Trump's desire to reduce the deficit. Can someone explain to me how this is a good thing?

This is from Business insider;

Ok, so not including all the other programs and departments Trump and the US Congress wish to cut, the new Healthcare proposal, if passed will cut about $33.7 billion from the Federal deficit, or about 6% of 2016's budget of $552 billion.

But I want someone to explain to me, how this is a good thing.

Cutting the deficit removes money from the economy. The government's spending is earned by someone in the private sector as income. $33.7 billion is 674,000 - $50,000 dollar a year jobs. When people lose their jobs they cut spending and other people in the economy in turn cut spending.

Anyone that supports deficit cuts, can you explain to me how the economy get's better when we cut the deficit? How does the average person benefit?

We have an example already of deep deficit cuts that led to the surplus of 1998-2001. Can anyone explain why, if deficit spending is good, why it ended in a recession? Historically, all sustained (3+ years) periods of surplus have ended in depression....Can someone explain that? I mean if reducing debt and deficits are good, why the negative outcomes?

Can anyone explain to me why the 20 years following the largest deficit spending in history (in real terms) the 1940's were some of the best years economically?

Now I know the answer, I'm well versed in economics, so no need to oversimplify if you have a complex explanation, I'm just interested in other people's opinions. However, should you decide to answer, expect that I will probably ask more questions.

looking forward to some interesting conversation.

 

Cutting the deficit means we borrow less money, which is pumped into the economy. So, you are basically removing money, which is business activity, from the economy. Yet we also have to admit we have a debt problem. At what point, when interests rates go up, do we arrive at the point where too much money is spent on interest on trillions of dollars in debt? We can actually reach a point where there isn't anything left to spend on anything, if debt gets to a certain level. So this presents a dilemma, right? So sometimes one has to look at the Big Picture.

Deficit spending can indeed spur economic growth, create jobs, for obvious reasons. But it only optimizes such growth and jobs, IF, we have our old economic model, where the money stays here in the states, to be used here. Money no longer stays here as it once did, so deficit spending no longer produces what it once produced when we had a sane economic model. So say you give consumers, the middle, tax breaks, creating deficits, under our traditional old economic model? With more disposable income it gets spent, fueling our economy, creating jobs to meet the increased demand for goods and services. But what happens when your consumer goods, most of them, are no longer made here, employing our own people? That increase in disposable income does not stay here, stimulating our economy. It goes to mexico, china, Vietnam, where our manufacturers moved, and then their profits are kept offshore. How does this deficit spending then do GOOD for our own people, our own economy? When deficit spending creates more jobs in slave labor nations, how does that help us? My point is, deficit spending no longer can be expected to do what it once did, right after ww2. The context changed. Yet many people act as if nothing has changed when it has.

We are in unknown waters. And unless trump can reverse the utter insanity, this bitch is sinking. What we have done, since 1981 is setting us up to implode, the house of cards is going to come crashing down, taking the rest of the world with it. Neoliberal economics is not sustainable, and it is already cracking at the seams. Deficit spending will not fix this. Nothing we can do will fix it until we reverse the course we have been put on, by our gov't turning the store over to our elite capitalists, who have an allegiance to no nation. So, how much deficit spending is done doesn't effect much of anything when it comes to jobs and domestic economic activity. The additional debt created by it is not worth the few jobs involved. We are between a rock and a hard place, in dangerous waters. We need to get to a place again where deficit spending can help, but our economic model now is not condusive to that at all. It is like trying to empty the pacific ocean with a teaspoon, as the waters are rising to consume coastal cities.

 

When a deficit is created, (spending more than revenues, not to be confused with debt), the US is consuming the future. The deficit reduction will reduce the liabilities on the government's balance sheet and therefore reduce risk. Having less debt reduces risk. Think of it this way, what if the US had a surplus and no debt? Is that better than a deficit and $20T in debt?

 

They have to find savings to pay for the tax cuts. Don't worry there isn't going to be a reduction in the deficit, quite the opposite.

 

One Mind, thand for taking the time for a response...Few thoughts.

The Fed controls rates, not the market.

Next, when we pay interest on the debt, it adds money to the economy because 1/3 of all treasuries are held by people, companies, states, cities etc. Another 1/3 is held by the government. So when the government earns money on its money (a ridiculous concept meant only to placate voters) it really just cancels out. The last 1/3 is owned by foreign interests. Interests that already hold over $10 trillion US dollars in FOREX reserves alone.

