Lecture 1. FEDERAL GOVERNMENT AND NATIONAL DEBT

Please note:
For brief definitions of unfamiliar terms,
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National Debt (ND)
The wealth of nations is measured by their assets and 
liabilities.  Our nation’s assets are its natural 
resources and its productive capacity, including its 
infrastructure and its people.

Our liabilities are the net sums owed to creditors by the 
federal government: the National Debt (ND). Throughout this
course, the ND refers to “Gross Debt”, which includes both
Treasury bonds and notes held by the public and insurance
payments eventually due to Social Securty, Medicare, and
other beneficiaries.

Throughout this course, we deal essentially with the federal 
government, which can issue currency. In economic terms, a
state or local government, which cannot issue currency, is
like a branch office of the federal government: it can tax,
borrow, and spend but cannot issue currency. It does not
have a central bank, like the Federal Reserve, that can
create currency. If successfully sued by its creditors, it
can become insolvent. Only the federal government is
sovereign and solvent because it can ultimately create
currency.
Government Power and Impotence
By law, the Federal Reserve has a delicate balancing act: 
"...to promote effectively the goals of maximum employment,
stable prices, and moderate long-term interest rates."

The Fed is now (mid-2011) failing at the first and most
important goal: jobs.

During the 1930s and 1940s, Marriner Eccles was the 
chairman of the Federal Reserve. He steered the economy 
through the Great Depression, WW II, and into a flourishing
post-war era. When Japan bombed Pearl Harbor,he did not
call in the Treasury bond holders and beg for sympathy.
He laid down the rules. To compare his command of a crisis
with the impotence of the current Fed, it is worth reading
this full description of his strategy, including this excerpt:


   "Today’s fiscal conservatives prefer to ignore
   the history of the 1940s, a period when the
   Federal Reserve was far more accountable to
   elected officials and far more independent of
   the private financial interests that have come
   to dominate the Fed in recent decades. During
   the 1940s, the federal government spent and
   borrowed far greater than today as a percentage
   of overall economic activity. Today, federal
   spending is about 25 percent of gross domestic
   product; in the 1940s, spending peaked at nearly
   45 percent of GDP. Today’s federal deficit is
   about 9 percent of GDP; in the 1940s, the
   deficit peaked at 31 percent of GDP. Today, the
   federal debt held by the public is about 61
   percent of GDP; in the 1940s, it peaked at over
   114 percent of GDP. Did those higher spending
   and debt levels bankrupt the U.S. economy?
   Quite the contrary — federal spending was
   critical to the war effort and the success
   of the U.S. economy.

   "After the war, massive federal spending funded
   social policy on a grand scale through the GI
   Bill of Rights and made available job training,
   tuition-free higher education,health care, and
   housing subsidies to nearly 16 million returning
   veterans, a third of the workforce. The GI Bill
   thereby bolstered an expanding middle class and
   created the conditions for sustainable economic
   growth. The growing economy pushed up tax
   revenues, lowering the debt burden and helping
   the federal government pay down debt."


While blaming "Washington", we must also blame the real 
culprits: the voters, past and present, whose stupidity 
and/or ignorance of economic and political matters have 
saddled our nation with four self-inflicted problems:


1.  The Congressional struggle to raise the
debt limit. Due to a law that violates the separation
of powers, Congress first votes to assume a debt and then
forbids payment of the debt by the executive  branch
until it gives its permission. The turmoil  threatens the
global economy for purely political reasons.

2. Our self-imposed, legal dependence upon the
Treasury bond market to finance the administration of the
US government (and therefore our economy). According
to law, Congress must either tax or borrow whatever it
spends. But a sovereign nation, which issues its own fiat
currency, cannot physically fail to pay its
debts as long as the computer keyboards of the Treasury
Department and the Federal Reserve are still functioning.

Treasury bonds offer the public a risk-free haven for
savings at an interest rate usually high enough to protect
against inflation. There is no good reason to pay a higher
interest rate. If bond holders stop buying bonds, we will
continue to feed, shelter, clothe, and defend ourselves.

