USA Financial crisis, debt stimulus and How US Government creates Debt 
Original theme by Bill Jenkins; Facilitated by Walter Sorochan

Posted May 19, 2019; updated May 9, 2021.

debt usaThis article explains how the USA government gets money to pay for all of government programs and how debt is created!  The revenue collected by United States government is not enough to pay for all expenses; hence, your government is living in debt beyond it's means! The update attempts to explain a novel approach in dealing with the faltering economy. Instead of fixing a runaway unbalanced budget or budget deficit, Krugman's revolutionary new approach focuses on helping people first with debt stimulus packages.

Update May 9, 2021: President Biden fulfilling promise to get USA back on track during pandemic

This update was result of reading Paul Krugman's opinion about how to deal with the economic crisis caused by the COVID-19 pandemic and disagreement with Krugman's opinion amongst economists.

When there is 'fear talk' about the need to balance the federal budget, the general public interprets such an approach as being similar to balancing the family budget.  But the two are extremely different. Balancing the family budget with income vs expenses works on a smaller scale. Families have to pay their debt. Governments do not .... all they need to do is ensure that debt grows more slowly than their tax base. The point almost nobody seems to get is that an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money the government owe to itself as it is continually printing money.  Krugman: Understanding debt 2012

Balancing a federal budget in a manner similar to families would mean austerity and elimination of many needed programs. It means cutting spending and raising taxes or austerity. And this usually creates an unfavorable political environment, increases inflation and a recession.

Paul Krugman, in explaining how United Kingdom responded to austerity [tight money policy] between 2008 -2015, presents an argument for using budget deficit and debt; all of the economic research that allegedly supported the austerity push has been discredited. He explains a most complex economic issue of debt stimulus: Krugman Austerity delusion 2015

The textbook answer to an economic recession as in 2008 was fiscal expansion and not austerity: increase government spending both to create jobs directly and to put money in consumers’ pockets; cut taxes to put more money in those pockets. [A radical idea before 2008]

But won’t this lead to budget deficits? Yes, and that’s actually a good thing. An economy that is depressed even with zero interest rates is, in effect, an economy in which the public is trying to save more than businesses are willing to invest. In such an economy the government does everyone a service by running deficits and giving frustrated savers a chance to put their money to work. This  borrowing does not compete with private investment. An economy where interest rates cannot go any lower is an economy awash in desired saving with no place to go. Deficit spending that expands the economy is, if anything, likely to lead to higher private investment than would otherwise materialize.

It’s true that the government can’t run big budget deficits for ever (although you can do it for a long time), because at some point interest payments start to swallow too large a share of the budget. But it’s foolish and destructive to worry about deficits when borrowing is very cheap.

At some point the government will want to reverse stimulus. But you don’t want to do it too soon – specifically, you don’t want to remove fiscal support as long as pedal-to-the-metal monetary policy is still insufficient. Instead, you want to wait until there can be a sort of handoff, in which the central bank offsets the effects of declining spending and rising taxes by keeping rates low. As John Maynard Keynes wrote in 1937: “The boom, not the slump, is the right time for austerity at the Treasury.”

Countries like United States, United Kingdom and Japan borrow against the printing of their own currency. They would never run out of money. As an example, President Obama's stimulus package led to higher output and employment than would have prevailed otherwise.

According to Krugman:  Smith: Krugman upbeat economy 2020

"What's happening now [pandemic crisis] is that we've shut down both supply and demand for part of the economy because we think high-contact activities spread the coronavirus. Even though this crisis is really different from anything we've seen before, Krugman's sense is that we've got a pretty good handle on the economics. In particular, we know enough to understand why conventional responses like stimulus or tax cuts are inappropriate, and why we should be focusing on safety-net issues. So typical stimulus isn't the goal here, and instead we're merely alleviating human suffering while we wait for the shock to end.

One shock is that we don’t know how long the pandemic will last or what sectors of the economy will be affected. Right now, we’re probably opening [schools, restaurants] too soon, which will actually extend the period of economic weakness. Many businesses closed and will take time to reestablish and have full employment.

We also have an unknown timeline in global response to vaccinations. Many third word countries like India and Nigeria have difficulty getting enough vaccines to bring the pandemic under control. The pandemic recovery period may be quicker in USA but very slow in many other countries, slowing the reopening of supply lines for essential goods."