With all due respect, What?!?!

Please explain that idea. Break it down, how could "We can actually reach a point where there isn't anything left to spend on anything if debt gets to a certain level"?

Money no longer stays here as it once did. You're on to something, though I doubt you fully understand the implications. (I know that sounds arrogant, and I apologize, it's not meant to...).

When we import goods and services from abroad, we do so because other nations can make those goods at a lower cost. Those lower costs come at a price, though, which is why we don't try to compete. Examples are things like environmental damage, poor working conditions, and extremely low pay.

Many people are lured into the false idea that our jobs are "stolen" from abroad and all we need to do to fix things is bring those jobs back here. Any attempt to "fix" the problem through intervention (tariffs etc) will just distort the market and rarely if ever have the intended effect.

The "old economic model" is gone, globalism is here to stay, at least for the foreseeable future. Though I predict a paradigm shift when automation makes it less expensive to make goods and services here in the states again. I think the Chinese know this as well which is why they are in the process of moving away from an export based economy. The clock is ticking....

That is an extremely complicated question that I, or people smarter than me, could write a book on, but basically, it looks like this.

We have a large trade deficit. Now that's not bad, actually, there are some benefits, like lower cost goods to our citizens to the tune of billions and billions saved by US consumers every year (something that helps the US poor). It's a benefit that most people find hard to quantify because there is no easy comparison. There is no easy way to say, "gosh, this TV was $1000 and was made in China, if it was made here in the US, it would have cost $1300. *whew* saved $300!!

So we net import goods to the US. Over the last 10 years or so the deficit of trade has ranged from about $400 billion to $800 billion. That means that we are importing goods and services and exporting our dollars.

Have you ever given any thought about what happens to those dollars once they are earned by a foreign company, say...in China?

Ever really thought about how China "lends" the US money? Did you know that the US only sells its debt in US dollars? How did the Chinese government get trillions of US dollars? Today they hold about $4 trillion US dollars, but the Chinese government doesn't sell anything to US consumers. So how do they get so much of our money that they, in turn, use some of (about $1 trillion) to purchase US treasuries?

There is a circle that looks like this:



Step 1 (above) glosses over how the government of China came to obtain US dollars. The truth is that the Chinese gov "prints" Chinese dollars (Yuan) and buys US dollars from the Foreign Exchange (FOREX) markets. Did you get that? They PRINT their money and buy ours with it. This causes the value of their dollar to decline (making their goods less expensive while at the same time making it so their own people can't afford the things they make) and the Chinese government now holds US dollars they can use to buy our Treasuries (You might call debt). The other $3 trillion they let sit in an account at the Fed. Sort of like your checking account. It earns no interest, but they have to hold it in order to "defend" their currency from manipulation.

So when they buy bonds, all they are doing is moving their money into a checking account at the Fed to a savings account at the Fed.

Now debt rollover is something we practice today. Last year we rolled over $94 trillion (that's right kids, $94 trillion. Click here for the source).

When they buy our currency and put it in an account, we need to recreate it here. If they decide to take some out and spend it, we need to tax it back out. but we think that creating currency will cause inflation, but how can that be true if $600 billion dollars worth has left the IS? Why can't we just recreate and spend it right back into the economy?

We can, but we are so hung up on ideas of debt, a debt we don't understand that we are killing ourselves.

Now I can tell you, with the utmost confidence, that if Trump gets his way and federal departments are slashed and healthcare is rolled out that removes people fromMedicaidd and take entitlements, we will fall into another severe recession if we are lucky. Unless we avoid it, like we did in 2008 by creating another credit bubble caused by a lack of deficit spending. Now, I was praising the possibilities of Trump's campaign promises to provide everyone with healthcare, spend $1 trillion in infrastructure and as stupid an idea as it is (from a practical standpoint), economically, if the materials to build it are created here, it would create a lot of jobs. Now the wall is a pipedream, Trump is backing the current plan that will spend less and take millions off of care and who knows where infrastructure spending is.

The irony is that it is your belief that is making it happen. You decry the evils of public debt, yet, public debt as a percent of GDP has been fairly steady since WWII. It's private debt that's rising, driven by fears of public debt. When the public sector spends less, the private sector borrows more. The private sector making up for the public sector is the true bubble.

We finally agree. Neoliberals and Conservatives both have it wrong. They both believe that you must pay down debt, they just disagree on the finer points. They are both failures of economic policy

There is no single fix, but deficit spending is definitely part of the fix for the situation we find ourselves in.

