That's a good point. I would say it is a bit of both. The Clinton years were good ones for the US economy, and there was a surplus under Clinton for some years, but this was never sustainable. In some sense, the real question is: What is the relationship between the surplus and the economy?

The sane answer, I think, is that the Clinton surpluses were only possible because of the economic good times. A well running economy implies high tax revenues and low social spending, and therefore pushes the budget deficit towards surplus automatically, even when politicians do nothing.

But the more worrying part, and this is where Vickrey got it right, is the question of how those good economic times were possible in the first place? The answer to that is that the Clinton administration was also a time when private credit really took off. Economic growth was largely fuelled by consumers going into debt to finance their consumption. As should be clear to everybody by now, that wasn't such a good idea after all, because unlike government debt, consumer debt is not sustainable.

You're taking the wrong metric here. When it comes down to it, the deficit is simply equal to the net imports plus the saving of the private sector. That is not a theory, by the way, it is a simple consequence of proper book keeping. So whether a government deficit is big or not really needs to be seen in relation to the desires of the private sector and the behaviour of the rest of the world.

What you are seeing in the US is simply that the crazily low savings rate of the private sector is returning back to normal now. Where before, consumption has been financed by easy credit, this access to credit has now dried up and everybody is scrambling to get their balance sheet in order - a balance sheet recession. This increase in private saving needs to be supported by a government deficit. If the government withholds the assets that the private sector needs, this will result in less spending, i.e. a lower path of GDP, and a lot of pain for private individuals especially via higher unemployment.

All that has been known for a long time, see e.g. here. Modern Monetary Theory also explains the connections quite well, and can perhaps help you calm down in general.

To anybody who reads the parent: yes, those debt numbers sound impressive. However, ultimately they are just the necessary counter-part to giving the private sector the monetary assets that it desires. This was understood a long time ago, see e.g. here. More recently, Modern Monetary Theory economists have been pushing the same point. If you haven't yet, I recommend you set aside some time to read introductory explanations e.g. here and here and here.

The bottom line is this: targeting a specific size of the budget is bad policy. The budget will be whatever it has to be to match the behaviour of the private sector. Artificial austerity, as is being proposed these days, is coercion of the private sector to go against its natural behaviour, even when that natural behaviour is benign. In other words, austerity actually means an oppressive and draconian government. Deal with it.

Perhaps your problem is a semantic one? You have to understand that there are different notions of what money is anyway. As I have hinted at before, banks cannot directly increase the monetary base (though they can indirectly force the central bank to either increase it or miss its monetary policy target). However, the actions of banks do change the size of the money supply, because the money supply includes the size of bank deposits. In particular, the money supply grows when banks make loans, hence money is created.

Anyway, here's one final attempt. Have you ever read this article on Money creation? Seriously, read it. It is fairly short compared to the other links I have provided to you.

The mainstream portrayal of reserve banking is flawed as far as I can tell, but despite such disagreements about the details, all major schools of thought in economics agree that banks create money (that does not mean that banks get an entirely free lunch, as regulations are supposed to make seignorage impossible; but banks do create money, if not for their own spending purposes). Unless you at least acknowledge and somehow address this dissonance between your claims and basically all of economics, you just come off as a crackpot who doesn't understand what he's talking about.

You don't have to take it from me. Here is a nice visualization of what happens when a bank makes a loan. You can let economist Bill Mitchell explain it to you. Or you can read between the lines in the Basel accords, which define how much leverage a bank can have. Of course, "leverage" is the key word here - banks normally create money when they increase their leverage (technically speaking, they can also increase their leverage by changing their position to be riskier according to the Basel rules, but that is an exception rather than the rule). If you speak German, you might also want to look at this explanation of the German central bank, in particular the section on "Giralgeld". More generally, if you want to understand how money works, the best sources are the writings of Modern Monetary Theory economists, simply because they place value on explaining the down-to-earth mechanisms underlying all the fancy talk. I suggest you start here or here.

If I were you, this cross section of sources from all over the economics spectrum (from ultra-orthodox to highly unorthodox) would convince me.

Since the premise of that implication is true without there being runaway inflation (though I want to emphasize that there still is no magic involved), it seems you also have to work on your understanding of how inflation works.

Look, I understand where you're coming from, and I understand you find it hard to believe the things that I'm writing. But consider the possibility that I'm right. Can you risk being wrong about that?

