“There is . . . no historical data to demonstrate that a balanced budget enhances gross domestic product or any other indicator of economic productivity . . . On six consecutive occasions from 1817 until 1930, when government cut spending considerably without simultaneously seeking to stimulate the economy with equally deep
cuts . . . depressions arose.” Michael Johns, The World and I, April 1996
“If we choose wisely, we can pay down the debt, deal with the retirement of the Baby Boomers, invest more in our future and provide
relief.” President Clinton, January 18, 2001. [The
recession began shortly afterward, only to end with the Bush federal budget deficits. As a result of those deficits, the economy grew.]
Had anyone in 1980 announced that in sixteen years the U.S. federal debt would increase more than 500%, most experts would have predicted rampant
depression, default on debt and the destruction of the world's financial system.
Experts in 1980 would have used the same arguments they now use when they bemoan the current federal budget deficit and debt. They would have been the first to demand a federal surplus. Yet:
1) The federal debt rose more than 500% in sixteen years.
2) We did not have rampant
was as modest as the Federal Reserve wanted it to be.
3) We did not experience a depression, a default or the destruction of the world financial system. Our economy grew massively, along with federal deficits.
4) To legislate a balanced federal budget is to legislate against the creation of money.
5) Our economy today, being larger and stronger than it was sixteen years ago, has and must have more money than it did then.
What would our economy be today if we had eliminated the federal budget deficit sixteen years ago? We would have had a depression, for lack of
Federal surpluses have been associated with every
in American history. (See below.)
When any organization -- a company, a government, an athletic team, etc. -- achieves success or failure, its leaders receive the credit or the blame. In America, we are led by politicians, academics who influence the politicians and the news media that influence public beliefs.
As this is written, in year 2008, many problems beset the American economy:
Since 1980 we have had four
and are on the cusp of a fifth.
We have had a Savings & Loan crisis, the failures of many banks including one of the nation's largest (IndyMac) and serious problems at Fannie Mae and Freddie Mac.
Repeatedly, we hear dire predictions about the futures of
Medicare. The U.S. Census Bureau reported, "The percentage (of people) without health insurance increased from 15.3 percent in 2005 to 15.8 percent in 2006, and the number of uninsured increased from 44.8 million to 47.0 million."
The Census Bureau also reported, "In 2006, 36.5 million people (lived) in poverty."
code has become increasingly byzantine, unfair and onerous.
Federal Highway Administration's 2006 "Status of the Nation's Highways, Bridges, and Transit: 2006 Conditions and Performance" indicates that much of our infrastructure is crumbling.
Our elementary schools and high schools are in crisis; our colleges are too expensive to the middle class.
We are in an oil crisis.
Our leaders are to blame. The buck stops with them. Clearly, they are doing something wrong, and the only way to correct these problems is to change what the leaders are doing. And the only way to change what they are doing is to change what they believe. Otherwise, they will continue to do the same things again and again, and we will continue to have the same problems, again and again.
All of the above problems stem from one incorrect belief. It is a belief so powerful that even substantial evidence to the contrary is ignored out of hand. It is a belief that paralyzes all attempts at solution to these myriad problems. Without that belief all of these problems easily could be solved..
The belief is this: "Federal
already is too high, and should not be allowed to grow substantially."
Virtually everyone believes it. Our politicians, many academics and the media believe it. You believe it. You never hear or read anything to the contrary. It simply is assumed to be true, without discussion or debate.
To solve an intractable problem, sometimes we must ask ourselves, "What if we assume something different from what we already believe?" What if stomach ulcers were really not caused by stress? What if Newton was wrong about gravity? What if time is not uniform throughout the universe? What if empty space neither is empty nor space?
What if the federal
were too low and should grow substantially?
Is the thought so obviously and outrageously wrong it should not even be contemplated or discussed? Are we so positive, based on what our leaders have told us, that we don't even want to imagine about anything to the contrary?
Think of the possibilities: If the federal debt were too low and made to grow substantially:
–We could eliminate all
–We could eliminate bank failures
–We could make sure our elderly never lack for support
–We could provide free health care for everyone
–We could eliminate poverty.
–We could eliminate federal
–We could restore our infrastructure
–We could improve our lower education and provide college for anyone who wanted it.
–We could create alternative sources of energy and never worry about the supply of oil
If -- just if -- we could accomplish all these heretofore impossible results, merely by changing one belief, would it be worthwhile at least to explore this belief with an open mind? Or are our minds so locked, so closed, so rigid, even these wonderful results are not worth the effort of thought?
That is the question FREE MONEY would like to explore with you.