Requiring Congress to  tax or borrow before it can spend
is beneficial only to the bond holders. Our nation
thrived for a century before Congress tied its own hands.

As a result, over 200 million adults are supposedly at the
mercy of a small number of bond-holders, all of whom have
willingly invested in Treasury bonds and don't know what
else to do with their money.

To explain the problem and propose a solution would be
outside the scope of this course. Interested students
should look into the "New Economic Perspectives"
blog for a good explanation of the operations of the
Treasury and the Federal Reserve.

3.  The maldistribution of wealth, income, and
political power. This is best explained by this excerpt
from Michael Hudson's article in the  "New Economic
Perspectives" blog:


   "Altogether, the post-2008 crash saw some $13
   trillion in such obligations transferred onto
   the government’s balance sheet from high
   finance, euphemized as “the private sector” as
   if it were the core economy itself, rather
   than its calcifying shell.

   "Instead of losing on their bad bets, bad
   loans, toxic mortgages and outright fraudulent
   claims, the financial institutions cleaned up,
   at public expense. They collected enough to
   create a new century’s power elite to lord it
   over taxpayers in industry, agriculture and
   commerce who will be charged to pay off this
   debt.

   "If there was a silver lining to all this, it
   has been to demonstrate that if the Treasury
   and Federal Reserve can create $13 trillion
   of public obligations – money –electronically
   on computer keyboards, there really is no
   Social Security problem at all, no Medicare
   shortfall, no inability of the American
   government to rebuild the nation’s
   infrastructure. The bailout of Wall Street
   showed how central banks can create money,
   as Modern Money Theory (MMT) explains. But
   rather than explaining how this phenomenon
   worked, the bailout was rammed through
   Congress under emergency conditions.
   Bankers threatened economic Armageddon if
   the government did not create the credit to
   save them from taking losses.
 
   "Even more remarkable is the attempt to
   convince the population that new money and
   debt creation to bail out Wall Street – and
   vest a new century of financial billionaires
   at public subsidy – cannot be mobilized just
   as readily to save labor and industry in the
   “real” economy. The Republicans and Obama
   administration appointees held over from the
   Bush and Clinton administration have joined
   to conjure up scare stories that Social
   Security and Medicare debts cannot be paid,
   although the government can quickly and with
   little debate take responsibility for paying
   trillions of dollars of bipartisan Finance-
   Care for the rich and their heirs."

4.  The obsession with debt, of which over 80% was
produced by the policies of those most obsessed by it.
In fact, the ND is important only when debt interest
payments are unsustainably high. This is not the case now
and can never happen with full employment and high tax
revenues.

Relative to the GDP, our post-WW II publicly-held debt was
twice its present value but was never reduced by a penny.
Instead, with unemployment rates rarely below 5% and top
tax rates over 50%, our GDP simply grew large enough so
that, at Reagans's first inauguration, 35 years later, the
ratio was down to 25% of its peak.

That is when the tax-cutters began to wreak havoc. Today,
the ratio is back up to 50% of its WW II peak. With  pre-
Reagan GDP growth and tax rates, we could regain the pre-
Reagan ratio and also reduce our dangerous income and
wealth inequality.

We do not have a spending problem. Due to the
maldistribution of income and wealth, we have a demand
problem that results in an unemployment problem that
creates a tax revenue problem that looks like a deficit
problem that could become a debt problem if we don't get
rid of the maldistribution-of-income-and-wealth problem.

Instead of voting for deficit hawks in both parties, an
intelligent, educated, and rational electorate would
demand a program of full employment based upon repairing,
rebuilding, and improving our obsolete and decaying
infrastructure. The purpose of this course is to show that
such a program finances itself in the same manner that
wasteful WW II spending created post-war prosperity.   
Proceed to:
 Lecture 2. GROSS DOMESTIC PRODUCT (GDP)
Thanks for your interest.
  Marvin Sussman, retired engineer

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