Two years ago, I probably would have reacted like you did (although I hope that I would have better estimated my own lack of knowledge in the matter). The fact of the matter is that, unfortunately, the macroeconomics education sucks everywhere around the world, and unless you study economics at university you never normally come across all these things. That's not your fault. In the context of the financial crisis I've become curious to understand more, and I've read up on all these things. I've come across a lot of unintuitive things along the way, and it takes time to digest everything. It took me at least a year, and I'm still learning new things.

I sincerely hope you will set aside some time to follow some of the links I listed above. It can be an amazing intellectual experience.

Ah, but why was that? Was that because people had no faith in the currency, or was it because there simply wasn't enough bread around? War takes its toll on the production capacity of a country.

False. If nobody has anything of value to trade against that dollar bill, then you cannot trade it no matter how much you believe in it. When a valley in the Alps is snowed in, people there do not "lose faith" in the value of their money, but if the supply trucks are cut off, that faith isn't going to help them at all.

It's all about supply and demand. Faith is irrelevant.

... and then he calls the judge to impound their assets, which is why normal people will rather go and offer their labor in order to get money and pay taxes. Keep in mind, of course, that collecting taxes would actually become easier if people had a shitload of money due to hyperinflation.

Look, fiat money is a creation of mankind, I totally agree. You cannot eat it or do anything with it, so it has no intrinsic value. But to go from there directly to the conclusion that the value of fiat money rests only on faith is bogus. It just does not follow logically.

In particular, if you actually drill into hyperinflationary periods anywhere, you will quickly understand that faith had no causal role to play in any of them. The stories read remarkably similar, and they are always caused by some combination of factors including collapse of production in the economy caused by war or idiotic policies, together with currency pegs or foreign-currency denominated debts.

The statement about the banks is misleading. While they cannot print money in the literal sense (physical currency is only created by government), they do "create money" whenever they give out loans. That money is then "destroyed" when the loan is repaid. This is generally agreed upon in economics; you can read about the various definitions of money supply, for example. Except for the monetary base, they all include credit money created by banks.

Actually, it's 100%, and there's nothing magic about that. Just as a matter of accounting, every from of monetary assets is actually somebody else's liability, i.e. debt. Those physical dollar bills in your wallet? They are a liability of the US government.

But that's no reason to go insane about it. Calm down, set aside a few hours, and read the Modern Money Primer by UMKC economist Randall Wray, or, if you don't have quite that much time, this summary on PragCap.

No matter how little "faith" people have in the US$ - and what the hell does "faith" mean in that context anyway? - they will still have to use US$ to pay their taxes, because the government says so. That is the floor that prevents the value of US$ from dropping to zero, and in fact taxes are where the value of money initially came from. Taxes drive money. Not enough people are aware of that, even though it's kind of obvious once you really think it through.

I'm not an expert on the matter, but there is a serious debate among academics that The Prince was actually meant as satire, i.e. that Machiavelli's goal was to criticize the practices outlined by highlighting them in their full immorality, perhaps even targeted at the general public as an audience. This debate seems to not be fully settled, but it's worth pointing out given your comment. If those commenters are right about Machiavelli's actual intention, it would be deeply sad and ironic how the word "Machiavellian" is used these days.

You're right to be sceptical about this. All these debt limit numbers, whether it's the GP's 100%, or the Maastricht treaty 60% for the Eurozone are really just pulled out of thin air. There is no solid research to substantiate them. For a bit of perspective, consider that Japan has been running with a debt level of way more than 100% of GDP for over a decade, and they haven't fared worse than most Western countries.

The key thing that people need to understand in this debate is how currencies even work. This is amazingly badly understood, even by academic economists (this is very slowly changing, but as they say, progress in the sciences happens one funeral at a time). If you have some time, you may be interested in this Modern Money Primer, or the somewhat shorter article of PragCap.

The tl;dr version is this: monetary sovereignty matters. The US federal government, being a currency issuer, simply cannot be reasoned about in the same way as we reason about our own personal, currency user, finances. In particular, the US federal government will never be unable to make US$ payments, and it will never be unable to service its debt obligations. In fact, it could start deficit spending immediately without even issuing matching treasury bonds, and nothing much at all would happen.

Most honest people accept that after a while, but the implications always take a while to sink in. There are no free lunches, but the current austerity obsession is needlessly throwing away lots of food that's on the table. It's also an uphill battle because there are so many misconceptions on how inflation works. Food for thought: the highest rate of inflation in the US in the last 80 or so years was in a year when the government ran a surplus!

