The mathematical impossibility of a balanced budget


#1

I’ve written walls of text, most of which has fallen on deaf ears…So I’m going to keep this as simple as possible and see where it goes.

Put simply. Let’s imagine we’ve gone back 250 years. We’ve just won our independence and the government is created and it’s mandate is to provide certain services. Things like creating all of the infrastructure to support the three branches of our government, creating the military, perhaps the post office and whatever other services you think the government is responsible for. It really makes no difference.

But, like today, the system back then (for the sake of this example) runs on a fiat system as we do today and just like today there is a Federal Reserve on day one. The government announces that it will spend it’s money and it will require taxes. Failure to pay taxes will result in some form of punishment including loosing your freedom.

Where does the money come from in a fiat system to pay for things? Well, the government simply creates the money and spends it into the economy. Now on day one, perhaps it creates some of what we now know as Washington DC, new buildings, roads bridges ect… It forms a military, post office, it builds embassy’s in other countries it wishes to maintain relations with. It hires lots of people to provide services for the military, to build the buildings, to make buggies and carriages to provide logistics ect…Lots of secretaries and horse and carriages, companies that make pens and paper…The list of things is endless and it pays of all of this with money it’s created. The people that do the work, knowing that they will have to pay taxes earn money so they can pay the government what it demands.

Now let’s say for the sake of argument that all of this cost $50 million dollars (A lot of money 250 years ago).

Now, the government simply creates $50 million and spends it into the economy to purchase all of the things that it requires. It makes a note of all the money it spends. So the Federal Reserve starts it’s first day negative $50 million dollars or $50 million dollars in debt and the private sector is $50 million in surplus and everything balances to zero. People that provided services did work and built things of real value to earn the dollars that the government has spent.

Now to keep things simple, the first year, the balance of trade is even to the penny. Whatever was traded was imported so the balance equals exactly zero.

Now the government is $50 million in deficit and since it’s year one it’s $50 million in debt.

That $50 million is in the hands of all the people that were required to make all of the stuff the government needed to begin.

If it wanted to run a balanced budget it would have to tax the $50 million, all $50 million back out of the economy, right?

That would leave the economy with zero dollars, right? Why would anyone do work if the tax for that work were 100%?

Is there another way to balance the budget?

Can someone explain to me, based on the system we have now how the system could achieve a balanced budget and still have money in the economy to spend.


#2

Whatever the government doesn’t tax out, lets say for this example, the game government taxes back $40 million leaving
$10 million. That $10 million is money that people use in the economy. That $10 million is a deficit. Today’s deficit is simply adding all past deficits up.

EDIT: More realistically, the government would tax people on average ~25%, thus, the economy would be left with closer to $37 million.


#3

Sorry, but when I saw the thread title, it pushed my Hogwash buttons. Private individuals have been balancing budgets and helping to grow the economy as long as there’s been an economy. I fail to see how a wasteful government can do as well let alone be necessary to an economy.

And that was one factor that you didn’t mention in your example; waste by the government in the building of that infrastructure vs. a nongovernment entity doing the same on the basis of market demand. Granted, some functions of government aren’t practical to be handled on a strictly private basis, but you’ll never catch me accusing the government of being cost-efficient about it.

I’m sorry, but it still looks like a perpetual motion machine; or maybe a pyramid scheme.


#4

This has nothing to do the efficiency of government vs private individuals. The claim is simply that all the money in existence (less coins) exists because the government taxed less than it spent, that’s it. That’s either true or it’s not.


#5

And I’ve argued that it is not.


#6

So then explain, in simple terms, on day one, where did the money come from?


#7

I read that if you eat to much Yogurt your ears turn green


#8

Is it really that difficult to refute my claim?


#9

Hey, sounds like you’ve been reading Jack Hectormann!


#10

It is NOT mathematically impossible to balance a government budget. Simply stated, the total of income generated by goods and services being sold in the US far exceeds the amount required to pay for even this bloated government.

