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The Incredible Shrinking Deficit

Posted on Oct 26, 2010
Flickr / Rob Lee

Republicans pulled off a pretty neat trick, running up huge deficits and then making it their party’s big issue. Not to be outdone, the Democrats have managed to make $1.3 trillion look small.

The deficit actually shrank in the last fiscal year, according to the Treasury, and revenues were up. Here’s the hitch: We were still $1.294 trillion in the hole, and it’s easy to shrink a deficit when the previous year’s shortfall included part of TARP and the stimulus on top of lousy tax receipts and the odd trillion for the military.

Consequently, both Democrats and Republicans are already campaigning on the news that the astronomical deficit is smaller.  —PZS

AFP via Google:

For the 2010 fiscal year that ended on September 30, the government had a budget shortfall of 1.294 trillion dollars, down 122 billion dollars from the previous year’s record-setting high.

Revenue rose and spending fell amid recovery from recession and as President Barack Obama’s Democratic administration wound down some of the emergency measures taken to restore growth.

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By felicity, October 28, 2010 at 12:14 pm Link to this comment

Fat Freddy - your 1) and 2) could be said this way. 
The expansion of debt and speculation that
characterized the US economy (and advanced capitalism
as a whole) since the 1960’s represented the main means
by which the system managed to avoid sinking into a
deep slump, while not enabling it to overcome the
stagnation of the ‘real’ economy.  A supporting truth
of successful capitalism is we create wealth by making

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By felicity, October 28, 2010 at 12:06 pm Link to this comment

Economists are amazingly adept at giving us the right
answers to the wrong questions, or to put it another
way, they ask the wrong questions when they don’t want
the right answers.

A lot of numbers, a lot of obfuscation, but these
numbers I can understand.  If the Bush tax cuts for the
super-wealthy were allowed to expire, Social Security
would be funded for the next 75 years.  As it is now,
it’ll be funded for the next 29 years. Senator Bernie

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By Fat Freddy, October 27, 2010 at 7:53 am Link to this comment

While it may be true that monetary inflation has helped curb unemployment in the past, there are a few differences between now, and then.

1)We have gone from the world’s largest creditor nation, to the world’s largest debtor nation.

2)We have lost a significant part of our productive capacity and our ability to sell products around the world.

As the country tries to inflate away its debt, the nations that are servicing our debt, are losing money (or more accurately, not making as much as they thought they would be). They are not stupid. Sure, the Saudis have more money than they know what the fuck to do with. However, China is trying to grow an emerging economy. The Chinese really don’t need us as much as people would like us to believe. The Chinese are perfectly capable of consuming their own products and natural resources themselves, especially, when what they are receiving for their products, is nothing but inflated, worthless paper. If it comes down to a currency war, and cooler heads are not allowed to prevail, we all will lose. Nobody wins in a currency war. Especially, if the currency war escalates to a conventional war.

I’m not trying to be all “gloom and doom”, here. We have a chance, and the ability to change things. Simply raising taxes on “the rich” is not really going to have much of an effect, unfortunately. The question is, do we have the will? Do we have the will to take our medicine, like adults, or keep pretending that more of the same will actually change anything, like little children? The desire for instant gratification of the poor and Middle Class, is almost as evil as the desire for increased wealth through monetary inflation, of the rich. Can we possibly begin to eliminate both, or will we continue down this path to our utter destruction?

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By Fat Freddy, October 27, 2010 at 6:50 am Link to this comment

Inflation is a magical thing. It can make your debts look less than what they really are. It can make toxic assets seem not so toxic. It can make the stock market and commodities rise in value. Yes, when you devalue the dollar, everything else seems like it is worth more. That is the magic of monetary inflation.

Inflation is good if you are heavily overburdened with debt, and own a bunch of worthless paper assets. But what is the downside of inflation? The downside of inflation is, it robs people of their savings. It causes consumer prices to rise. Eventually, the rise in commodity prices, like wheat, corn, rice, oil, etc, will find their way into consumable (and non-consumable) goods. However, this rise in prices lags the increase in the money supply. As prices rise, eventually, wages will rise. But the rise in wages lags the rise in prices.

Here’s the cycle:

Monetary Inflation—> Asset Inflation and Debt Deflation—> Price Inflation—> Wage Inflation

(Don’t forget, that during this entire cycle, interest rates are extremely low, like they are today. That means people are encouraged to borrow, not save, and the money they do save, is going to go into “risky” investments, like the stock market instead of savings accounts and CDs, which are guaranteed by the government.)

One might say, “well, that doesn’t look so bad. Eventually, I will get a raise, and it will make up for all of the increases in prices, and the “value” of my stocks in my 401(k) and real estate will increase.”

True, but the question is, when? And, who really benefits? The problem is, this cycle doesn’t happen overnight. It takes years to play out. During those years, numbers can be manipulated, like GDP, CPI and PPI. and all the other “economic indicators” that are designed to measure changes in short term trends, can be used to lull people into a false sense of security for the long term. The wage increases can never fully keep up with price inflation, because once the wage increases start, the cycle starts over. The money supply must be increased to pay the higher wages.

The increase in assets, and decrease in debt, comes at the cost of future wage increases. So, what benefits the poor and Middle Class, and what benefits the wealthy? Well, since the wealthy rely on asset increases, and long term finance to make their money, and most Middle Class rely on wages, it is clear that this cycle of monetary inflation benefits the wealthy, at the expense of the poor and Middle Class. Monetary inflation, in the extreme, represents a redistribution of wealth.

Also, through this entire cycle, there’s always the real risk of causing an investment bubble, and possibly, hyperinflation. If stocks become too overvalued with the increase in money supply, they can, and do, crash.

Note: Don’t get me wrong, some increase in the money supply is necessary simply to service the increase in population. But what we have seen in the past 10 years (and continue to see), is the extreme.

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