The certainty of debt and taxes- comments on the Fiscal Cliff

It takes a fiat currency to sustain full employment.

And a fiat currency, like the $US and the euro, includes the certainty of debt and taxes.

Taxation is required to allow the government to spend its otherwise worthless currency.

And ‘debt’- some entity spending more than its income- is required to ‘offset’ an entity’s desire to spend less than its income.

These desires to not spend are known as demand leakages.

That means, at full employment, either a private sector entity or the government will be spending more than its income to offset the demand leakages.

Private sector spending is, operationally, revenue constrained. It is limited by income and credit worthiness.

Public sector spending in a currency it issues is not revenue constrained.

The private sector, the user of the currency, must first obtain funds before it can spend.

The public sector, the issuer of its currency, must, from inception, spend or lend first, before it can ‘collect’ taxes and/or borrow.

The private sector is necessarily pro cyclical. In a down turn, the private sector loses credit worthiness and therefore is limited in its ability to spend more than its income.

That leaves only the public sector to spend more than its income to fill any residual output gap and sustain full employment.

Those claiming ‘the problem is too much debt- private sector and public sector’ are entirely missing the point.

That includes everyone in Congress, President Obama, and Candidate Romney.

Those now pushing for Federal deficit reduction are entirely missing the point.

There is not Federal solvency problem, short term or long term, with any size deficit.

There could be a long term inflation problem.

However, I have seen no credible, professional long term forecasts of substantial inflation. That includes the Fed, the CBO, and the forecasts of the largest financial institutions, as well as the inflation rates implied by the long term inflation indexed US Treasury securities.

Last year the pre debt ceiling war cry from all sides was that immediate deficit reduction was imperative to keep us from becoming the next Greece.

That fell by the wayside after the downgrade, that was supposed to cause interest rates to spike and find the US, Greek like, on its knees before the IMF,
instead cause rates paid by the US Treasury to dramatically fall. The difference is the US govt is the issuer of the $US, while Greece is but a user of the euro.

So seems to me in this economy federal deficit reduction should be off the table, and the burden of proof of a sufficiently high long term inflation risk
be on those who want to put it back on the table. Anything less seems subversive, either by accident or by design.

(feel free to distribute)

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