For sake of argument, let’s forget differential economic efficiency in the discussion. That’s an argument for another discussion. What compels government debt are the roadblocks we place in the way of controlling spending to match our ability to raise revenues without negatively impacting commerce/job creation. For example, government/leaders have established government agencies that operate outside the bounds of accountability. Our government agencies provide and mandate services and bureaucratic regulatory regimes never contemplated by the founders to be a legitimate function of government. I could go on and on, but what the hell. Suffice to say, these agencies have a life of their own. Agencies beget more agencies and politicians feed them our tax dollars to buy votes.


#11

No matter how many times you write a “wall of text” around this fallacy it will remain a fallacy, everything you claim on this subject is based on this false foundation; that is why you are wrong.

There is no need for the government to ever touch the money in a Fiat system for the money to be created, remain secure in its value, enter circulation or move freely through the economy once it has been circulated.

The attempt to establish a necessary middle man in the form of government cannot be explained by ignorance at this point, the only explanation that can pass the smell test at this point is an unspoken motive to establish the false premise that government must continually expand in size and authority in order for the economy to survive.


#12

I see the flaw in your thinking . I’ll do this in steps so that if you disagree you can tell me where I went wrong…

Let’s see if I can explain it like this.

The government creates $1 and spends it into the economy (it is the only dollar in existence). Let’s say it buys a widget. The government is -$1 and has a widget. The widget maker is +$1 and he has 1 less widget. The government let’s that one dollar exist in the economy without taxing it for 1 year. In that time it is passed to the widget maker, to the baker, to the farmer, to the shoe maker, to the brick layer, back to the widget maker, over and over again back and forth. Each pass of the dollar is an exchange of currency for a good or a service. Things of real value.

Now, let’s say at the end of the year, the dollar has passed 3000 times. This has created $3000 in economic activity measured as GDP. There isn’t $3000 in the economy, in this case there is much less, just $1, it is the velocity of the dollar that has created the economic activity. in this case the ratio of dollars to economic activity is 3000:1.

Now at the end of the year, the government demands a tax of a totaling $1. Then it doesn’t re-spend that dollar for 1 year.

Assuming all business is done in dollars and that the next year would have been similar to the previous year, then $3000 worth of business doesn’t get done because there exists no money. So taxing out the dollar cost the economy $3000

Point is, that your statement; “total amount of income generate by goods and services being sold in the US far exceeds the amount required to pay” is false because “the total amount” is not what is used to pay back the debt. In my example you have $3000 worth of economic activity NOT $3000. You still only have $1.

In our economy there exists $12.4 trillion dollars of M2 stock in the US. The ratio is about 1.5:1. Thus each dollar you tax out costs the economy approximately $1.5 dollars of GDP. When you tax out all of the money you end up with $18 trillion. (12 x 1.5=18)

Now, to be honest I didn’t include everything for the sake of simplicity. The real answer is a much larger math problem, because 1/3rd money paid back to US private sector debt holders would still exist in the economy (it’s actually about $4 trillion), but for each dollar left in the system after that transfer, there would be a liability somewhere else in the system of an equal amount, like loans taken from banks, but I promise you, that when it’s done, everything cancels out. Now, again if I’m trying to be totally and completely thorough, there would still be all the money in coin, about $1.34 trillion. It would exist because when it was created, it was created debt free. There was no corresponding liability created for coins (this is where the idea for the trillion dollar coin came from btw).

At the end of the day, every single dollar created (less coins) was created as an entry in a spreadsheet and is accounted for. The $12 trillion dollars of M2, “checkbook money”, every dollar is accounted for.

No matter how much real wealth that $12 trillion creates, be it $12 trillion or $48 trillion or $120 trillion there still exists only $12 trillion dollars. You can’t pay your taxes in “real wealth”. Only US dollars. If the ratio of dollars to economic activity is 4:1, then each dollar taxed out of the economy removes $4 dollars of GDP. If the ratio was 10:1 there would be $120 trillion dollars worth of activity (GDP), or a ratio of 12:1, but there would still-only-be $12 trillion dollars.

