{"id":21692,"date":"2012-11-14T18:16:06","date_gmt":"2012-11-14T08:16:06","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=21692"},"modified":"2012-11-14T18:16:06","modified_gmt":"2012-11-14T08:16:06","slug":"win-win-us-budget-deficit-expands-and-supports-growth-and-private-saving","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=21692","title":{"rendered":"Win-win – US budget deficit expands and supports growth and private saving"},"content":{"rendered":"

\t\t\t\tThe Sydney Morning Herald carried an AFP story today (November 14, 2012) – US deficit hits $120b as fiscal cliff nears<\/a> – which reported the latest US Treasury Department figures which showed that “the US budget deficit rose 22 per cent in October from a year ago, to $US120 billion ($A115.56 billion), as spending far outpaced revenue”. At which point I thought – how lucky the American people are that the Government deficit is still expanding and supporting growth unlike the expanding deficits in Europe which are expanding because of a lack of growth. It is an astounding achievement for the US people. Unfortunately all the signs are that the American polity doesn’t actually understand that their in-fighting, which has allowed the deficits to continue growing, has been good for the nation. Had they actually cut the deficits or failed to pass the debt limit extension, the US economy would be in the doldrums just like Europe. The problem now is that the political debate will reach some conclusion pretty soon and the harbingers of doom are growing stronger. But for the time being with the US budget deficit expanding and supporting growth and private saving it is a win-win.
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\nThe article should have stopped at that point. It then had to tell readers “But the sustained deficit continues to push the country’s debt load higher”. Why the use of the word “but”? That shifts the article from being news to opinion and the biases revealed indicate a lack of understanding of what the issues are.<\/p>\n

The rest of the report was about how time was running out and not only did the US government have to navigate the “fiscal cliff” but it also would violate the current debt ceiling soon, both events giving the politicians a chance to demonstrate how destructive their ideological leanings might be.<\/p>\n

But meanwhile, the substantive information was that the budget deficit rose and supported private saving through continued national income growth.<\/p>\n

It is hard to keep track of all the nonsensical articles that are being written at present the desperate need for fiscal consolidation in the US at present.<\/p>\n

The Wall Street Journal article (November 13, 2012) – Obama’s Left Flank<\/a> – claimed that “Everyone talks about Republicans and taxes as an obstacle to bipartisanship, but the liberal delusion that entitlements can be financed by taxes alone is something Mr. Obama needs to address if he wants a successful second term”. To which I muttered – no he doesn’t and no it isn’t. You can match my responses to the appropriate myth, which is an easy task.<\/p>\n

On November 12, 2012, a senior IMF official, one David Lipton gave an address at Chatham House, London – Resolving The Crisis And Restoring Healthy Growth: Why Deleveraging Matters?<\/a> – which rehearsed all the confused narratives that the IMF are presenting to the public as they lose their grip on the national debates in various locations.<\/p>\n

The confusion is because the IMF has become a very schizoid organisation with its ideological obsessions being continually confronted with poor predictive performance of their modelling; outright errors in modelling which completely alter the conclusions (the spending multiplier fiasco); and the obvious realisation that their policy recommendations have made matters worse rather than better.<\/p>\n

But still they are caught in a vice-like grip by ideology that says one thing while everything else say the opposite. The tension that emerges manifests in statements such as:<\/p>\n

\n… policymakers need the right pace of consolidation in the short term, effective and credible commitments over the medium term time frame, and a willingness to adjust as needed along the way. Deleveraging is necessary, but it should be implemented at a speed and in a way that minimizes the impact on growth.\n<\/p><\/blockquote>\n

We read of fiscal consolidation that should be “of quality and as growth-friendly as possible”. Earlier the official admitted that “exiting the crisis requires strong enough demand to restore growth and jobs” and that the private sector needed to reduce its debt levels “which will dampen demand”.<\/p>\n

If you decompose the Speech you will quickly find it doesn’t add up. David Lipton said the following:<\/p>\n

1. “households need to work off debt, in order to restore their financial position and be ready to cope with the uncertain financial future they now see before them” – which means the household sector will be seeking to spend less than it earns. That means, in Lipton’s words, that this “means higher saving, lower consumption, and other things equal an economic slowdown”.<\/p>\n

2. “banks need to deleverage, … [and] … If banks cut back assets by tightening their lending, credit to the private sector will decline, hurting those that are most dependent on bank lending (i.e., SMEs and households), which also undercuts recovery”. So the investment climate will be subdued.<\/p>\n

3. This reality would require the “public sector … to be countercyclical … But the high public sector indebtedness in advanced economies, adds a constraint, and requires major, sustained consolidation over the medium term if countries are to restore the soundness of their finances, rebuild fiscal space, and lay a foundation for sustained long-term growth.” Which means he is advocating budget surpluses.<\/p>\n

The statement is full of myths. The concept of fiscal space has no meaning in the context of a currency-issuing government. <\/p>\n

The IMF<\/a> defines fiscal space as the:<\/p>\n

\n… room in a government\u00b4s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability – making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.\n<\/p><\/blockquote>\n

They both assume that the government has the same constraints that restricted governments during the gold standard when currencies were convertible and exchange rates were fixed.<\/p>\n

In a fiat monetary system, these concepts of fiscal space ignore the main points which are:<\/p>\n