I think there is a lot of confusion
about the real meaning of the deficit. There is a lot of talk about
the need to balance the budget, the need to pay down the deficit, to
make the 'hard choices' – but no-one really talks about the why.
There is some ambiguous talk about deficit vis a vis the future, but
no specifics at what is at stake.
In simple terms, as long as others are
willing to purchase and hold U.S. Dollars, thereby funding the
deficit (or holding it in terms of bonds), the dollar remains strong,
e.g., its purchasing power remains great. However, if conditions were
to change, if others' confidence starts to falter, and U.S. Bonds are
not seen as the low risk instruments that they are today, it would
signal a weakening of the U.S. Dollar, and the purchasing power of
the dollar would likewise fall.
A falling dollar translates, here at
home, to inflation, as the amount of goods or services that can be
purchased with a given amount drops. Everything starts to cost more,
from food to clothing, services to labor.
Inflation isn't necessarily good,
although it impacts different people differently. To truly understand
the demagoguery surrounding the deficit, one needs to ask the
question: Who will be most impacted by inflation?
The answer, of course, is lenders.
Bankers. Wall Street tycoons. Anyone who lends money and derives
their income from the resultant payments sees their income fall. And,
if their money is tied up in a long-term, fixed rate instrument
(think a 30-year fixed rate loan at 4%), there is a huge risk that
such an instrument's yield will drop to near (or possibly, below)
zero if inflation climbs high enough – that the payment flow is
actually negative.
Now, a debtor or borrower is in almost
the opposite position. While there was likely some initial pain as
their income dropped relative to the goods and services they wished
to purchase, since labor (i.e., wages) are a form of service and
hence increase their cost along with inflation, labor typically sees
their income keep pace with inflation, and the resultant pain is from
the fact that there is no growth in their wages. Conversely, as
inflation takes hold, the amount relative to their pay that their
long term debts require is dropping, laborers are seeing an actual
increase in their standard of living as a greater amount is free to
purchase other goods and services!
So, who really cares about the deficit?
Not likely you or I. In fact, it has been suggested that one of the
best ways forward would be for America to
gradually inflate her way out of the problem of a high deficit,
and that the consequences are orthogonal to the current horror
stories told about a high deficit.
So, the next time someone tells you it
is imperative that we balance the budget and begin serious efforts to
reduce the deficit, ask them “Why?”
And if the answer isn't because they
have substantial money tied up lending to others at low interest
rates and a future inflation risk may lower their income, they either
have no clue or are lying to you.
And in either case, they have no
credibility. So why listen to them?
