The deficit presents no solvency risk to the United States

I will begin by a review of the monetary system that has been in place in the United States since 1971 and is currently in place in the United Kingdom, Japan, Australia, and Switzerland among others. Note that I will not be discussing the Eurozone system (unless required to for rebuttal) as the way their monetary system works is completely different. I will focus on the United States (and unless I say otherwise this is the country I'm talking about), but most of what I argue would also be applicable to any country where the national government is the monopoly issuer of the currency, the currency is non-convertible, and there are free-floating exchange rates.1. All government spending is "new money"When you examine the way government payments are made, it becomes apparent that government spending always introduces new money into the private sector. Ben Bernake admitted as much in his interview with 60 Minutes when he said "The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. "[1]. All government spending works this way[2,3]. The government does not "borrow" or "print" money, rather it simply spends it into the economy. This is true whether the spending is payment to a contractor for construction of a bridge, or a social security payment. Let's consider the latter. My grandmother (who will we will see again later) has $3000 in her bank account. When she is supposed to get her $1000 social security payment, all the Treasury does is instruct her bank to change the '3' to a '4' in the computer system. There are a number of accounting entries that occur at the same time, but the net effect is $1000 has been added to the private sector. Nobody at Treasury is on the phone to china to borrow the money nor trying to jam a gold coin into the keyboard. They just change the number. When taxes are paid the reverse happens. If the payment is electronic, the amount of tax paid is simply removed from the account (and thus the economy). If one were to pay taxes in cash, the IRS would issue a receipt and then throw the cash in a shredder. [4,5] The bills have served their purpose as a carryable alternative to numbers in a bank computer system. They are of no value to the government. The monetary system exists to further commerce and economic development. The government acts as scorekeeper for the monetary system. Just as a score-keeper in a card game can never run out of points, the government can never run out of dollars.2. The "debt" is just the sum of previous deficits"One way to think about the debt is as accumulated deficits. "[6] That is, if you add up the deficits (the amount more the government spends than it takes in each year) you get the debt. Calling it "debt" is really historical term from a time when the dollar was tied to gold. Under that system the government would need to borrow gold (or gold backed instruments) to spend gold backed instruments. This is no longer how it works. [7] The government does not need to borrow before it can spend nor does it need to tax before it spends. In fact, as we have seen, the dollars that are used to buy treasury bills or pay taxes entered the private sector through government spending.3. Swapping asset classes has no impact on the solvency of the U. S. governmentIn addition to collecting social security my grandmother holds U. S. savings bonds. Can you imagine her saying, "Gee I wish the government would force me to give these bonds back in exchange for cash"? Of course not. Neither her nor the government's current financial position would be in any way changed by swapping a $100 bond for a $100 bill, although my grandmother would need to find a new place to save. Savings is a demand leakage[8]. When people save, they are not spending all that they earn. This means that they are consuming less than they produce resulting in unsold goods or services elsewhere in the economy. Unless these goods and services are sold then producers will scale back and the productivity of the economy will spiral down. The government deficit injects new money to offset these demand leakages.4. Inflation (optional point)Although a discussion of inflation is not necessary to uphold the proposition, since many people on the comments board for this debate have raised it, I will address it nonetheless. Inflation is a continual process of rising prices. [9] It is not an increase in money supply, although one can sometimes cause another. Thus, the ability of the government to run a deficit is not completely unconstrained, although it is not constrained by its ability to borrow or tax. The ability of a government (of the sort I've been discussing) to spend is constrained by the ability of its economy to produce. Government spending causes inflationary pressure regardless of whether there is offsetting borrowing. It is the extra consumption that drives up prices not the extra money. Three quick examples: First, f the government prints $100 trillion, seals it in concrete and sinks it to the bottom of the ocean, there would be no economic impact whatsoever (except perhaps trivially on the paper, ink, and concrete markets). It's not the printing, it's the spending that matters. On the other hand, let's say the economy produces and the American public consumes 1 million cars per year. If the government buys 200,000 cars, then they have increased demand and this will put upward pressure on the price of cars. Again, it doesn't matter how they got the money. They could sell gold from Fort Knox to buy cars or they could just invent dollars to buy cars. The result is the same, the price of cars is set by the supply and demand for cars. Finally, if the government taxes the population, then money is removed from the private sector so some people who would have bought cars won't now. This effect will lessen the impact of the government spending. At any rate, the government is not "running out" of money and does not need to "borrow" more to continue spending. How big the deficit should be is a matter for political debate, but there is no solvency risk. We should decided how much government spending we want (how many teachers, how many soldiers) and then set the tax rate to keep inflation low, but there is no solvency risk. The government can always pay its debts. The proposition should be affirmed. References[1] . http://www.cbsnews.com...[2] . http://www.fms.treas.gov...[3] . http://ecfr.gpoaccess.gov...[4] . http://www.moneyfactorystore.gov...[5] . http://www.newyorkfed.org...[6] . http://www.treasurydirect.gov...[7] . http://www.businessweek.com...[8] . http://www.unc.edu...[9] . http://www.merriam-webster.com...