So, how much deficit spending is done doesn't effect much of anything when it comes to jobs and domestic economic activity. The additional debt created by it is not worth the few jobs involved.[/quote]

Why? Explain the cost that offset deficit spending. Give me examples.

Thanks for being a good sport, look forward to your reply.

 

I wonder how many weekend vacations in Florida it will take to eliminate any savings to the budget?

 

Are you aware, that in 4 years 1940-1944 the US government created $4.1 trillion dollars (2013 dollars) to fund the war? Why didn't the "future" suffer for it? As a matter of fact, the years following the war were some of the best long term in US history. How do you explain that?

How do you explain the opposite? The US has run sustained surpluses 7 times in its history, 6 were followed by depression and the last 1998-2001 were followed by 2 recessions in 7 years.

1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1998-2001: U. S. Federal Debt reduced 9%. Recession began 2001
2004-2008: Deficit Growth reduced 40%. Recession began 2008.

These are facts. You can verify them for yourself. How do you explain this? Periods of record debt and deficit have been followed by economic boom and periods of surplus and no debt (achieved once in 1836) are followed by periods of depression.

What risk? The US government denominates it's debt in dollars it creates. Where is the risk??

My response directly above seems to lend evidence to the fact that surpluses are bad, very, very bad.

 

I hope you're right.

 

A surplus actually destroys money, it takes money out of the system. Think of it this way. The government can create money at will just like a subway company can create tokens at will. Both can make as many dollars or tokens as they want. Both ask for them back taking tokens and dollars out of the system. What would a government do with excess dollars received in taxes? Pay down short term debts? Pay premiums to pay off long term debt sooner? Store them in some virtual bank online somewhere? Now look at the opposite scenario, deficit spending. In this case, the government adds money to the system that is above what they collect. This increases the amount of money available. What is the only check on them? Inflation. We have virtually no inflation at all. The amount of dollars created by lending of all sorts is gigantic yet here we are, no inflation, a strong dollar and all that money is sitting in overseas bank accounts not doing a damn thing for anyone, it might was well be on the moon for all the good it does any of us.

 

Why? Explain the cost that offset deficit spending. Give me examples.

Thanks for being a good sport, look forward to your reply.[/QUOTE]

Well, this is certainly a refreshingly informative post. I'm wondering..

The irony is that it is your belief that is making it happen. You decry the evils of public debt, yet, public debt as a percent of GDP has been fairly steady since WWII. It's private debt that's rising, driven by fears of public debt. When the public sector spends less, the private sector borrows more. The private sector making up for the public sector is the true bubble.

^ Does this mean that we are so reliant on the banks to lend us money because there is too little public spending? I have a sizable student loan debt with no statute of limitations because the government wasn't spending enough (in the form of deficit spending, creating public debt)? Or what? How is private sector borrowing making up for a lack of public sector spending?

Economics has gotten pretty damned complex, it would seem. It's a popular message among the less informed today that we're hopelessly in debt and that this is a looming crisis. Even apparently smart, informed people are saying this. Such as Peter Schiff.. What is he missing here? What are we all missing? Is more debt than the trillions before us already a good thing?

 

you're

I think people who can't discern contractions from possessives should just avoid contractions altogether! Write "you are" and be done with it

 

Yep, gets me sometimes. BTW, you screwed up your quote (that's karma )...

 

I did? I'm not seeing any problem.

But yeah, I've seen that "karma" bite from time to time, and not just when I'm at it.

 

Because everyone was dead from the World War???

 

Isn't that a bad thing though??? The deficit is from tax cuts and budget cuts. Not spending.

 

I would say that when government spending decreases, private borrowing increases as you can see here:



Look at household borrowing from 1984-1998 Fairly consistent. Then look at how it rises from 1999 -2007. Now, the economy should have crashed in 2002, but the dot-com and mortgage bubbles pumped trillions of dollars in consumer and business credit into the economy. The problem with consumer credit driving economic growth is that when debt becomes a larger and larger portion of each household's expenditure, the amount each household can spend on new consumption It also tends to cause people to drain their savings as seen here:

The (poorly) highlighted period is 1998-2001. See where the pink dips below the line and goes negative? The blue line (savings goes negative, which means in the aggregate people are taking more out of savings than adding to it)



What we saw in 1998-2001 was trillions of dollars taken from the private sector in government spending and the result was private sector borrowing and savings depletion.

