A Note Regarding the Federal Debt

October 17, 2013

Two Pet Peeves:
   Tonight, on our local news, I heard one of our local Congressmen rattle on about the ruinous debt levels that are going to bankrupt the country. I've had it with this bull twaddle! 
    National debt... British, French, Brazilian, or U S.... is not like private debt. The money that governments borrow... and nearly every country on Earth is running a perpetual deficit... is recycled, presumably for the benefit of their citizens. Because of constant (programmed*) inflation, deficits, when measured in absolute pounds, francs, reals, or dollars, always increase. Deficits need to be expressed as a percentage of each country's gross domestic product. Even then, what counts isn't the size of the deficit but the cost of servicing it--that is, the interest on the national debt. For the U. S. at the present time, the interest on the U. S. national debt is well below its all-time high during in the 1990's.
    At the same time, the annual federal deficit needs to fall... which is happening... so that rising interest rates won't outpace the growth of federal income. 
    This will all work out OK as long as we don't enter another recession and boost our safety-net obligations.
    Railing about the current federal deficit is to me the epitome of hypocrisy on the part of the Republican Party... or that subset of the Republican Party that's preying upon public ignorance to mislead their constituents. The Bush administration got us into two expensive wars that are still generating red ink for the current administration. Beyond that, the current administration inherited the worst recession since the Depression, just as the Bush administration inherited the (less expensive) 2002-2003 recession from the Democratic Clinton administration, and Ronald Reagan inherited the 1981-1982 recession from the Democratic Carter administration. Did safety net deficits rise under the Reagan and Bush administrations? Of course, they did! Did the Democratic Party rail about the 1981-1982 or the 2002-2003 federal deficits because of unemployment payments? That I don't remember, but if it did, then that would be as hypocritical as the Republican Party blaming the Democratic Party for the current level of the national debt. 
   My other pet peeve is conflating the current size of the money supply with Weimar hyperinflation.
   In the inflationary 1970's, we were taught that the size of the money supply (M1, or M1 + M2) would determine whether or not we had inflation or disinflation. But that assumed that the other factor in the flow-of-money equation, the velocity of money, would be high enough to insure that any money the Fed generated would circulate through the economy. But a huge money supply by itself doesn't cause inflation. It's the flow of money... the size of the money supply times the velocity of money... that determines whether the money supply will cause inflation.
    Or at least, that's my interpretation of how it works.
    Of course, I don't plan to hoist the tricolor, sound the Marseillaise, and charge the ramparts, so I guess it doesn't make any difference what I think about conflating the the current size of the money supply with Weimar hyperinflation.
    As Andy Rooney might say, I just hope they get it right without me (:-))