verofakkis style), results in immediate austerity. All lending ceases.

 

No, the government does not take money from the private sector in order to spend it. It takes money from the private sector in order to regulate the amount of money relative to the goods ad services it represents as a claim on.

Between the government and the private sector, it is zero sum, that's true, but looking only from the private sector side, government deficit spending is the private sector's surplus, thus it's not zero sum because the government can "borrow" indefinitely.

Which reduce incomes and reduce demand and result in greater suffering and an economy that's worse off.

If you are talking about cutting from the overall budget, any cuts in spending (unless the money is spent somewhere else) will result in decreases in income.

Not sure I follow

Truthfully, the decision on deficit spending depends on other variables. It is neither good nor bad in a vacuum, It is a fiscal policy option to be deployed when it's needed. People see the debt as "bad" and the conclusion is that deficits add to the debt must also be bad. This position is based on fundamental ignorance of how the system we have today works.

 

No idea what that means in the context of this conversation.

 

It means you have to pay your bills.

 

I'm not suggesting that anyone follow Japan. The stagflation they are experiencing is the result of economics they don't understand.

Deficits can only be "reduced", not "paid down". I think you meant debt.

Deficits are spending that are in excess of taxes. By definition reductions in spending are reductions in income.

No, it isn't. If that were true people wouldn't accumulate millions of dollars.

Not sure I follow you here.

Sure, but the limit on supply is based on labor and the availability of real resources. If there are real resources available and labor that can't find work, there's no reason not to create money and put those people to work. Money is the only thing that's infinite.

That's not to say we should create infinite money, what I'm saying is that money should be created relative to the labor and the supply of raw materials.

Said another way. Do you think the US government could build a stat of the art bullet train for DC to LA?

If it cost $1 trillion dollars, is it money that limits its creation?

No, the US government can create all the money it wants, what is limited is the people and real resources needed to make a train.

The population has increased by over 100 million since 1980. That's about 1/3. The money supply has to expand with population growth and per capita productivity.

That's a political decision, not an economic one.

We're not taking about people. People's personal finances have nothing to do with government finances.

Apples and Oranges. The US creates it's own money, it is a monetary soverign, Greece is not.

 

Me, I have to pay my bills? Yeah, that has nothing to do with what I'm talking about here.

 

Demand is infinite.
After I get an Ihpone 1 I still want and Iphone 2.

After I get a black Porsche I still want a white one.
After I have had a doughnut I still want another doughnut later.

Demand is infinite.
Supply, is limited.

Demand for dollars is infinite. People accrue millions of dollars and still want more.

The value of a dollar is not what the government say it is, it is what the person you are bartering with agrees with you it is.

If you will give me a factory today in exchange for nothing, I want it.
If you will lend me your porsche. I want it.
If you will lend me a billion £. I want it.

Demand is infinite.
Supply however is not.


Creating money? Don't wish to revisit that one with you.

Politics>economics.

Economics does not make decisions. There are no economic decisions.
Economics is a study.
We study events. Record them. You have heard the expression, "follow the money", that is what economics does.
It doesn't make trends, it spots them.

Political decisions govern many aspects of our economy.

Peoples personal finances have everything to do with government debt.
That is who the government borrows the money from.
Via the intermediary of a bank. It's real people's money and they aren't giving it people who's "investment" runs a deficit. Makes a loss.
Why not? because other people who make a profit... are likely available to borrow it. And indeed blowing your own money is more fun than lending it to a foreign country to.

 

Why do you think the government shouldnt pay its bills? Dontchu know constantly printing money depreciates its value?

 

Where do US dollars come from?

 

The US.

Dollars are trade goods. Supply and demand laws apply.

The more there are, the less valuable they are.
So when you print money, you devaluate all existing money.

You steal value from people holding dollars and give it to yourself.
You take a slice of their pie.