THE BLOG
11/16/2012 10:24 am ET Updated Jan 16, 2013

It's Not the Deficit, Stupid!

As the "fiscal cliff" looms, we see that every economist forecasts lower GDP and higher unemployment when government raises taxes and cuts spending. Likewise, every forecast is for higher GDP and lower unemployment when government cuts taxes and increases spending.

Isn't lower unemployment and higher GDP the common goal in Congress? So what's the problem?

  • Why are they going backwards?
  • Why are they acting counter agenda?
  • Why are they pursuing deficit reduction?

Why? Because:

  • They think we've run out of dollars;
  • They think deficits cause interest rates to spike;and
  • They think we could be the next Greece;
  • Etc. etc. etc.

They thought all kinds of bad things about the deficit. And then, after the 2011 debt ceiling debacle and the formal downgrading of the credit rating of the United States, they were all proven utterly wrong. Immediately after the U.S. was downgraded, interest rates unexpectedly went down! They did not go up as universally feared. The U.S. government was not cut off from spending; was not down on its knees before the IMF begging for funding; and it was not the next Greece.

And the likes of Alan Greenspan and Warren Buffet immediately explained exactly why -- we "print" our own money. Just like Japan and the UK, for example, who also never face funding issues no matter how large their deficits may be, we always have the ability to make any size payment in our own currency -- U.S. dollars. The U.S. government is not like the Greek government that is not the issuer of the euro, and is not like California that is not the issuer of the U.S. dollar. So we can't be the next Greece or the next California, because the U.S. government is never dependent on borrowing or taxing to be able to spend. As the issuer of the dollar, that notion is entirely inapplicable. Yes, too much net spending might cause inflation, but there is never a solvency risk for the issuer of a currency.

As a point of logic, has this has not obviously shifted the burden of proof for anyone promoting deficit reduction? Have not all of their reasons for deficit reduction vanished?

It is now true that, with all of those "solvency" reasons gone, anyone who wants to cut the deficit by cutting Social Security and Medicare must now do so on different grounds. And all that's left is the possibility of an inflation risk. However, with the mainstream economists, the markets and the Fed forecasting low inflation even with the current forecasts of much higher deficits, the deficit hawks have nothing to indicate inflation is currently a substantial enough risk to justify budget cuts or tax increases that weaken the economy. What the deficit hawks do have going for them, however are tragically ignorant deficit doves that have yet to realize this landmark shift of the burden of proof shift, as even the doves continue to propose cuts in Social Security and Medicare for the purpose of deficit reduction.

So to repeat: Ask any forecaster. A tax cut and/or spending increase will cause him to revise his GDP forecast up and unemployment forecast down.

How hard is this????

If you would like to see a more detailed understanding of deficts, I just republished Soft Currency Economics as a Kindle book. The book provides an explanation of how banks and central banks operate with a look at 20 years of Italian deficits. It will be available for free for Huffington Post readers on November 17. Click on the link above or the picture below on Saturday and download it for free to your Kindle, and if you don't have a Kindle just download it to the Kindle Cloud Reader and read it on your computer. You will find it an interesting read and I am sure it will instigate you to ask questions. I am here to answer them.