I rarely do this but I want to repost an article found online that really clarifies the point I was so clumsily trying to make in my recent post called Money Money Money.
Original article click here:
Federal budget process: What did Leon Panetta mean?
May 19, 2014 6:00 am • By Duane Catlett and Dan Metzger
Leon Panetta was recently the guest lecturer at the University of Montana’s annual Jones-Tamm Judicial Lecture. Mr. Panetta is a true patriot, having served with distinction for more than 20 years under two presidents. Under President Clinton he directed the Office of Management and Budget and later served as Clinton’s chief of staff. Under President Obama he served as secretary of defense and later as director of the CIA.
Mr. Panetta stated in his lecture that “the nation’s biggest security issue was its inability to deal with the budget.” Although many will interpret his statement as a call to cut the deficit, what he was really criticizing was the Congress’ inability to produce and pass a spending budget that would put some certainty into the ability of the nation to do strategic long term planning.
Like most Washington public servants, Mr. Panetta holds the old-fashioned view that federal budgets should be balanced and the magnitude of deficits is an important metric for the economy. This view is appropriate for households and businesses that have limited financial resources. However, the federal government issues the nation’s currency and is not constrained by financial resources. It has all the financial resources it needs and is constrained only by the nation’s productive resources.
Both political parties are dominated by the false view that the federal budget must be balanced. The only difference is that conservatives think the government has a spending problem and liberals think it is a revenue problem. Both are wrong and it is hurting America’s competitive global advantages.
In the modern world of fiat currency the federal government must focus on real resources (available materials, factories, infrastructure, labor, knowledge) instead of financial resources (money and bonds) in managing the economy. Money is the vehicle that allows the smooth movement of goods and services from sellers to buyers in the economy. The federal government as the sole issuer of the U.S. dollar can issue all the money it needs to move any resources of the nation.
The U.S. and most other nations of the world have used a fiat monetary system since President Nixon defaulted on the gold standard in 1971. Under a gold standard the quantity of money available to the nation is determined by its store of gold, which limits economic growth. Under a fiat system the available money varies with the growth of the economy, and depends on bank loans and federal spending. In the absence of adequate bank loans to make investments in our main-street economy, Congressional budget decisions are responsible for reviving a depressed economy.
The Congressional budget exercise should not be about achieving a balanced federal budget. The budget should be developed to assure that all available resources of the nation are put to good use. There is plenty of work to be done, and we can avoid high unemployment. The federal government can employ all the resources not employed by private industry. If unemployment is high, as it is now, federal deficits are too small.
Many will denounce deficits as causing inflation or adding to a gigantic national debt. They forget to mention that inflation is the result of demand greater than our productive capacity. But, government purchases of either goods or services from labor, which are readily available because of high unemployment, increase total production along with demand, and that benefits businesses. Such purchases are not inflationary.
They also fail to mention that the huge national debt is in reality a huge private asset. The national debt is nothing more than government bonds that individuals, banks, and pension funds hold in their accounts as secure savings instruments.
Mr. Panetta is correct that the nation is weakened when it fails to deal with the budget. But, forcing the federal budget to be balanced either by reducing spending or increasing taxes only hurts our main-street economy by preventing it from growing. Such austerity measures are appropriate only on the rare occasion when the economy is overheated and threatening inflation. A depressed economy, which is what we have today, requires higher spending and lower taxes.
The threat to our future generations is not from a gigantic national debt, which is in reality a gigantic collection of safe and secure savings instruments that will be held by our future generations. The real threat results from the U.S. Congress’ failure to responsibly spend money into circulation to fix our failing bridges, highways, waterways, sanitation systems, public schools, state universities and other public services that we citizens rely on in our daily lives.
Duane Catlett lives in Clancy. He is a retired career Ph.D chemist and materials technology manager. He is a student of Modern Money Theory and the role of government in our economy.
Dan Metzger lives in Santa Fe, N.M. He is a retired Ph.D physicist and engineering manager. He is a serious student of Modern Money Theory.