Notice after 2007 (top chart) borrowing goes negative? This is why the government deficit spent trillions through this period, to make up for the lack of consumer spending. Without that deficit spending the "Great Depression" would have looked like a cake walk.

As far as the complexity of economics, each facet of economics is relatively easy. The problem is learning how each facet affects the others. So for example, I can explain inflation to you. It's an easy concept, but to understand it in context, you have to understand the variables that make inflation good or bad.

Peter Schiff is a self-interested idiot that makes money when people buy gold. I can't really decide if he believes what he says or he's just a charlatan, but either way he's an idiot who makes a million predictions, most of which are false, but when one comes true people believe he is a genius.

The biggest problem, in my opinion, is that people don't realize the economy doesn't operate as it did under the gold standard. The US government, under a fiat standard and can never, ever, ever, ever run out of money or go broke. Period, full stop. Now there are lots of bad things that can happen if you create too much money and I will be accused of believing that the government can print all the money it wants without ill effects (something I definitely don't believe, but will, before this thread is over be accused of), but that does not change the fact that the government can never go broke. Why? Because the US government creates its own currency. US Treasuries are sold ONLY in US dollars. Therefore, the US government can never find itself in a place where it cannot repay.

Once you understand that, the next question is; "If the government can create all the money it wants, what is the real constraint on money creation?" THAT is the question that most people don't understand.

Very, very, few people understand the real constraint on money creation. Before 1934 it was gold, after 1934 and before 1970 it was gold and Treasuries and today its inflation.

 

First, I'm not touting war as an economic solution. War is actually a poor driver of the economy relative to other kinds of spending because the things created for war have few residual benefits relative to the benefits of spending on infrastructure, training, R&D in the private sector.

Having said that, three-tenths of one percent of the US population were killed in WWII and by the next year, there were more babies born than servicemen that died. now not to minimize the loss of those men and woman, "everyone" didn't die.

 

No, the deficit is when the government spends in excess of tax receipts.

What's ironic about the term is government deficit is private sectors surplus by definition. Private sector surplus being defined as; the private sector pays less in taxes than it received in government spending.

Here is a chart that demonstrates this....(You can pull this chart up from any nation that runs a trade deficit and it's the same).



When government deficit spending (red line goes negative) the US private sector goes positive?

See how they flipped in 1998-2001?

 

There is also the plain human factor, the quality of life concern. People aren't going to be as happy when they perceive that more of their earned income is going to pay bills and debts. They're getting less for their labor and production.

So, is government spending (deficit spending) an answer to alleviate that? I wonder how it would feed into the economy to make us all "wealthier" again, such that we keep and spend more of our earnings on good ol' happiness-producing consumption.

 

By the way, have you ever watched these fun little videos? It's a cool debate, Keynes vs Hayek.





Obviously you're a Keynes man. I suppose we have to acknowledge that the modern system is Keynesian and that it works quite well outside of crazy situations like Zimbabwe and Weimar Germany.

 

No. There is no magic money pot to draw from. Deficit spending pulls money from other parts of the economy and runs it through the Federal government, which greatly enriches those areas with in commute distance of the Federal capital, but only by draining these resources from the rest of the nation.

Yes. Getting the deficit under control will harm the Northern VA and Maryland economy.

Interest rates are rising. Interest payments put upward pressure on taxes or downward pressure on expenditures, resulting in a wealth transfer from the deserving working class to wealthy US debt holders.

Uhh... yeah. Except for the US, the manufacturing base of most of the developed world lay in smoldering ruins!

But, to really make headway on our federal deficit, we have to address our trade deficit, and I suspect we will!

 

One of the ways reducing the deficit is beneficial to an economy is by diminishing the amount that must be paid to "service the debt" (which some estimate is about a third of the budget). That's money the government can't spend on schools or public assistance.

 

I've seen those video's, pretty funny.

Though, I'm not a "Keynes man". Not because I think Keynes was wrong, necessarily, but that Keynes lived during a different economic time. The nation was taken off a gold backing in 1970, so you could call me a post-Keynesian.

 

If you ever want to make more than near zero interest on deposits again, you better freaking hope the gov eliminates it debt. Until then the fed will hold rates near zero so the gov can service it's debt.
When rates finally get away from them, you'll be facing a **** storm so severe you won't know what hit you

 

a little deficit is fine.