Hopefully that makes sense.


#13

Then if you are right then you should be able to, in simple terms explain how the government can on day one create $50 million dollars and spend it into the economy and end up government -$50 million and Private sector +$50 million. Then balance it’s budget without taxing all $50 million back out.

Everything else is a red herring.


#14

Easy.

  1. The government does not create money so your premise as always is dead on arrival.

  2. The Federal Reserve (a private bank that does create money) gets 50 million dollars worth of secured loan requests on one day from banks that wish to fund private sector business expansion and/or home/commercial real estate purchase/development loans. These loan applications are secured by the credit and assets of the private citizens and businesses who have applied for the loans and they have been deemed worthy of the risk by the banks who received the applications.

  3. The Federal Reserve deems the requests worthy of trust and agrees to fund the loans, this is the “printed money” and it is transferred to the banks that wrote the loans who then fund their loan applicants; the applicants turn the money over to the sellers and/or suppliers in exchange for whatever they borrowed the money for.

  4. The new money is now in circulation, all of the “printed dollars” are secured by the new collateral that the citizens provided, the lending bank is paid back in installments with interest and the lending bank in turn pays the Federal Reserve back in installments with interest.

The economy grows according to real demand (as opposed to government trying to create demand by creative spending first) and the dollars value is preserved because real wealth is created and secured as the new dollars enter the economy.

THAT IS HOW THE FIAT SYSTEM IS DESIGNED TO WORK.

Our Government is designed to fund its activities through taxation, tariffs and duties; this siphons off productivity from the private sector who creates the real value which enables the entire economy to grow securely and without limit, so it should be done as minimally as possible (limited government).

There is absolutely NO REASON for government to deficit spend UNSECURED BORROWED DOLLARS that diminish the value of ALL DOLLARS due to being put into circulation with no direct increase in corresponding value.

There is NO advantage to using government as a middleman to get new dollars into circulation, in times of National crisis government deficit spending can be justified for other benefits but it is NEVER necessary or even advantageous to use the government for the sole purpose of laundering an increase in the money supply.

You now owe me tuition for 1 years worth of Econ 101, I am a Capitalist so I do not work for free.


#15

Fantastic…Some substance!

Though it’s late and I have to work in the morning…To be continued!


#16

[quote=“csbrown28, post:1, topic:48119”]
I’ve written walls of text, most of which has fallen on deaf ears…So I’m going to keep this as simple as possible and see where it goes.

Put simply. Let’s imagine we’ve gone back 250 years. We’ve just won our independence and the government is created and it’s mandate is to provide certain services. Things like creating all of the infrastructure to support the three branches of our government, creating the military, perhaps the post office and whatever other services you think the government is responsible for. It really makes no difference.

But, like today, the system back then (for the sake of this example) runs on a fiat system as we do today and just like today there is a Federal Reserve on day one. The government announces that it will spend it’s money and it will require taxes. Failure to pay taxes will result in some form of punishment including loosing your freedom.

Where does the money come from in a fiat system to pay for things? Well, the government simply creates the money and spends it into the economy. Now on day one, perhaps it creates some of what we now know as Washington DC, new buildings, roads bridges ect… It forms a military, post office, it builds embassy’s in other countries it wishes to maintain relations with. It hires lots of people to provide services for the military, to build the buildings, to make buggies and carriages to provide logistics ect…Lots of secretaries and horse and carriages, companies that make pens and paper…The list of things is endless and it pays of all of this with money it’s created. The people that do the work, knowing that they will have to pay taxes earn money so they can pay the government what it demands.

Now let’s say for the sake of argument that all of this cost $50 million dollars (A lot of money 250 years ago).

