The U.S. Government does not have a spending problem just because recent outlays have eclipsed receipts and the U.S. Federal deficit is projected to be close to $1 trillion in 2018! Several U.S. states do have a spending problem, as well as many (most?) Americans, but trying to equate the federal government’s ability to meet its debt obligations with those other entities is just wrong! The only difference that matters is that the U.S. Government has a fiat currency, while the others do not. Can you imagine New Jersey issuing its own currency? As my friend and former Invesco colleague, Charles DuBois, recently noted, our current fiscal stimulus should be greeted with shouts of “Happy Days are Here Again!”.
According to the Monthly Treasury Statement, budget results for the month of May have been in deficit for the 63 of the last 64 fiscal years since 1955. Yet, the sky hasn’t fallen, and our economy is certainly much larger today than it was back then. What’s up?
We’ve mentioned in previous KCS blog posts that a large part of the deficit increase feeds right into business profits. When the private sector (both corporations and individuals) are incapable of generating economic activity, we need the government to step into the fray, as they did so wonderfully in 2009 and beyond. According to Charles, this increased fiscal stimulus is why the stock market is proving to be resilient despite numerous “risks”, including interest rates, tariffs, investigations, etc.
Most Wall Street analysts are concerned with the wrong elements of the U.S. Government debt. For instance, the fear of rising interest expense is misplaced, as the cost to the government is actually the private sector’s interest income.
They also worry excessively about the crowding out myth – believing that higher Treasury issuance will push up rates. This is false, as all the selling of Treasuries does is mop up the reserves created by deficit spending – so there are no such upward pressures on rates.
As we have shared, the potential problem is none of these referenced above, but rather too much of a good thing (happy days…). If private sector income is too high because of the deficit spending, inflation could become a problem. That is if our economy was already at full capacity. However, according to Bill Mitchell, and other MMT disciples, the U.S. economy still has excess capacity providing further room to grow.
Anyway, if the government is spending more into the economy than it is taking away through taxes, that’s “obviously” a good thing. No one seems to get the basic accounting that the public sector deficit = the private sector surplus. It is about time that they did!