Eliminating the Deficit

The White House released figures this week stating that the federal government will run up $9,000,000,000,000.00 in deficits over the next ten years. That’s on top of the current national debt of roughly the same amount. Of course, they are quick to point out that the Bush administration is partly to blame. This is akin to the kids in the schoolyard pointing at some other kids and saying “Well, they were doing it, too,” as if somehow this is an adequate justification. (I am reminded of my mother saying “And would you jump off a bridge if they did?”)

What is more disturbing is that no one in Washington is actually talking about what would be necessary to end the deficits. In fact, if you dig around and listen to what the policy wonks are really saying, you will find some unpleasant news: no one really wants to end deficits, nor do they want to end the other curse that comes with deficits: inflation. Oh, sure, they throw the occasional bone to the taxpayer with ‘pay as you go’ and claims of a balanced budget long after they will have left office, but it is hard to take them seriously when they continue to talk about all the programs that ‘need’ funding.

To set the matter straight, inflation is when more dollars chase the same number of goods and services. If there is one million dollars in circulation and a loaf of bread costs $1, and then, without changing anything else, another one million dollars were put into circulation, within a short period of time a loaf of bread would cost $2. The important point here is that the baker didn’t cause the inflation, the folks printing the money did. With very, very few exceptions over the past 100 years, every incident of inflation has been caused by similar actions by governments – increasing the money supply to ‘stimulate the economy’ in the face of stagnant (and low) production.

So, despite the fact that the government isn’t talking about it, the deficit spending we are all engaged in involves not simply raising our national debt, it also involves raising the money supply, which means inflation. What is worse is that wide ranges of government economists view this as necessary. In fact, this is how they will eliminate the current debt: if the economy grows large enough in dollar volume the debt will be easily paid.

Here’s how this works: for ease of numbers, I’ll round things off. Let’s say that the US Gross Domestic Product (GDP) is $14 trillion, the national debt is $10 trillion, and annual payments are $500 billion. If we had a 7% inflation rate, in 10 years the US GDP would be $28 trillion (note: the US isn’t producing any more; like the loaf of bread above, the money supply has increase, your money means less, so the total dollar volume is more). If the US GDP is $28 trillion, the payment of the $500 billion for our current debt, which will still be only $500 billion, works out to only half the real value ($500 billion only buys half of what it used to).

To accomplish this the government must keep increasing the money supply, so the deficit keeps getting bigger. But the theory is that as long as the government economists can keep ahead of the problem then this is ‘manageable.’ Of course, if they make a mistake there is a problem – this can come down around our ears. If this all sounds like something that would get you run out of Las Vegas if you tried it there, you are correct. The only organizations that are allowed to do this kind of thing legally are national governments, ones that can control their own money supply.

The even darker side to all this is what this does to the individual. Government economists are often quick to point out the positive impact of ‘sustained growth, keeping money available helps capital investment and new home growth, etc.,’ but they usually don’t mention what it does to anyone who has been diligent in planning for the future.

If you have a fund or savings plan that you are trying to manage and grow, and it is growing at 5 percent per year, and you manage to sustain 5% growth per year every year for the next ten years, while the government manages to sustain a 7% inflation rate, at the end of that 10 year period you will have effectively lost about 20% of your savings and investments. If you have already retired, you will have no more chance to add to your fund. In short, the scheme of controlled, sustained inflation to pay off controlled, sustained deficit spending will have put you and your planning into the poor house.

But, it doesn’t stop there: in the example above, assume that your actual dollar income increases from $50,000 per year to $80,000 per year over that 10-year period (while your effective purchase price has 20% because of the 100% inflation). The best part of this for the government is that you have now moved into a higher tax bracket! You are making less money (measured in your purchasing power), but you get to pay more taxes.

So, how do you stop this?

There is no easy path. The only thing that can be done is to deny the organs of government the authority to engage in this behavior. Remember, ‘We the People’ are the actual authority; government derives its powers from what We grant it. The obvious, but difficult answer is that we should not expect government, which created the problem, to find a solution to the problem. They need to be told the correct answer. And the correct answer is a constitutional amendment for a balanced budget.