Image Source: Pexels

Here we are again, on the verge of another bout of economic self-harm. (a continuing resolution has been agreed to, but only for 45 days).

The GOP Congress is insisting on reducing the deficit (our private surplus) because they don’t understand that the US is monetarily sovereign and part of a floating exchange rate system, which means it does not need to borrow its own currency. The Federal budget is not like a household budget. The Federal government (not State or Municipal) creates US dollars through spending bills and cancels some of them through tax laws. In fact, that is the greatest power of Congress; it gets to create and destroy US dollars.

As I have explained in the past, the matching of the deficit (spending more dollars into existence than are taxed back) with T-bond sales is a vestigial leftover from the gold standard that was meant as a hedge against currency devaluation. Bond sales are no longer necessary since the value of the dollar is not dependent on the number of dollars in existence. The value of the US dollar is determined by the confidence FOREX traders have in US governance. However, the banks (primary dealer banks) and the already-rich, profit mightily from the trade in bonds and from the risk-free interest income they get from T-Bills and Bonds. There is no financial need for the Treasury to sell bonds. Bond sales are not required for Treasury spending. The US is the currency creator and, therefore, does not need to borrow what it creates at will.

Taxes, also, are not required to pay for spending. In fact, taxes are, literally, the foundation of a market economy. Taxes are a coercive way to force people to trade their labor or their produce for currency (hence, a market economy); you can only pay your taxes with US dollars, and if you don’t, you go to jail. Without taxes, there would be no market economy.

For the Federal Government to have a balanced budget, they would have to tax back every dollar that they spend, leaving nothing in private bank accounts. The fact that politicians say they desire a balanced budget, means they don’t know what they’re talking about.

Government deficit = Private surplus

The uncertainty over the start of fiscal 2024 and funding of the government, could be a drag on the SPX for the next several weeks, but the longer-term situation remains positive. The September tax drain will be returned to the economy government spending will be agreed to in Congress…and the SPX will be free to continue in its primary bull trend.

More By This Author:

Investor Sentiment And Stock Market Timing
The Stock Market Floats On Fund-Flows
Raising Interest Rates Is Not The Solution To Inflation In The Short-Term. No Recession In 2023.