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nbsp; nbsp;  Sometimes the conventional wisdom is a lie. nbsp;  Not always,  but often enough that it pays to challenge the conventional wisdom and instead look at the facts and draw our own conclusion.
nbsp;  Tax deficits for example. nbsp;  Someone recently commented on the political hay that Democrats could make out of urlLink Vice President Dick Cheney’ s alleged assertion that “ deficits don’
t matter. nbsp;  Now it matters not a whit if Mr.  Cheney actually made this statement or not for the purposes of this discussion. nbsp;  Personally I hope that he did because it would mean that he was asserting a bold truth in the face of a conventional wisdom that is clearly a lie.
nbsp;  Deficits don’ t matter. nbsp;  That is a statement of rock solid,  unchallengeable truth and I will endeavor to prove this over the course of this writing.
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 A deficit is defined as urlLink “ the amount by which outlays exceed revenues in a given period,  typically a fiscal year.  A negative deficit is equivalent to a surplus.  & nbsp;
 It’ s appears to be a fairly simple statement. nbsp;  If you spend more than you take in you have a deficit,  right? nbsp;
 Moreover,  since deficit spending isn’ t really possible the money to pay for these ‘ overdrafts’  has to come from somewhere. nbsp;
 If government doesn’ t have the revenue stream or the savings to pay for it’ s over spending it would seem reasonable then that it must borrow money to pay for it’ s expected expenditures. nbsp;  If they have $
100. 00 in revenue but $ 150. 00 in expenses they must borrow the difference causing the Federal Debt to increase. nbsp;  Or so the conventional wisdom goes.
nbsp;  In reality the relationship simply doesn’ t work that way,  in fact the reverse is true.  & nbsp;
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nbsp; nbsp; nbsp; nbsp;  Government borrows money continuously in the form of US Savings bonds and Treasury bills. nbsp;
 Because these items can be purchased at will as investment items by private citizens Government has little control over debt generated in this manner. nbsp;  When the Stock Market is strong Bond sales tend to fall off and the debt falls. nbsp;  The relationship holds in reverse as well with Bond sales soaring when the Stock Market is weak or unstable causing debt to spiral. nbsp;
 This means that government has a relatively constant flow of debt- laden currency coming into its coffers. nbsp;  This is the cold hard cash that allows the D. C.  crowd to wallow in deficits year in and year out.
nbsp;  It also allows them to deal with whatever emergency situations may come up. nbsp;  The first fallacy,  that government borrows money to cover its shortfalls,  is thusly laid to rest.
nbsp;  The debt is not driven by the deficit;  the deficit is driven by the debt. nbsp;  The reverse is truth;  deficit spending is only possible because the debt already exists.
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 This,  of course,  is not the only source of Federal debt but it does make up the vast majority of the publicly held debt. nbsp;  The urlLink Tennessee Valley Authority and the urlLink Postal Service also generate some of the publicly held debt,  but that amount is inconsequential in comparison to what is generated through the sale of savings bonds and treasury bills.
nbsp;  Publicly held debt accounts for 58. 12%  of the urlLink Federal debt at the time of this writing. nbsp;  The balance of the debt is made up of what are known as urlLink Intergovernmental Holdings .
nbsp;  These are debts largely made up of debts between various Federal agencies and Departments. nbsp;  This debt structure is very similar to the idea of lending your spouse $ 10. 00 and then declaring that your household has incurred a $
10. 00 debt. nbsp;  More accurately it’ s like lending your spouse $ 10.
00 and declaring that your household has incurred a $ 15. 00 debt because of the interest you are charging him/ her on the loan.  This part of the debt truly is meaningless and is more a question of accounting and budgeting than any actual debt. nbsp;
 It could be wiped out with an eraser at any time.  & nbsp; nbsp; nbsp; nbsp;
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nbsp;  So now we know a dirty little secret,  government incurs debt whether it needs cash or not. nbsp;  Not only that but they cannot choose the time of repayment except in very loose terms. nbsp;
 They simply cannot repay publicly held debt until the holder of that debt demands payment. nbsp;  This means that government has a constant,  largely uncontrolled influx of new debt- laden currency into its coffers. nbsp;
 It cannot invest this money in any traditional sense or even just put it in the bank for a rainy day. nbsp;  The Federal Government is barred by law from doing that and with good reason,  although we won’ t go into that at this time. nbsp;
 All of this adds up to a problem. nbsp;  This influx of money cannot be invested or saved in the traditional sense so it must either be spent or allowed to pile up in a huge,  and I mean HUGE,  vault somewhere. nbsp;
 Stockpiling cash is not a good idea. nbsp;  It takes it out of circulation and effectively makes the total economy smaller. nbsp;  Spending it is the only acceptable method of disposing of this windfall because it’ s the only way to get it back into public circulation.
nbsp;  It can only help to drive the economy if it is dispersed back into the private sector through spending. nbsp;  No one that I know of will ever make the claim that Federal spending does not help drive economic growth. nbsp;  The Keynesian economic models favored by statists everywhere are based primarily upon that very idea.
nbsp;  This of course brings us full circle. nbsp;  Deficits don’ t matter. nbsp;
 They don’ t matter because the cash to pay for it has already been borrowed. nbsp;  We could,  I suppose,  go further and claim,
 if we were statists,  that deficit spending is actually a net benefit and should be encouraged if we are going to continue down this path of uncontrolled borrowing. nbsp;  I’ d love to see the Democrats try to make political hay of Cheney’ s statement as well.
nbsp;  He doesn’ t seem the sort to let conventional wisdom stand in the way of truth.  urlLink MORE…
