Is it possible to run a balanced budget and the economy in a sustainable fashion?


So I started my own thread on this topic as it’s my hope to get a good debate going as many Conservatives (and Dems for that matter) advocate a balanced budget or even a surplus.

Just to expand a bit on the thread title, it is possible to grow over short periods. That’s not what I’m talking about. I’m talking about sustainable long term growth. Doesn’t have to be huge growth, it just has to be growth. If your answer is that the private sector run a massive surplus, that’s a great idea, but you’ve got all your work cut out of you demonstrating how it would ever be possible to undercut China and even if we could undercut China how we’d avoid becoming a third word nation to do it.

I’m saying that there are 5 major factors that effect growth. Let’s talk about the first 4.

[TABLE=“width: 500”]

Federal Spending

**Imports **


The stuff on the left in italics is controlled by Government (including the FED), stuff on the right is interactions with foreign markets. Green is additions to the economy, red is subtractions from the economy.

Pick any year you like and fill out those 4 Items.

To show you I’m not partisan (though I doubt you’ll be impressed), I point out in liberal forums all the time, that the surplus that Clinton ran in the lat 1990’s early 2000’s was one of the worst periods in recent history in terms of how the government fleeced the private sector.

So if we create a simple formula, it would look like this (FS+E)-(T+I)=. Those are taken from the table above…So let’s do some math…

The year 2000 was one of the worst. Let’s use the formula above, see what it comes out to and see what kind of conclusions we can draw.

(All numbers are in trillions) (1.79+.781)-(2.03+$1.22)= 2.571-3.25=.679 or negative $679 billion Roughly negative 6.7% of GDP

But what is this number?

This is the aggregate of all federal spending, taxes, imports and exports. This means that the economy should have shrunk by $679 billion! That’s 13.5 million jobs at $50,000 each (for one year). But we know the economy grew in 2000, so how can that be possible? (see below)

Well the 5th factor is made up of 2 basic elements, private sector borrowing and saving depletion. In order for GDP to increase the private sector was forced to borrow. Remember that when the government deficit spends, no matter what you think of deficit spending, the governments liabilities (debt) are the private sectors assets (additional money). If that is true, when the government runs a surplus, then the governments surplus is the private sectors deficit. So the government taxed out $240 billion dollars more than it spent in. Now we call this a “surplus”, but this is really the “glass half full/ half empty” argument.

When you add the private sector deficit of $240B and the trade deficit of $439B you get a deficit of $679B!

Ok so take the deficit to the private sector of $679B and add total household borrowing of $874B (for 2000) and Bingo…You get a positive $195B. GDP increased $337 Billion dollars more than that, some of that came from savings depletion and states running deficits, but it really stats to get into the weeds. I’ve grabbed the largest contributors and shown that the only way for the economy to go positive is on the backs of those that want to carry unsustainable private sector debt. If 2008 prove anything there is a definite threshold to private sector borrowing and when unwinds it’s brutal.

Now when times get tight and demand drops, but payments don’t stop rolling in, companies and private citizens who don’t understand what’s going on (that is, most people don’t good information about the economy), people start to withdraw from savings and borrowing to protect their assets. It could be a companies delivery truck that sits unused as demand falls. Payments are still due even when times are tight. It might be a guy like you or me who had a great job and bought a house 10 years earlier but suddenly have no income after an unexpected layoff. Withdraw savings first than borrow.

Now all you have to do is look at this paper and it shows that household borrowing increases 20% from 1997 to 1998 the same eyar the surplus began? Now is it any coincidence that the deficit had been dropping steadily from 1995 to 1998 as private sector borrowing ramped up over the same time? When it was all over with we fell into a recession as the private sector could no longer sustain debt and everything shifted as we see large government deficits which push money back out into the private sector to help it unwind.

If you use my little formula above for the years 2000-2006 the aggregate of (FS+E)-(T+I) is negative $3.3 trillion. On the other side we have private sector borrowing of $6.5 trillion. We know where that lead…The housing crash.

