[** Double entendre intended.]
Should we look at the Federal Government budget as our own household budget?
Conservatives, Libertarians, and fiscal hawks who favor austerity type of financing for our Government right now like to ask of us, “Shouldn’t we run the Federal Government just like our household – not spend more than we take in?” If your household could print your own money, you could spend endlessly. Especially if you had been doing this for two hundred years and you never missed a payment and no one ever questioned your ability to pay. That’s the difference between you and me and our Federal (not our State and Local) Government. We cannot print our own money, or add to the supply of money in the system (through the Federal Reserve Bank dealing with our Treasury Department) like our Federal Government can.
Our Government, like most countries, has control of its own currency. Greece does not have control of its currency – it is under the Euro. So Greece has a problem. We are not Greece. Even in the past, when Greece did have its own currency, it was irresponsible and has defaulted on its debt several times in the past century – I think it last did this in the 1970’s. Italy has a problem under the Euro; but, when Italy had its own currency, the Lira, it sustained debt to GDP ratios well in excess of 100% year after year. Italy has always kept a highly leveraged economy – it did very well in good years, and very poorly in bad years. The value of the lira was 600L to a dollar in the late 1960’s and was around 1700L to a dollar by the 1990’s. The U.S. dollar on the other hand, has been quite stable. We did let it devalue during the 1970’s, and paid our oil debt to the Arabs that way, and suffered from high inflation as a result – even though we had very high real GDP growth rates in the 1970’s.
Another advantage the U.S. government has is that the dollar is a reserve currency around the world. Other countries use it, even if they do not deal with us – e.g., oil is priced in dollars regardless of whether China is buying from Iran or whatever. Another advantage we have, is that our indebtedness to other countries (I think it is less than $6 Trillion of the $16 Trillion we owe) is denominated in dollars, not a foreign currency. When Argentina had debt problems and hyper-inflation its debt was held in foreign currencies – U.S. dollars, German DMs, etc. We do not have that problem.
And still another advantage we have is that we still attract foreign investment here on our shores rather than foreign governments investing in their own countries – Germany and China, just to name a few. As bad as our economy is doing right now, it is still better than elsewhere.
So, when you hear someone making a comparison of the U.S. economy to you running your household, you better ask yourself just what this person knows and what is he up to. Are we scoring political points or making sense?
For further reading: http://vicpsu.blogspot.com/2012/12/economics-without-bs.html
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