The so-called independence of the Fed is all smoke and mirrors. The Fed was created by Congress, it has to operate under the rules set by Congress, and it can be undone by Congress. More importantly, even today the Fed does not operate independently from the Treasury. The Fed and Treasury coordinate their transactions to enable the Fed to manage the bonds market. Seriously, read up on it.

That is quite misleading. Outside of regulatory capture (which is unfortunately a very real thing), the banks have exactly zero influence over the politics of the Fed. They are formally owners, but even the profit of the Fed is largely paid out to the Treasury.

This last point highlights just how absurd the institutional setup is, by the way. The profit of the Fed is in large part due to interest that the Treasury pays to the Fed for the bonds that the Fed owns. The profit is then paid back to the Treasury. Hooray for smoke and mirrors bureaucracy!

Oh, really. Never mind the fact that such an action wouldn't even be necessary, what form do you imagine this economic panic would take? I assume it'll be like the panic that happened after Treasuries were downgraded to AA+?

Bad comparison, because Greece and Ireland are in a very different situation. Their problem, especially in the case of Greece, is that its currency should have devalued significantly relatively to currencies of the rest of the world, but that was prevented because Greece tied itself to the Euro. Countries that do not have pegged currencies don't suffer from the same problem, because their exchange rates never go that far off-kilter.

That said, I would say that reintroducing their own currency is in fact the best thing Greece can do economically. Better to have a very painful but short cut followed by a swift recovery, than to suffer many years of economic depression. Argentina is a good example that this can work.

I was wondering when the inflation bogeyman would show up. Hyperinflation in Germany and Zimbabwe was never about printing too much money; that was just the spectacular side effect of other, very different problems. This is a good introductory paper. Tl;dr: in both cases, a collapse of productive capacity combined with foreign currency-denominated debts created an impossible situation. Printing money was a symptom rather than a cause.

Since that can only happen due to the interest that the government pays on the debt, the answer is very simple: decrease the interest rate. The interest rate is a political choice set by the Fed, after all.

If the decreasing interest rate should cause people to buy and invest instead of saving, even better: This will cause tax revenue to go up endogenously, thus driving the deficit down and ending the situation that you fear so much. If this process goes so quick as to create inflationary pressures, then MMT also prescribes a clear solution: Raise taxes in a targeted way to force the economy to cool down.

What's with all the sarcasm attempts these days?

Anyway, just like your sibling comment, you have to understand the difference between a monetarily sovereign government like the US federal government, and a government that is only a currency users, such as the Greek government. And just like your sibling comment, you may find a look at the Eurozone situation from an MMT perspective interesting.

Also see my reply to the sibling comment.

I have not questioned that.

What I'm saying is that the question of big vs. small government is orthogonal to the question of the government's budget balance. That may seem like hair splitting, but it's really not. When you take a look at Modern Monetary Theory economists, you'll see a very wide variety of political opinion on the question of where they stand on big or small government (Warren Mosler is a good example, but of course their opinions are usually much more subtle).

But they all agree that the deficit and debt hysteria is a red herring.

Perhaps that's not what you want to have a debate about, and you would rather debate the question of the size of government. Fine with me. I'd just thought I should point out that you're confusing categories: size of government is more or less equal to the total size of government spending. The deficit and resulting debt are something different.

All I want is that the distinction is appreciated, because it would elevate the quality of the discussion. That you believe this to be trolling is surprising (and a bit depressing).

I appreciate the sarcasm, but it mostly shows that you have either not read about or not understood the implications of MMT. The situation of the Eurozone countries is more like that of US states, since they are currency users, not issuers. They are not monetary sovereigns. In fact, US states have much less debt relative to GDP than the Eurozone countries, and as non-sovereigns, they have to have low levels of debt. The problem is that within a currency, there must be someone with growing levels of debt to allow growing levels of private savings. In the US, the federal government typically plays this role (the only reason there was a surplus under Clinton was that, during that time, the financial sector successfully convinced the rest of the private sector to take on more and more debt, i.e. the savings rate of the private sector was negative - historically an extremely atypical situation, which was unsustainable and lead to the GFC). In the Eurozone, nobody can play this role. That is why there is a crisis in Europe: the Eurozone was doomed to fail from the start.

I admittedly did not mention the importance of monetary sovereignty in my earlier post, but one cannot always write everything. Since the discussion was clearly about the US situation, I left it out for brevity.