Now I’m not going to claim that one caused the other, nor am I interested in planing partisan politics when it comes to the crash. Anyone who tries to blame “the other side” is more interested in rooting for their team than looking at the issue. But please. I’ve said a lot and I’d like to stick to it. Let’s leave the crash to another thread…

To answer you question to me, is growth always desirable? Nope. I can think of lots of circumstances under which growth should be cut.

Now if you think that the economy can grow in a sustainable way under these conditions, please tell me what could have been done different?

Running a balanced budget leaves you with the problem of the trade deficit that has averaged roughly $650B. Again from the formula above if FS+E=$0 and T+I= -$650B then the aggregate is -$650 per year. After just 5 years the economy would shrink by more than $3 trillion, far beyond the private sectors ability and willingness to borrow. That’s 10’s of millions of jobs…

So tell me, either what I’m doing wrong, or tell me how the economy could grow while the private sector runs a deep deficit.



You can’t sustain growth on deficit spending because you can’t run deficits indefinitely. Sooner or later, you’re going to have so much debt that you can’t possibly make even the interest payments, and long before then (at least it should be), no one will loan to you. So you end up with a catastrophic fall (the ultimate market correction). I think we’re headed for one no matter what as things stand now. Ideally, it would be better to get it over with sooner rather than later so that the fall won’t be as catastrophic. Then let the free market pick up the pieces and keep government out of it.

Government spending and meddling in the economy much yield short-term gains, but it it’s like sprinting in a marathon; you get ahead temporarily, and then you’re toast.

I’m not that knowledgable about the nuts and bolts of economics, but like a person without a degree in math or engineering, I can still know that perpetual motion machines don’t work.


I’m kinda disappointed you didn’t address my claims with regard to federal spending, taxes, exports and imports. I think I made a pretty good case that people just don’t understand that they benifit from the governments debt.

As I said above, money is sort of like bricks. You can’t employ people to be brick layers unless there are bricks to build with. The economy cannot meet it’s potential without money to grease the wheels of commerce. Take away the bricks, no bricklayers and no building. Take away the money and people loose their jobs and there is no economy.

I want to address the subject of interest payments. It would seem logical that if interest payments increase as the amount of the debt increases. The question is, is that interest as you suggest becoming a larger and larger portion of the governments outlays?

The graph below would seem to suggest that, as a percentage of GDP. The debt hasn’t risen to anything near what people are lead to believe. The debt is, as of 2013 around 2% of the total debt. Is this really a problem? If it is, it’s been a problem since at least 1934 when the nation stated it’s move away from the gold standard 80 years ago.

One thing that is important is how much debt is owned by foreign creditors, but most people don’t understand why (hint it has to do with a countries inability to recover from massive private sector productivity losses, think war, disaster, labor issues) . This post is already WAYYYY to long so I’ll save it for another time.

Simply put, as the output of the country rises, the debt number will grow, just as if you went from making $25K to $100K you wouldn’t judge your debt based on the idea that you made $25K.
The next question I have for you is, who do we owe the debt to?

Most people believe that the US owes most of it’s money to China. There are a few who are more well versed and understand that China, as of today owns less than $800B (they have sold off quite a bit of our debt recently), which means they own roughly 5%. Japan and England are the next largest holders.

But who is the largest holder of US debt?

WE ARE! US interests own 66% of US debt. So if we paid back all that debt, 66% of it ends up back in the hands of interests that are in the US.

What if we paid off the debt, what then…Is that even a good idea? What would the government do with the that money that it receives? The answer is, destroy it. Yup, that’s right, the government would effectively destroy all that money.

When the government creates a treasury, it’s a piece of paper. It’s an IOU. Think about it like this, if I borrowed $50 from you and in turn you wrote me an IOU saying that you owed me $50. Now when you return the $50 to me several days later and I hand you the IOU, does the IOU you wrote have value to you? Of course not, the paper never had value, the only thing that had value was the faith and promise that you would honor the agreement we made.