A major problem is that most politicians do not understand Krugman's macroeconomics in order to make wise decisions. Politicians also cater to a public that doesn’t understand the rationale for deficit spending, that tends to think of the government budget as the same as families balancing their financial budget and living within their means.

All of this is standard macroeconomics of 2021!

As President John F. Kennedy once said, “the time to repair the roof is when the sun is shining.”

President Biden is breaking with old time economics in using macroeconomic theory to to jump-start the economy, get money for infrastructure, jobs, education and provide economic aid for families in 2021.  Cassidy: Biden rebalancing economy 2021 It is based on build-up economics that is complex.  Reich: Build-up economics 2020 This gives a false image of a healthy economy. It helps to explain why the stock market on Wall street is holding on and United States is successfully postponing a deep and long lasting recession. So yes, debt matters. But right now, other things like people matter more than economics. We need more, not less, government spending to get us out of our unemployment trap and pandemic.

The common theme among economists like Krugman is that we don't have to worry about deficit spending or how we'll pay off the debt run up in dealing with Covid-19, because we will never never pay it off, just as we never paid off the debt from WWII. But there are many economists that disagree with Krugman's viewpoint.  Committee Federal Budget: Concern national budget 2019  Weinstock: Federal debt, deficits & COVID-19 2021 Will Biden's approach to fixing a broken economy work and vindicate Krugman? Biden has yet to deal with social security and health care that previous presidents have been unable to fix.

For now, we will have to wait and see! The future is uncertain! But eventually United States will need to meet its ceiling for borrowing and spending.  One can only escape reality for so long.

Krugman, in 2020, made the case for permanent stimulus as a way of planning for future disasters.  Krugman: Permanent stimulus 2020

Meanwhile, President Biden is once again making headlines, getting Republican criticism and attracting attention.

So, how does the federal government get money [revenue]? Studebaker Gov't raises money 3 ways 2015

1. The first is to tax the people. The problem with that from the point of view of our masters is that everyone knows who's doing it. The politicians can't blame greedy capitalists or any others for what the tax-man does, and that's a problem for them.

2. The second source of revenue for the government is borrowing. But again, there's a limit on how much you can borrow, because everyone knows who's doing it - and has a good idea of how indebted the government is.

3. The third way is much, much better from their point of view, and that is to create money out of thin air. That may be done via fractional reserve banking, or printing fiat currency, or whatever. This is good from their perspective because not one in 1,000 people, or maybe not one in 10,000, knows who's doing it and that it is causing inflation. It's theft on a grand scale, understood by so few, so they can get away with it.

There is a cover-up to hide this truth from the American people!

Here is Bill Jenkin's version of how the USA government gets money to pay for government expenses and creates debt: Jenkins: Gov't Paper addicts 2009

The amount of taxes collected here in the United States last year would not have been enough to fund Social Security and Medicare. It’s hard to believe, but true.  Jenkins: Gov't Paper addicts 2009   So where does all the money come from to pay for the infinite number of other expenditures of the federal government?

How do they pay for schools? Not just the aging and dilapidating buildings, but the books, supplies, teachers and the massive bureaucracy? How do they pay for the military… guns, tanks, soldiers, computers, jets, ships, submarines and planes? How do they pay for the Senate, House, Supreme Court, president, Secret Service, CIA, FBI, NSA, NASA, DOJ, DHA, HUD, DHS, ATF, IRS? Not to mention welfare programs of multitudinous varieties, college grants and national parks. How do they pay for all this? By means of two devices about which the man on the street knows little.  Jenkins: Gov't Paper addicts 2009

The first is through bond and Treasury auctions. We — as in “we the people’ — sell these instruments to people who believe that we are a good risk. Then we pay them to let us borrow their money. Of course, borrowing money costs money… it’s never free. But when a country borrows more than it takes in by taxation, because it is spending more than it takes in by taxation, the result is a growing debt problem, which never gets paid down. So how can the United States, or any country, continue on this cycle of never-ending borrowing? Not to worry, my friend. Because here is where the second device comes into play.

Countries begin paying off their debt with money that they “print.” It is commonly called monetizing the debt. It’s not hard to understand, but countries try to make it hard. When you’re stealing from your citizens, it is better if they don’t know it. If you make the example and the problem personal, it all falls into place.

If I [Bill Jenkins ] had a nearly endless source from which to borrow, some deep-pocketed uncle for instance, I could borrow from him indefinitely, as long as I could pay him back in money that I printed myself. If he did not know the money I gave him was fake, or if he just didn’t care, I could continue that scam in perpetuity. I could borrow millions… billions… TRILLIONS! But let’s not get ahead of ourselves.

