Part II: The Government Deficit

Myth: when the government runs a deficit, we should cover it with paying more tax tommorow.

Fact: Government deficit is surplus to non-government parties

The misleading view for looking the detail of economic phenomena is the assumption that the government should have a surplus or it has to have a balance in budget as a minimum of achievement. when it comes to a deficit, it means something wrong in economy and will affect the future generation with burdening them for paying more on tax. This assumption is correct for a country that uses a gold standard as an underlying or the country that uses fixed exchange rate. It is happening because that country must always convert every surplus and deficit to the gold, when a country having a loss on trade, or printing more money, it will reducing the intrinsic value of its nominal currency and also it is tangible causes that weakening the interest rate and causing the inflation. However, for a country who has sovereign currency, it doesn’t matter. It is because of either the surplus or the deficit will never give a significant impact by the reason of that country can “print and burn” for its own money without having any restriction.

After we have learnt which country that could be sustainable maintaining the deficit before, now we gonna make a distinction for understanding where the money goes for when the government has been running a deficit. In this particular part, I create an elaboration with two parties in which the first is government such as The Federal Government and the second is non-government which is similar with the term like a household or a private businesses such as the picture below.

From the two pictures above, we see when the government has a deficit it means a surplus for the non-government chamber and vice versa. In this point, when the government runs a fiscal deficit it means the government expands a surplus in to the economy and it will increase either the demand or supply side that could be improving the economy as well. Now, we have a good reason why we should control the government to be always in deficit position rather than in surplus, but, is that any evidence that could be convincing us based on the data? Ok, before I answer that question, I think its good for us to understand the role of government borrowing mechanism and the relation with the third party, which is foreign sector first.

The simplest analogue for the government borrowing is when the government has spent $100 and take $90 as a tax then $10 left in the pocket of non-government as a usual (green) dollar. Now, for some reasons –i.e. avoiding the excess reserve on banks, the government issues the yellow dollar that called treasury bond with giving the interest-bearing inside it. Most of people undoubtedly will change the green dollar to the yellow dollar because the yellow dollar contains interest rates that can cover the loss of intrinsic value that’s caused by inflation. In other word, something that we called treasury bond its just the number of the saving’s circulation that is being held by The Fed, and of course it is still in the same money but only in different form, not a burden like we had imagined before.

Now we add a new variable which is called “foreign sector.” This is another part of economy outside the domestic private sector which is in every case throughout the world, this part always does its contribution to the economy in which sometimes gives benefit or vice versa. To understand it in a simple way, lets look at the picture below.

                 Three Sector Accounting

That picture describes when the US government spends $100 and taxes $90 away, leaving behind a surplus of $10 in the US private sector bucket. Those dollar can spin in the economy to purchase some goods and services while sometimes the private sector necessarily needs for importing products from abroad. In this circumstances, lets say the private sector spends $5 dollar to buy goods and services from the rest of the world –foreign sector- while foreigners just spend $3 buying products from US. Now we have an insight in which government’s fiscal deficit (minus $10) is exactly balanced by the sum of the surpluses in the other two buckets ($8 plus $2). There is no bad effect since US has monetary sovereignty and the transaction always uses US dollar. The pivotal point is, from those three sectors, all of them could not be in the surplus together, one or two parts should be in a deficit, but, don’t let the private sector goes in the negative way.

By the way, like my promise before, now is the time for me explaining this deficit based on the real fact through the factual data.

The chart above undoubtedly strengthens the previous explanation in which when the government ran a deficit that was the surplus to private sector. However, when the opposite –government surplus- happened such as in Clinton era, it means deficit for the private sector. Moreover, when it was added by the the surplus in foreign sector, the horrific private deficit had been the result. For the additional information, I will add the historical data which is explaining the year when the US government had done a surplus it would have been followed by the recession or even depression.

That is all of my explanation regarding to the government deficit, hoping you enjoy in reading this article, see you on the next chapter in which I want to discuss regarding to the national debt and the effect from import to the country that has sovereign currency. Thanks in advance for having me on… don't be hesitate for giving me critique, advice and so forth, I am waiting on it... :)