The Federal Government is better than the Lanisters when it comes to repaying it’s debts (for you Game of Thrones fans out there). The government can always pay it’s debts because it’s debts are denominated in currency it creates!! The only reason we wouldn’t pay our debts is if we choose not to. The problem is a political one, not an economic one.

Treasuries are IOU’s that aren’t worth anything to the government. They are a measure of liability equaled ideally by the productivity that the economy represents. If you pay them back, the government extinguishes it’s debt and that extinguishes the liability. Extinguishing the liability that represents the entirety of the US debt would instantly shrink the money supply by 75% (the total of all federal holdings and foreign debt) which would effectively tear down 75% of the value of our economy. There would be less than $4 trillion left in the economy, but at least there would be $4 trillion flowing thorough the economy, right? No, there would be $4 trillion, but it wouldn’t be flowing.

The only people that would have money are people who didn’t need it. Hell, 25% of my retirement is in bonds. Even if I got that money back, I couldn’t use it, I would just have to invest somewhere else. For the multi-millionaire, he didn’t need that money, that’s why he invested it. He has all the money he needs to consume, so he’d just look for another safe investment. Perhaps Chinese bonds? That is why people choose to buy US bonds in the first place. You see, you have to remember that the government doesn’t panhandle for debt. it doesn’t ask people to buy it’s debt, it SELLS treasuries. Companies, people and governments don’t buy US debt because it’s doing our government a favor, people buy US debt because it’s the most secure asset in the world and if you have a large sum of money you aren’t using and you want to protect from inflation without any risk you buy a bond. So when you give it back, you’ve giving back to someone who didn’t need it, that’s why they parted with it in the first place.

The only people that have significant holdings in bonds are people in the top 40% the the overwhelming majority of that held by the top 10%
Point being, after all that, is, if you pay off the debt, or even reduced it by 50% you would cripple our economy.

Try to remember that the money in circulation was created by the government. It went into debt so the private sector could go into surplus. If you reverse that, then the government goes into surplus and the private sector goes into debt. The irony of all of this is the value the money represents is effectively destroyed and along with it will be all the productivity that it represented.

Yes, as so many others believe and it’s why things are so bad. We are a more afraid of inflation than we are unemployment. We think that when government creates money it’s propping up it’s own bureaucracy. We can see past the noses on our own faces.

I hope I’ve at least given you some doubt about this position. One other thing, there is no such thing as a “free market”. Anyone that’s actually read Adam Smith knows that the “invisible hand” is not what people claim Adam Smith said that it is.

It’s so ironic you should say that, because in the OP I showed how in reality it is EXACTLY the opposite. When the federal government runs a balanced budget, billions of dollars leave the economy. People respond by “sprinting” (they borrow or deplete savings). This allows them to get ahead, but it all unwinds and we get crashes like we say in 2001 and 2008. Private sector debt is what is unsustainable and when it unwinds you get the effect you claim is caused by government, but that’s clearly not the case.

There is nothing resembling perpetual motion in our economy.

There is a lot more, but this post is already too long. This is why I prefer when people engage. Thanks for your comments, looking forward to more discussion.


Some on this is deep for me (it’s not a subject of great interest (no pun intended) to me), but I’ll give it a shot:

  1. I did mention that I’m not that knowledgable about the nuts and bolts of it.
  2. I disagree, but I’ll let it ride on some of your other arguments for the moment.
  3. No one said money (or barter for goods and labor) had to be from or of the government.
  4. This is another of those nuts-and-bolts issues; but I can say that it doesn’t matter if it was unsustainable before.
  5. Graphs make my eyes glaze over, especially when I know nothing of the source.
  1. If I’m understanding what you’re saying, more on it later.
  2. Same as item 4.; and I don’t accept as conclusive that what you’re suggesting is the case (yes, I may be ignorant about the subject, but being (figuratively) from Missouri is a healthy thing).
  3. I’m not sure of your claim here; but even so, that 34% isn’t small potatoes.
  1. How about they don’t take it from the people in the first place if it isn’t for essential services (military, federal law enforcement and courts, interstate regulation, etc.)? If they “destroy” it, they’re just destroying fiat currency and making what people have in their hands worth more because the government can’t waste it. Until they decide to print more (again).
  2. Actually, getting that I.O.U. back is very valuable for establishing that I.Don’t.O.U., so that U. can’t (legally) collect more from I. at a later date.
  3. Until they run out of other people’s money. That’s an economic one.
  1. I don’t give a rip what something is worth to the government; I give a rip about value to the private citizen. The government is historically and chronically a bad steward of its resources. The “money supply” would be driven by the value of each dollar. Time was when pennies mattered because the currency hadn’t be devalued beyond belief. What gives dollars value is what you can buy with them; not how many the government can print and buy things with them when they didn’t earn them with goods and labor (a good definition of counterfeiting).
  1. Only in terms of a correction from government meddling.
  2. Only in the sense of fiat currency; wealth is independent of the government (until they consume our wealth and produce little in return).
  3. Not a problem; now we’ve got both…
  4. They’re creating fiat currency, but not wealth. And yes, I’m solidly convinced that they are propping up the bureaucracy.
  1. Sorry, but not really, for reasons given.
  2. I haven’t read whatever he said, so I can’t comment.
  3. It was another case of my eyes glazing over on a subject that I’m not that well versed it. But it seems fundamental to me. I don’t have an economics degree nor is it a hobby of mine; but when you try to make the case that debt (and deficit) is good, my hogwash meter starts smoking.
  4. In the sense that perpetual debt and deficit are unsustainable, I’d agree. Sooner or later, someone is going to get tired of this fiasco; and the deteriorating work ethic is partly an effect of this (why work when someone else benefits from your labor?).
  5. I probably won’t be keeping this up too long; you’ve touched on some things that I feel strongly about, but again, I’m not that much of a nuts-and-bolts guy for addressing many of your specifics.


Mr. Brown makes the fatal mistake in his economic analysis that ALL liberals seem to make…the assumption that ALL money first belongs to the federal government–primarily because it’s the feds who mint coins and print dollars. Our money hasn’t represented much of value for nearly 50 years now. Oh, people still ACCEPT U.S. dollars as representing something of value, but the reality is that it’s an imaginary “value,” nothing concrete. 2000 years ago, one ounce of gold would purchase roughly 400 loaves of bread. Guess what? Today, one ounce of gold will purchase roughly 400 loaves of bread.

  1. Fair enough. It’s a tough subject. I’ve been at it since the early 2000’s
  2. But it is and unless you have an alternative there isn’t much to discuss.
  3. I was responding to your claim that it’s unsustainable, that is the point of the graph. The source is at the bottom right OMB is the Office of Management and Budget. The only point of the graph is that as a percentage of the overall economy, the interest on the debt isn’t rising.
  1. The point was simply that if you made $25k $1000 in debt would be difficult to pay, but if you made $100k that $1000 represents a smaller portion of your income and wouldn’t be judged the same way.
  2. No 34% isn’t small potatoes, but as I said it’s not an issue unless we have a massive drop in productivity for reasons I won’t get into simply because I think it would make your eyes glaze over more than they already are.
  1. The money people have, they have because it was created out of debt. It was the creation of a government security that spawned the creation of the dollar. Think about it like this. When the government goes -$1 (when they sell a bond) the private sector goes +$1. Now I know your figuratively from Missouri :smile: but I’m guessing you can add -1+1=0. Thus every dollar exists only because the government created it (it exists as a liability). When you pay them back, the government has to extinguish the liability. The dollar (asset) and the government debt (liability) cancel each other out.

You kinda missed my point. With all due respect, I don’t think you understand the real impact of inflation. I’m going to go out on a limb here and say that like most people you think of the cause of inflation as in increase in the number of dollars relative to goods and services. While this is correct, this is another situation where it really matters how you look at the problem. i.e. is the glass half full or half empty.