Technically, I  [ Bill Jenkins ] could only borrow from him until he was out of money. Right? Well, no… not exactly. If he had creditors who would take my fake money as real money, he would never have to stop lending. Until someone held his “wallet to the fire.” That is essentially what is happening. Only it is our Uncle Sam who is doing the borrowing. Then he prints his own money and uses it to pay his bills to his creditors around the world. Up until recently, our creditors had to take it. Because we had the bully power to force it on them. Plus since all the countries in the world were doing the same thing, our funny money was considered the best. That gave it some sort of intrinsic value.

But now there are currencies more valuable than ours. And now we do not have the military firepower to force it on others. Some feel that means that the whole jig is up. If our paper money is refused, then everyone’s paper money will be refused. But just because our government has spent us into trouble and is trying to make it worse with bigger and bigger spending projects from stimulus to healthcare doesn’t mean that the other major economies of the world are ready to throw in the towel. Indeed, if they can hang on, they will, because perhaps they will move into the position of world’s reserve currency and can produce prosperity out of nothing, all while impoverishing their citizens and neighbors.

Sorochan Commentary:  Author Jenkins has revealed the bitter truth:  US does not have enough money, cash on hand, to pay the interest on the borrowed money. Your government has also deferred payments on the principal [money borrowed].  Hence, more debt is piling up! Your government [ the congress and senate ] 'kicks the can down the road' by printing money that has no collateral to back it up! Economists refer to such money as junk.

The reader may find reading David Stockman's 2015 article about the dangers of national debt helpful: David Stockman interview about runaway debt

Here's how that national debt works. If you add up all of the U.S. government's promises to pay retirement and health care benefits for the next 75 years and subtract the projected tax revenue dedicated to those programs over the next 75 years, there is a gap. Depending on the year, for 2015, there is over a $ 100 trillion gap!

Your government has distorted the real truth about just how much we really owe. The government says about $ 20 trillion in 2015.  At the end of FY 2016 the total government debt in the United States, including federal, state, and local, is expected to be $22.4 trillion. This is the amount that the federal government says it owns.

But this amount does not include hidden expenditures like entitlements. According to Edelson, the amount is at least over $ 100 trillion dollars in 2015.  The plain truth is that Washington D.C.’s debts are far larger than most people realize.

Incidentally, entitlements [ social security] must be counted in the amount that the government owes.  Why?  Because, for example, the federal government took [ stole ] the funds that retirees paid into social security as retirement funds and gave a worthless IOU. This social security amount was borrowed from the retirees on the promise that it would be paid back.

In addition to that debt of $ 20 trillion in 2015, according to the latest statistics [2015] from the U.S. Department of the Treasury, our government owes another $97 trillion that it never wants to talk about. These are what it politely calls “unfunded liabilities” — the money it owes primarily to veterans and to seniors in pensions, Social Security and Medicare payments. Below is a graph projected by Larry Edelson for 2015:

debtrealusa

Altogether, Washington was on the hook for more than $115 trillion on 2015. That’s more than 6 times the size of the entire U.S. economy. The plain truth is that Washington D.C.’s debts are far larger than most people realize. The national debt in 2021 is obviously much, much bigger today than it was in 2015.

Why does the debt grow each year? Because the government spends more money than it gets.  Your government does not live within its budget means.  The video below explains this:

Video: The Size of the U.S. Debt in 2015:   length = 1:58 mns.

Lack of transparency: Why are the American people not told the truth about the national debt? Chris Cox, a former chairman of the House Republican Policy Committee and the Securities and Exchange Commission and Bill Archer, a former chairman of the House Ways & Means Committee explain this debt dilemma: "A better explanation is that the full extent of the problem has remained hidden from policy makers and the public because of less than transparent government financial statements. For years, the government has gotten by without having to produce the kind of financial statements that are required of most significant for-profit and nonprofit enterprises. The U.S. Treasury "balance sheet" does list liabilities such as Treasury debt issued to the public, federal employee pensions, and post-retirement health benefits. It does not include the unfunded liabilities of Medicare, Social Security and other outsized and very real obligations." Cox: Hints of true US debt 2012