With a surplus, the U.S. government spends less than it receives. On net, the government destroys
and eliminates the Federal Budget Deficit.
With no federal budget deficit, the total real value of existing money declines due to inflation. If our economy contained $5 trillion dollars tomorrow and forever, even the most minuscule inflation would cause those $5 trillion to have a real worth of less than $5 trillion.
With an inflation of only 2%, those $5 trillion would be worth, in constant dollars, $4.9 trillion in one year. After sixteen years, our economy would contain only $3.6 trillion in constant dollars.
We are geared to inflation. Experts feel a small amount of inflation creates the beneficial illusion that salaries and real-estate values are increasing.
If the real value of all the money in our economy declined, the entire economy would decline, and in a short time, we would enter a depression. It happened in the Great Depression. Workers lost their jobs. Businesses lost their profits. The value of real estate plunged -- all this from a federal surplus.
result from salaries, business profits and real estate holdings. A
or depression causes
collection to decline. If the federal government were not allowed to create money via a federal budget deficit, it could not pay its bills as
The government would be forced to increase
rates, which further would destroy our economy. The federal government would go bankrupt, thanks to its balanced budget.
A federal surplus will be even worse.
Compare the above economy to an economy that increases its money supply 500% in sixteen years, with the same 2% inflation. That economy would contain a real $18 trillion. In constant dollars, is a $3.6 trillion economy as strong as an $18 trillion economy? Obviously not.
What will happen to the U.S. economy if the federal budget deficit causes the federal debt
to rise 500% in the next sixteen years? History shows we will continue to have whatever modest level of inflation the Federal Reserve wants, no depression, no default and no destruction of the world financial system. Our economy will grow larger and stronger than it is today. And yes, we will have more lending capital than ever.
Will the U.S. government service the $25 trillion debt it would have in sixteen years? Yes. The U.S. always repays its debts, right on schedule (unless Congress gets into a political hissy-fit of ignorance, as it sometimes has in the past, and refuses to approve a higher federal debtceiling).
The U.S. repays its debts with U.S. dollars, the same money you use to repay your debts. Because U.S. dollars are credit, the U.S. repays its debt with credit/money, the only money in existence. To create credit/money, the government must create a federal government deficit.
To service a growing debt requires an accelerated creation of money. Borrowing begets borrowing at a growing rate because of the need to cover interest. When the government borrows one dollar, it must pay back more than one dollar.
At current interest rates, and no change in spending or
taxes, the U.S. federal debt would double in less than sixteen years. The government easily will service that debt.
With inflation at 3% and interest at 5%, the government needs 8% more money each year, just to accomplish what it did the previous year.
Just to stand still we need a $16 trillion dollar debt in 2010. Anything less requires that we have a
recession or a comparable increase in non federal debt.
As our population grows and ages, many more people will require Social Security and Medicare payments. We have had a long period of relative peace and the end of the cold war. Though these conditions have allowed for a reduction in military spending, the situation will change.
It is unlikely the government will be able to limit its expenditures and to accomplish no more in future years than it does now.
Stop and Think: A shrinking federal debt reduces the amount of money the federal government creates. Can the economy grow if the federal debt shrinks?
For about twenty years after World War II, the federal budget deficit averaged $0, so the federal debt remained flat, decreasing in certain years, while increasing in others. Yet the economy grew.
Question: How was this possible?
Answer: Federal debt is one part of total debt. At the end of World War II (1945) federal debt amounted to about 62% of total debt. We also had consumer debt, business debt and non federal (state, county, city, park district, school board, etc.) debt.
During the post World War II period, non federal debt rose substantially. Twenty years after World War II, federal debt amounted to only 26% of total debt. The rise in total debt supported the growing economy.
Graphs showing average annual changes in total debt and Gross Domestic Product reveal that the two tend to move together.
The best solution is to eliminate the federal budget deficit and debt altogether, not by paying the debt down, but by ending the government practice of borrowing. The government does not need to borrow money, because the government has the unlimited ability to create money without borrowing. The process would be:
Congress would create an account called "Money."
Congress arbitrarily would fund this account by fiat. That is, Congress merely would determine how much money this account contains. The process would be similar to the way Congress now determines the debt ceiling.
Federal agencies would write checks against this account according to budgets decided by Congress. If any federal agency needed additional funds, Congress would decide whether or not to allow this spending, in the same way that Congress votes for additional spending by the military et al.
There would be no need for federal borrowing, which would eliminate concerns about "our grandchildren paying for the federal debt." There would be no federal debt.
To see a complete discussion of the federal budget deficit and the historical effect it has had on the U.S. economy, please see