Two Kinds of Balance

2017.06If our household checking and savings and investment reserves equal the amount we owe for living expenses and loans, our budgets balance. If our reserves exceed our deficits, we feel good that we have money to spare. If our personal and business deficits exceed our reserves beyond any hope of achieving balance, we are bankrupt. That’s the way things work for us at home and for businesses. That’s not the way things work for governments that print their currencies… as ours does. At the national level, reserves held by the private sector (our households and businesses, and maybe foreign lenders) are matched by an equal level of deficits assumed by the government… because the actual value of the currency and credit that resides in the private sector relies upon the full faith and credit of the Treasury to redeem its currency and meet its credit obligations. Shrinking the government deficit serves to shrink private sector cash flows… and vice versa: expanding government deficits tend to increase private sector cash flows. There is an upper limit when government deficits outstrip Gross Domestic Product at full national production capacity in the private sector. And there is a lower limit when shrinking government deficits reach zero, drying up cash flow and production in the private sector. We have been there, done that, at each of the two limits; history marks them “hyperinflation,” “Great Depression,” and “Great Recession.” Balancing our personal household and private business accounts is a virtuous goal. As the graph above shows us, balancing our government’s budget by shrinking its deficits to zero choked our national economy several times in the last 50-plus years… nothing virtuous about it. That’s because our government was designed to enhance the health, safety, commerce, and general well-being of its citizens: it is not a business.