I’d argue that inflation is caused when productivity cannot keep pace with demand. This is what happened in both Wiemar and Zimbabwe, both historic examples of hyper-inflation caused when each nations industry was dramatically slowed, Wiemar affected by war and Zimbabwe Kicked out European farmers and gave the land to citizens who didn’t know how to farm. In both cases (and here is the reason you don’t want foreign debt to make up too much of your overall debt) each country had to print money to pay back it’s foreign debt. Money printing without an equal increase in productivity=inflation, or more specifically “price inflation”. Now there are different types of inflation, cost-push and demand-pull. The oil embargo of the 70’s, cost push, over-printing, demand pull…Look it up if your interested.

In one sense the intuitive solution is to eliminate dollars (something I’ve read several times here). The other solution is to create more of the things that people are demanding. When productivity increases and dollars stay the same, value of each dollar rises.

  1. No, not a correction of government meddling, All of the money in the economy is an asset that was created from a liability. Think about money as matter and the bond as anti-matter. When they touch it vanishes.
  2. Yes wealth is independent of government. Government doesn’t spend or create wealth, it spends money. People use money to create wealth, just as I said, bricks don’t make buildings, people make building with bricks.
  3. I know I might as well be talking to my wifes cat, but inflation right now is extremely low. As a matter of fact, the fed is having a hard time increasing inflation to it’s target of 2%. The reason this is the case is because there is so much spare capacity after 2008’s recession, additional money isn’t causing a drastic rise in the general price level, companies are using the money to put people and resources they already own back to work (it’s called “slack”)
  1. Fair enough, it’s been a civil and productive conversation. Others will read it and draw their own conclusions and I hope, join in.
  2. Lots of people think that Adam Smith promoted the idea of free markets unobstructed by regulation. It’s just not true.
  3. Economics is fundamental, but it’s not intuitive. If anything much of it is counter intuitive. Much of what people believe actually works exactly the opposite of what they think, sorry that’s so vague as to be meaningless, but I don’t want to rail on and on (too late I know).
  4. Actually private sector perpetual debt is unsustainable, but beyond the claim that government cannot sustain a long term debt without consequence, your wrong. It’s understanding what constrains the government in the creation of money that needs to be understood. The answer is, resources.
  5. No problem, you’ve been a good sport and I always enjoy good conversation. Thanks for sharing your opinion.



It’s not a Liberal or Conservative issue. The need to pinhole me as “Liberal” is simply to turn my discussion into an “us vs them” argument. I came here to engage with people here. many of which I know I have disagreements with. Please, let’s try to keep this civil and try to be constructive.

Moving on…

It’s simply how the economy works. Having said that, I’m not going to claim that the way the economy works today is the only way an economy can work, or even that it’s the best way an economy can work. I will say that the system we have now is the best that we know of. If you’d like to discuss other systems, awesome…In the end my discussion is how the system really works, that’s it. Again, I make no claims about how good or bad that it is, just what it is.

Gold is a commodity like anything else. It is effected by the supply of it and the demand for it. Obviously there is a very large demand for the pretty, soft metal with few practical uses. The irony is that gold is valuable for the dsame reason the dolalrs in your pocket are, because we all agree that it has value. The idea that gold is intrinsically valuable I find kind of silly. At the end of the day most people value their health, happiness and well being, and gold serves none of those purposes, at least in the 1st order. That is to say, if I was going to stand you on a deserted Island for 1 year and you could only bring 100lbs of supplies, I’m gonna go out on a linb and say that any reasonably intelligent person wouldn’t list gold as something they wanted to bring with them, simply because it has no intrinsic value.


Oh, good grief! People were making money in this country when we weren’t a country. Whatever “debt” King George III had remained in Great Britain - he didn’t send it here to support the colonies. “We” were supporting ourselves. I see you buy Obama’s “You didn’t make that” phony philosophy.


I’m not sure how anything you just said has anything to do with what I’ve said.


The federal government does not spend money to achieve desirable economic ends, it spends money to achieve the currently-favored, short-term political ends. I would say that nearly all short -term political goals are detrimental to long-term economic prosperity.