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees' future retirement benefits—already exceeded $97 trillion in 2015. The actual figures do not appear in black and white on any balance sheet. Cox and Archer blame the U.S. government for using shoddy accounting and for misleading the American public on their finances. In fact, the most misleading thing about that $97 trillion is the way the mass media often misunderstands and distorts the real truth about the national debt.  Thompson: Real debt Cox: Hints of true US debt 2012  Weisenthal: Real US debt 2011

Former Reagan economic adviser Laurence Kotlikoff said the U.S.'s "true indebtedness" amounted to $211 trillion [in 2013]. That's more than 15 times the $14 trillion official figure. "We're focused just on the official debt, so we're trying to balance the wrong books," Kotlikoff said, naming Social Security, Medicare, and Medicaid for the skyrocketing unofficial figure. If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That's the fiscal gap .... Why are these guys thinking about balancing the budget?...They should try and think about our long-term fiscal problems. We don't hear more about this enormous number, Kotlikoff says, because politicians have chosen their language carefully to keep most of the problem off the books.  Foxman: Actual debt 2011 

Other countries, having similar problems, have copied the USA model of printing money in an effort to balance their budgets.  “Overall debt relative to gross domestic product is now higher in most nations than it was before the crisis [of 2008],” McKinsey reports. “Higher levels of debt pose questions about financial stability.”

Still confused and in disbelief? Below is a video that summarizes how our economy works and how Uncle Sam creates debt:

Video: Length = 5:12 mns.

As of 2010 -2021, the old theories of repaying a national debt has been displaced by macroeconomics where government uses reverse stimulus to avoid economic recession.

E-mail  wsorochan@gmail.com

Reference:

Cassidy John, "Biden's great economic rebalancing," The new Yorker, May 3, 2021.  Cassidy: Biden rebalancing economy 2021

Committee for a Responsible Federal Budget, "Why Should We Worry About the National Debt?" April 16, 2019.  Committee Federal Budget: Concern national budget 2019

Cox Chris and Bill Archer, "Why $16 Trillion Only Hints at the True U.S. Debt," The Wall Street Journal, November 28, 2012.  Cox: Hints of true US debt 2012

Foxman Simone, "Economist Calls Entitlements A Massive Ponzi Scheme And Says US Is Actually $211 Trillion In Debt," Business Insider, August. 31, 2011.  Foxman: Actual debt 2011

Gale William G., "Five myths about federal debt," Brookings Institute, May 2, 2019. Gale: Myths frderal debt 2019

Jenkins Bill, "Paper Addicts," Whiskey & Gunpowder, December 11, 2009.  Jenkins: Gov't Paper addicts 2009

Kotlikoff Laurence J., "Kotlikoff on NPR Hits US $211 TRILLION Debt," The Daily Bell, September 07, 2011.  Kolikoff: US debt $211 trillion 2011

Krugman Paul, "Nobody Understands Debt," Economist's View, January 02, 2012.  Krugman: Understanding debt 2012

Krugman Paul, "The case for cuts was a lie. Why does Britain still believe it? The austerity delusion," The Guardian, April 29, 2015.  Krugman Austerity delusion 2015

Krugman Paul, "The case for permanent stimulus," VOX, May 10, 2020.  Krugman: Permanent stimulus 2020

Louis James, “Walter Block interview,” Casey Daily Dispatch, April 10, 2013.  Louis: Casey interview 2013  James: Casey Report 2013

Reich Robert, "Trickle-down economics are a cruel hoax. Invest in infrastructure, education and public health," UCBerkely Blog, December 21, 2020.  Reich: Build-up economics 2020

Smith Noah, "Paul Krugman Is Pretty Upbeat About the Economy," Bloomberg Opinion, May 27, 2020.  Smith: Krugman upbeat economy 2020

Solman Paul, "David Stockman: We’re Blind to the Debt Bubble," David Stickman/s Contra Corner, February 3, 2014.  Solman: Debt bubble 2014

Studebaker Benjamin, "The 3 Ways Governments Raise Money Part II: Borrowing," 2015.  Studebaker Gov't raises money 3 ways 2015

Thompson Derek, "Is Our Debt Burden Really $100 Trillion?" The Atlantic, November 28, 2012.  Thompson: Real debt burden 2012

Weisenthal Joe, "OMG, Is The US Really $211 TRILLION In Debt?" Business Insider, September. 4, 2011.  Weisenthal: Real US debt 2011

Weinstock Lida R., "Federal deficits, growing debt, and the economy in the wake of COVID-19," Congressional Research Service, March 23, 2021  Weinstock: Federal debt, deficits & COVID-19 2021