Gov spending vs. private sector debt

There are two types of money creation.  The government spending money into the economy, and the private sector taking out loans.  The 20 to 30 year boom we just experienced was due to a combination of both government spending (which many erroneously call “debt”) and private sector debt (which really is debt).  Since our country spends more than we earn in international trade, and since our corporations and our richest citizens save huge amounts of cash, new money must be pumped into the economy to replace that money.

Of course our politicians are spending more time talking about pulling back on government, while at the same time the private sector is paying down, and defaulting on, debt.  Not surprisingly we are no longer experiencing an economic boom.  Instead we’ve had a collapse, a recession, and now a muddle through economy due to money contraction and destruction.

Looking at deficit spending, and Federal “debt” growth, combined with private sector debt growth, it’s clear a ton of new money was being created and spent into the economy over the past 30 years.

Since money creation spurred on the 20 to 30 year boom, and money contraction and destruction are causing our current economic malaise, it seems clear the solution to getting the economy back on track is money creation.  If true, the question is Government spending vs. private sector debt?

That answer is easy since private sector debt is bad.  Debt is borrowing from future earnings and spending that money today.  Since the private sector, via student loans, mortgages and credit cards, went on a 30 year debt binge, TODAY is the future.  Today is when we need to pay for yesterday’s spending. The country is doing that via deleveraging through a combination of paying back debt and defaulting on it.

Government spending, which most also call “debt”, does not have to be paid back in the same way.  First, the government can print money out of thin air, so if some big bill comes due it can be taken care of it with new money.  Second, most of that money are treasuries which are essentially savings accounts for third parties like China and pension funds.  They won’t be asking for that money back because it is an investment that pays interest, and they prefer the income stream to the cash since, in the case of China, they have plenty of their own cash and are continuing to earn more of our dollars via their exports to us.

So to repair the economy there are 2 choices.

1) Wait for the private sector to deleverage before their spending returns which will provide the demand that drives companies to hire.

2) Help them deleverage by getting more money into their hands via government spending.

A third choice is to get the private sector to borrower again.  Terrible idea since that’s how we got into this mess of an economy.

However, you may be reading this and thinking that government spending also didn’t work.  The truth is a lot of it didn’t, but not for the reasons most believe.  Government spending is the only true money creation since it really doesn’t have to be paid back.  Private sector debt is temporary.  Governement spending doesn’t have to be.

With $14+ trillion in national “debt” (or cumulative spending) where has all the money gone, and why don’t we have a better economy today?  And if $14+ trillion in spending hasn’t done the trick of providing a robust economy than why would more spending help?

The answer is two-fold.  For one, a huge portion of that money was siphoned off to the financial elite.  By “financial elite” I don’t just mean the wealthy, I mean those who earn their money from pushing paper around, and creating paper products like derivatives.  They are also the lending industry – those who earned from fees and interest on loans, from penalty fees like over-draft charges, and from all kinds of tricks like offering free checking to those you know are most likely to rack up huge fees for over-drafting.  This sort of business is not only not productive, it has clearly been destructive to the well being of the consumer who represent 70% of our GDP.  Meanwhile, the top 1% got incredibly rich off of financial gimmicks which helped everyone else rack up huge debts, and ultimately collapsing the economy.

Much of the government spending recently has gone directly to the financial industry via bail outs.  Imagine if those lenders, investment firms and insurance companies were allowed to fail and that money went to roads, bridges, green technology, high-speed rail and other constructive, rather than destructive, areas.  Or directly to homeowners to bail them out?  Both would have help with private sector debt rather than further enriching the financial elite.  The former would have helped the economy, the latter has not helped it.

There are only two other alternatives to more government spending; 1) tax and redistribute, or 2) debase the dollar so that we stop importing so much and can start exporting.  But Republicans simply will not accept either of those two solutions, so more government spending is literally the only possible option – and the only possible spending plan Republicans would ever support would be a tax cut for main street. Of course they aren’t likely to support that either until there is a Republican President, or the Democrats get tough AND stick together.

Either way, government should not be supporting more private sector debt, the private sector should do everything it can to get out of debt and avoid debt in the future, and the unless we debase the dollar or redistribute wealth via taxation, government spending is the ONLY other way out of this sick economy.

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