[Rich Z]

I was sitting down eating dinner tonight, reading the latest issue of The New American and came across an article entitled Budget Deficits Keep Skyrocketing. Just adding more weight to the national debt.

Now our government is paying interest on this huge debt, for sure, and we as tax payers are footing the bill. But WHO is getting that interest money? Who are the people that are profiting from the windfall of our government spending money they don't have?

Just curious....

 

[Ken Chiarella]

I think it depends upon where we are borrowing the money from. Imagine if the deficit is caused by a country like China sending us more goods than we sell to them. We are fueling their economy. We have to level the playing fields so that our goods can also be sold with ease. They have cheap labor, lack of pollution controls, and other regulations that drain business, and then they get favored nation trading status and we allow them to do things like pirate our software and technology. I'm not a fear monger, but it seems like we are happily digging our own graves.

 

[Chuck and Susan]

Ken...are you talking about a budget deficit or a trade deficit? There is a difference. This is more Chuck's area of expertise but he's really not in the mood tonight for forums so asked me to respond.

Susan

 

[Ken Chiarella]

You're right! I was talking about Trade Deficits. I misread Rich's post. The budget deficit is caused by too much spending and too little money in the coffers.

 

[eli95]

Where does our government get the money?

Come on people, who controls the money supply?

Read a dollar bill, your answer is there!

As for Rich's question, the interst rate, the last time I dug it out was 16%.

 

[Darin Chappell]

The fact of the matter is that the budget deficit is really a non-issue that both parties use to beat each other over the head as an exercise to inflame the voters one way or the other. We owe that money, but overwhelmingly, we owe it to ourselves.

It's a bit like taking money out of your Christmas fund to boost your checking account. Is there a deficit? Yes, but what if you never pay it back? Nothing really happens in the long run, and so it is with the Federal deficit. Since we control the value of the dollar now (as opposed to several years ago, when we were still ont he gold standard), there is no real need to worry about many of them we owe ourselves. It simply doesn't matter any more.

Of course, through the sense of stability, the rise and fall of the deficit has short term effects on things such as interest rates and market demand, but those issues are going to seek their own natural levels of competition in an open market setting. Some people would lose money in a big, temporary fluctuation, but a lot of others would make money in the long run.

There is a small percentage of debt that we owe to foreign nations in the form that they have purchased T-bonds, T-bills, and T-notes. There are those of the American population who have bought those over the years as well. However, this amounts to a tiny portion of the national debt, and could be completely paid off with just a minimal effort, once the interest on the current national debt was disavowed.

As to why we run a deficit in the first place, it really goes beyond the simple overspending ideas that are perpetuated on the news broadcasts. In a reccession period, the very best thing the government can do is to overspend. Why? Because to do so is to pump money into the economy as quickly as possible so as to jump start it. If we were to run a positive balance during slow economic times, that takes money out of the system, thereby slowing the chances for recovery.

Also, the government overspends on the case by case scenarios on purpose so as to help economic considerations. Remember the $400.00 toilet lids of the '80s? No one is so dense as to actually spend that much accidentally. Those prices kept assemply lines up and running while we were trying to extricate ourselves from one of the worst reccession periods since the '30s. In 1979-80, we were at double-digit inflation, double-digit interest rates, and double-digit unemployment. It was a very bad economic outlook, to say the very least! So, we spent and spent until the spending caused the spark of the economic recovery we saw. Did we rake up a huge debt? Absolutely, but it was the longest period of non-wartime economic growth the country had EVER seen!

Deficits (or surpluses) simply do not matter in the long run.

 

[eli95]

Darin:

You are saying then that the Federal Reserve is a government agency?

 

[Darin Chappell]

Well, "Yes" and "No."

How's THAT for ambiguity???

The Fed is an agency of the Federal government in that it operates under Congressional oversight, and the Fed Chairman serves as the will of the President. In that way, it is a federal agency.

However, in its establishment, the Fed was given a level of independence not shared by any other agency, and the Fed does not receive any funding from Congressional rolls. Insrtead, it is funded from the interest that it charges various banks from transactions in its role as the national bank.

Clear as mud, I know!

Here is a link to some FAQs concerning the Fed.

 

[CAV]

Macroeconomics 101:

Government can influence the economy through either fiscal policy or monetary policy. Congress can set policy through an increase/decrease in government spending. Likewise, the Federal Reserve can raise/lower interest rates. Both fiscal and monetary policy changes will ultimately shifts the equilibrium that exists in a free market, between the supply of money and the demand for money.

An example:

The Fed lowers interest rates. As a result Americans rush out to take advantage of the cheaper loans (refinance mortgages or businesses taking out a loan to finance a new capital project). As demand for money increases, so does the "premium" charged to borrowers. The Fed's action of lowering the rate will stimulate spending.

To Darin's point, the Reagan Administration's decision to dramatically increase government expenditures on national defense projects helped pull the nation out of a recession. Why? New projects create work for American companies, and allow them to hire new workers. These workers went out and bought homes, cars, TV sets, ect. All of this spending generates tax revenues and increases corporate spending. This "trickle-down" effect continued for the better part of 10-15 years.

Did it have a price? Yes. Deficits were created because of the increased spending. However, the deficits are financed through the issuance of Treasury Bills and Treasury Bonds, encouraging savings and investment. Contrary to what the media reports, these deficits are a known result and are an intended consequence from the policy. Like the old saying goes, “You have to spend money to make money.”