Deficit Deniers & 40-Years Of Economic Erosion

After 40-years of economic erosion, there are still deficit deniers.

The belief that debt and deficits “don’t matter” primarily stems from the basis the economy hasn’t collapsed and become a historical equivalent of Weimer, Germany. However, the rather elementary view fails to distinguish that dropping a frog into boiling water or slowly bringing the water to a boil equates to the same outcome. That latter just takes longer to get there.

A recent article by Barry Ritholtz entitled “Time To Stop Believing The Deficit Bullshit” is an interesting read. It makes a logical argument as to why running massive deficits doesn’t seem to matter. (Such is the basis for Modern Monetary Theory)

We are told (over and over, again and again) that if we allow the federal government to deficit spend, a parade of horrors awaits us, including:

  • Excess Federal spending will crowd out Private Capital, choking innovation and new company formation;
  • The costs of US borrowing will skyrocket, making the debt impossible to manage;
  • The US Dollar will be devastated, and it will be radically devalued against all other currencies;
  • All of this will cause rampant inflation, spiking prices to levels not seen before;
  • Deficits will act as a drag on the overall economy;

It has been 50 years of hearing this — and NONE OF IT HAS PROVEN TRUE. So I am calling bullshit on this — and you should, too.”

On the surface, everything he states is correct. We haven’t seen the destruction of the underlying economy over the last couple of years from running a massive deficit.

In other words, deficits didn’t seem to drop the economy into a vat of boiling water.

But just because the evidence isn’t obvious, does that mean it doesn’t exist? For that answer, we must take a longer-term view.

Not All Deficit Spending Is Bad

In “Learn To Love Deficits,” I quoted Dr. Woody Brock, author of “American Gridlock,” on the critical distinctions between good and bad deficit spending. To wit:

The problem is that these progressive programs lack an essential component of what is required for ‘deficit’ spending to be beneficial – a ‘return on investment.’ 

Country A spends $4 Trillion with receipts of $3 Trillion. This leaves Country A with a $1 Trillion deficit. In order to make up the difference between the spending and the income, the Treasury must issue $1 Trillion in new debt. That new debt is used to cover the excess expenditures but generates no income leaving a future hole that must be filled.

Country B spends $4 Trillion and receives $3 Trillion income. However, the $1 Trillion of excess, which was financed by debt, was invested into projects, infrastructure, that produced a positive rate of return. There is no deficit as the rate of return on the investment funds the “deficit” over time.

There is no disagreement about the need for government spending. The disagreement is with the abuse and waste of it.

John Maynard Keynes’ was correct in his theory that in order for government ‘deficit’ spending to be effective, the ‘payback’ from investments being made through debt must yield a higher rate of return than the debt used to fund it.

Currently, the U.S. is ‘Country A.”

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