Why Are Balanced Federal Budgets Not Desirable?
Executive Summary
- It is considered common knowledge that one wants a balanced federal budget and that deficits are bad.
- Balanced budgets are not a good thing for federal governments.
Introduction
Private banking interests propose that governments should run balanced budgets, and if they need money they should borrow that money from the private central bank (in the case of the federal) or private banks or even hedge funds (in the case of state and local governments).
Extended Ridiculousness
One has to really wonder in amazement at this assertion.
What is even more curious is that state and local governments do not even get as good of terms as the federal government. This is because they do not have access even to the Federal Reserve Bank.
However, why is this?
States and local governments are part of the overall US government. Naturally, they should have access to US government credit. After all, the overall US is only comprised of states.
The Question to Ask
Why would a government need to borrow something from private bankers that the government itself creates and that a private bank cannot?
A private bank cannot make any currency the legal tender of the land. Only a government can do that. When a government can create its own money, there is no such thing as a budget deficit or a debt. These things only exist where there is a private central bank. Balanced budgets are both not desirable, but it is based upon the assumptions of the private banking system. Under conditions where the government creates its own money, there are no state or municipal bonds, there are no federal bonds or debt because debt is not possible.
The statements by conservatives around public debt being a burden on future generations assume that government debt is like private debt. This is explained in the following quotation.
“Nor is the public debt a burden on the future. How could it be? Everything produced in the future will be consumed in the future. How much will be produced depends on how productive the economy is at that time. This has nothing to do with the public debt today; a higher public debt today does not reduce future production—and if it motivates wise use of resources today, it may increase the productivity of the economy in the future.” – James K Galbraith
Furthermore, the following quote explained what happens to economics after surpluses. This is explained in the following quotation.
“I pointed out to Candidate Gore that the last six periods of surplus in our more than two hundred-year history had been followed by the only six depressions in our history. Also, I mentioned that the coming bust would be due to allowing the budget to go into surplus and drain our savings, resulting in a recession that would not end until the deficit got high enough to add back our lost income and savings and deliver the aggregate demand needed to restore output and employment. Anyway, Al was a good student, went over all the details, agreeing that it made sense and was indeed what might happen. However, he said he couldn’t “go there.” I told him that I understood the political realities, as he got up and gave his talk about how he was going to spend the coming surpluses.”
On this point, it has been repeatedly claimed that surpluses are a good thing. This is covered in the following quotation.
“The Clinton surplus has been spun as the driver of the prosperity of the late 90’s, rather than the cause of the subsequent collapse that we have yet to overcome. Deficits of the early 90’s drove the economic growth that followed. Deficit spending to build the Panama Canal reduced costs and was net deflationary.”
Source: Mosler Economics