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Courtesy of The Pragmatic Capitalist 

That is the headline on CNBC at the moment.  And I fully agree.  We do have a serious problem.  We have a group of leaders who have zero experience in monetary theory, little to no financial background and those that actually do tend to be descendants of a line of thought that has largely been proven wrong in recent years.

Alan Simpson, the co-chair of the deficit reduction committee says we have a serious problem with our debts and deficit.  And we should believe him, right?  Why?  Because he has ZERO background in the financial industry or in monetary operations.  He is a law grad, served in the US Army and a lifelong politician.  Certainly an admirable resume.  But where is his background in the financial world and why in the world is he discussing the deficit and its impacts on the economy?

It’s not fair to single Mr. Simpson out.  After all, he is just the CO-chair of this committee.  His partner in crime is Erskin Bowles.  Now, Mr. Bowles is no stranger to the financial world.  He worked at Morgan Stanley and helped found his own successful financial firm.  He went on to become Bill Clinton’s Chief of Staff and was instrumental in helping the Clinton administration substantially reduce the national debt.  That all sounds great until you realize that Mr. Bowles is simply another case of Mr. Obama rehashing the Clinton administration and hoping for the same results.  Yes, the same results that helped lay the foundation for this very financial crisis.

In a press conference earlier today Mr. Bowles said that he is initiating an important discussion. According to him it’s an:

“adult conversation about the dangers of this debt”.

Yes.  America has a debt problem.  We have a very serious household, municipality and state debt crisis that is in many ways similar to what is going on in Europe.  What we absolutely don’t have is a federal government debt problem.  After all, a nation with monopoly supply of currency in a floating exchange rate system never really has “debt” unless that debt is denominated in a foreign currency.  He says this conversation is the:

“exact same conversation every family, every single business, every single state and every single municipality has been having these last few years.”

There is only one problem with this remark.  The federal government is NOTHING like a household, state or municipality.  These entities are all revenue constrained.  The Federal government has no such constraint.  We don’t need China to lend us money.  We don’t need to raise taxes to spend money.  When the US government wants to spend money it sends men and women into a room where they mark up accounts in a computer system.  They don’t call China first or check their tax revenues.  They just spend the money.

The size of the deficit is merely a reflection of the amount of money that the US government spends money on  some public purpose or need.  It’s important to note that the efficiency or allocation of this spending is debatable.  I have had very serious problems with much of our spending in recent years.  Cash for clunkers and housing tax credits come to mind….But the size of this spending is never constrained.

It is best to think of the deficit like a barometer of the economy.  When the economy is running cold the deficit can afford to be higher.  When it is hot the deficit should be lower.  Because there is no solvency concern in the USA (as there is in the revenue constrained European nations) the only concern is inflation and with record low inflation rates there is no fear of the deficit resulting in hyperinflation which would be a pseudo form of default.

This is not to imply that the US government can afford to spend recklessly, drop money from helicopters or pump money into bank vaults so bankers can pay themselves higher bonuses.  It merely shows that, by accounting identity, the US economy will sink into recession if the government sector stops spending at a time of balance sheet recession: net household financial income = current account surplus + government deficit + Δbusiness non-financial assets.  But again, because inflation is the bogey here we must recognize that deficit reduction is not a concern at a time when inflation is at record lows.

Mr. Bowles continues by saying that the discussion is:

“about making tough choices.  Any time you have limited resources you have to make tough choices”.

Mr. Bowles again makes the mistake of assuming that the USA is revenue constrained.  That’s an absurd and dangerous notion.  He will certainly make tough decisions.  Of course, they won’t result in bankers losing their jobs or Congressman seeing lower wages, but they most certainly will involve fewer jobs for Americans.

In addition, the USA is certainly suffering from a lack of resources currently.  A lack of resources that are being put to work.  The US government has no lack of resources.  Like an alchemist, the US government can NEVER run out of its primary resource.  It could dilute this resource by producing money in excess of the country’s productive capacity, but it can never run out of it.

Mr. Bowles continued:

“Al and I couldn’t be happier with where we are in the process.”

Of course they’re happy.  They’re going to ensure that the unemployment rate remains extraordinarily high all so they can report back to their lawyer friends in Congress who think they’ve accomplished something by avoiding a sovereign bankruptcy that was never even a concern.

The bigger problem here is, Mr. Bowles is far from alone in believing this nonsense.  He said:

“I don’t think there is a soul left in America who doesn’t understand this debt and deficit is like a cancer.  And it will destroy this country.”

I beg to differ.  There is a very small group of Americans who understand how our monetary system works, have diverse backgrounds in the financial world and are well versed in monetary theory, operations and reserve accounting.  And we all understand that this debt and deficit is not a cancer.  In fact, in a balance sheet recession it is a great benefit to this economy.  And we certainly understand that it will not destroy this great nation.

Mr. Bowles finished his press conference by saying that the American people get it:

“There is one thing I am absolutely sure of.  If nothing else, I know deep down the American people get it.  They know this is the moment of truth”

The American people most certainly don’t get it.  And how can you blame them?  When a supposed financial expert like Mr. Bowles can’t grasp these concepts how could we ever expect the average American to understand it?  It’s time for an adult conversation to begin before this misguided conversation regarding the future bankruptcy of America sends us towards our own “moment of truth” – a 1937 moment

Originally published at The Pragmatic Capitalist, AMERICA, WE HAVE A SERIOUS PROBLEM

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  1. Record LOW inflation rates?
    Jeessus H. Krist!  Where do you come up with that bullshit?
    You been to a grocery store lately?  Pay for fuel? Seen the increases utilities are now enacting?
    Good lord, man, wake the hell up.