Now, the government simply creates $50 million and spends it into the economy to purchase all of the things that it requires. It makes a note of all the money it spends. So the Federal Reserve starts it’s first day negative $50 million dollars or $50 million dollars in debt and the private sector is $50 million in surplus and everything balances to zero. People that provided services did work and built things of real value to earn the dollars that the government has spent.

Now to keep things simple, the first year, the balance of trade is even to the penny. Whatever was traded was imported so the balance equals exactly zero.

Now the government is $50 million in deficit and since it’s year one it’s $50 million in debt.

That $50 million is in the hands of all the people that were required to make all of the stuff the government needed to begin.

If it wanted to run a balanced budget it would have to tax the $50 million, all $50 million back out of the economy, right?

That would leave the economy with zero dollars, right? Why would anyone do work if the tax for that work were 100%?

Is there another way to balance the budget?

Can someone explain to me, based on the system we have now how the system could achieve a balanced budget and still have money in the economy to spend.
[/quote]Government doesn’t really make money. It does print or create bits of paper we perceive as having value, so we use it as money. It also bans other forms of currency, monopolizing the market with its money.That said, the money has value, but the government doesn’t create value at all.

The money has value because it represents the value of things people produce, and it’s only worth what they think it’s worth relative to that production. If the government prints $50 million and spends it, it doesn’t create a single penny worth of value. It buys $50 million in production, probably inefficient in the actual economics sense of the word. Folks get paid that $50 million, and the government is in debt $50 million. It created money but not production or value. That already existed prior to the government running a printing press.

Let’s assume the government didn’t print $50 million now. The same folks will need to buy things. They’ll trade their goods and services or find another medium of exchange to handle the transactions. They’ll spend $50 million or $100 million, whatever it is they can do. The production and value are all still there regardless of the involvement of the government. Trade still happens. Money still happens, and all of it gets spent one way or the other.

When the government prints $50 million (and/or taxes $50 million) it diverts the resources of production from their best and highest value and use. That means one dude doesn’t get to buy the pair of shoes he wanted because the government crafted a cobblestone no one really wanted.

So far as I can tell, you are just reiterating Paul Krugman’s approach to economics. He suggested a couple of years ago that an alien invasion would spur economic growth as governments started spending to fight off the invasion. If it were true and if what you’re saying is true, we might as well just direct our government to purchase everything for all the money it can print. We’ll all be loaded with money because debt doesn’t matter. It’s some kind of weird variation on the broken windows theory.

It was refuted perfectly and succinctly in 1850 by Frederic Bastiat in “The Law.” Jim the glazier gets to make money fixing the window broken by moron kid, but poor Clyde the watchmaker goes without because poor Frank the butcher has to replace the window. That’s all the government does when it diverts productivity. It makes sure Jim gets paid for work that didn’t need doing, and Clyde gets screwed. But in some circles, this is called economic development.

Government can create fiat money. It cannot create value. It can diver production, but it cannot create production.

Furthermore, I balance a budget every month. If I can do it, so can Uncle Sam. My state balances a budget every year. It’s required by law. While in reality my state has debt, it doesn’t have quite the same debt as a place like California. Over in employee retirement though, we can all see just how horrible spending tomorrow’s money can get. Sure, they don’t print the money, and Uncle Sam does, so it’s all different. But it really doesn’t change the basic economic principals. You keep telling folks to forget Econ 101, but Econ 101 and 102 should be a required course for all Americans. Higher economics classes, deeper understanding, don’t refute the material in Econ 101. They augment and better explain what you might learn in Econ 101.


#17

#18

You should be proud that you are getting a real education from people who know rather than from what is laughably education nowadays. Reality trumps theory and out and out nonsense.


#19

Yep, me too.


#20

[quote=“samspade, post:18, topic:48119”]
You should be proud that you are getting a real education from people who know rather than from what is laughably education nowadays. Reality trumps theory and out and out nonsense.
[/quote]Theory describes reality, sam. Both theory *and *reality trump this apparent nonsense – and Trump too incidentally :wink: