Modern Money Theory: Deadly Innocent Fraud #3: Federal Government budget deficits take away savings – Warren Mosler. 

Fact: Federal Government budget deficits ADD to savings.

Government deficits equal increased “monetary savings” for the rest of us, to the penny.

Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting. For example, if the government deficit last year was $ 1 trillion, it means that the net increase in savings of financial assets for everyone else combined was exactly, to the penny, $ 1 trillion. (For those who took some economics courses, you might remember that net savings of financial assets is held as some combination of actual cash, Treasury securities and member bank deposits at the Federal Reserve.)

This is Economics 101 and first year money banking. It is beyond dispute. It’s an accounting identity. Yet it’s misrepresented continuously, and at the highest levels of political authority. They are just plain wrong.

When the government account goes down, some other account goes up, by exactly the same amount.

Deficit spending doesn’t just shift financial assets (U.S. dollars and Treasury securities) outside of the government. Instead, deficit spending directly adds exactly that amount of savings of financial assets to the non-government sector. And likewise, a federal budget surplus directly subtracts exactly that much from our savings. And the media and politicians and even top economists all have it BACKWARDS!

The last six periods of surplus in the more than two hundred-year US history have been followed by the only six depressions in our history.

And after the sub-prime debt-driven bubble burst, we again fell apart due to a deficit that was and remains far too small for the circumstances. For the current level of government spending, we are being over-taxed and we don’t have enough after-tax income to buy what’s for sale in that big department store called the economy.

When the January 2009 savings report was released, and the press noted that the rise in savings to 5% of GDP was the highest since 1995, they failed to note the current budget deficit passed 5% of GDP, which also happens to be the highest it’s been since 1995.

The only source of “net $U.S. monetary savings”(financial assets) for the non-government sectors combined (both residents and non-residents) is U.S. government deficit spending.

But watch how the very people who want us to save more, at the same time want to “balance the budget” by taking away our savings, either through spending cuts or tax increases. They are all talking out of both sides of their mouths. They are part of the problem, not part of the solution. And they are at the very highest levels.

The government deficit equals the savings of financial assets of the other sectors combined .

So now we know: – Federal deficits are not the “awful things” that the mainstream believes them to be. Yes, deficits do matter. Excess spending can cause inflation. But the government isn’t going to go broke. – Federal deficits won’t burden our children. – Federal deficits don’t just shift funds from one person to another. – Federal deficits add to our savings.

The right-sized deficit is the one that gets us to where we want to be with regards to output and employment, as well as the size of government we want, no matter how large or how small a deficit that might be.

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