Can you give me examples of the kind of activity you speak of? I mean, I wouldn’t be so naive as to claim that money isn’t spent achieving political goals, but you said that, and I have to paraphrase; that the government doesn’t spend any money to achieve desirable economic ends. All money is spent in pursuit of short term political goals.

Isn’t that a tad hyperbolic?


Yes, all money spent by the federal government is disbursed in furtherance of (or to prevent immediate harm to) someone’s political endeavors. Every single cent. Any economic benefit which accrues is either necessary for the political goal (and of no importance in itself), or purely coincidental. No I don’t think that’s hyperbole. The money is controlled by politicians, after all.


OP, are you a proponent of MMT?


THe problem is the government always wants to add more and more to the debt and to do so they ask for more taxes not to pay down that debt but to use those taxes to pay for their latest political agenda.

Look at the current budget bills and tell me how much they would be reduced if we eliminated all the pork in them. Pork put there by both parties.


If the budget were balanced - and reasonable - the economy would be booming. Because there would be far more money in the private sector, and money in the hands of the people (and this includes businesses) begets money.

On the other hand, money in the hands of the government tends simply to lessen the “supply.”


I think MMT is the best description of the way the economy works.


What is generally referred to as a deficit, can also be called a private sector surplus. Government goes into debt and the private sector is the recipient of the money the government spends, right?

Government is negative private sector is positive.

If that is true, if the trade deficit is greater than the private sector surplus (gov deficit), than the result is a shrinkage of private sector assets, right?

This is just plain, simple math.

If you run a balanced budget with a trade deficit then your economy will shrink.

The only way for the economy to grow is for private citizens and businesses to borrow against future productivity (take loans).

With a trade deficit averaging about $650B over the last decade, the private sector would have to have carried over $6.5 trillion in debt just for the economy to break even.

Every year, we run a trade deficit the economy shrinks if we run a balanced budget.

So far no one has shown me the magic of an economy that can grow with less money in that economy.


Let’s try this visually…

This is 2008.

Hopefully everything is self explanatory…

In the end the private sector lost $420B in assets.

Now on the left side, just imagine that the net of spending and taxes are $0

The loss to the private sector would have been $820B dollars

See how this works?



Problem is that the money that the Government spends, it wastes a lot of. The net result: Less true wealth in the economy.


While I’m not promoting waste, even waste brings value into the economy. Take the F-35 project. Widely regarded as an inferior aircraft with an astronomical price tag.

Now, the question is, what happened to all the money that’s been spent so far?

Well, it’s not like it was simply dropped out of helicopter to the streets below. It was used to fund projects an employ people. Suppliers made money supplying parts, new design techniques and materials were created. Much of the which is likely to be used in future aircraft. The people that created those processes are still here and they will go on to use that information in other parts of the government or private sector.

The difference is, that when a company engages in large scale waste and abuse, the money is in effect transferred from the company doing the wasting to the other companies they are wasting money on. The economy gains nothing when assets simply change hands. When the government wastes money the portion of that money not equaled in taxes is a net asset gain in the private sector. Now, if the waste is that something was bought that wasn’t needed, it’s not as big a deal if a fleet of Aircraft Carriers is built and all sink on their first day at sea.

The point is, like almost anyhting else in economics, intuition is a poor guide.

At the risk of being told that this is nothing but a broken window fallacy, I really don’t think it’s that simple, because as I pointed out, some of the activity spurned from the creation of a failed project to create the F-35 did create some value.

The real question we should be asking when addressing waste is how to put that waste into a quantifiable number. There are lots of anecdotal examples of Government waste, hell I could tell you a few stories myself as I’ve worked for the government and some of the largest IT companies in the world, but I’ve never seen anything that would prove that Government waste is significantly higher than that of private industry, when accounting for size and the nature of the work done. The difference is that Government waste is out in the public eye, private waste is largely hidden. It’s all just taken as gospel by people who have an ax to grind with the government that the government, which in terms of the number of people it employs is as large as Walmart (domestic), IBM, McDonalds and Home Depot combined, is less inefficient than private industry.