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by
Milt Heft
Petrogen, Inc.
P.O. Box 75610
Colorado Springs, CO 80970-5610
Much has
been said about “the deficit” without clearly identifying exactly what is being
discussed. There are TWO
kinds of federal deficits. One is
totally within the control of our Federal Government to manage, but the other
is an untamed beast that is permitted to run loose and is potentially lethal to
our society. Unfortunately, public
attention is riveted on the easily controllable deficit, while the extremely
dangerous one continues out of control, ignoring the perfectly reasonable
techniques that could eliminate its threat.
THE
CONTROLLABLE DEFICIT
The more
visible and publicly debated deficit is an internal matter that is the function
of too much government spending and not enough federal government taxing. It originates in the Federal Government’s
power to print money. With the
power to print money, the Feds can spend first and tax later. In fact, they might be able to spend
without taxing at all. That
happened in the first 100 years of our country when taxing was quite
minimal. For many years Federal
taxation was fairly limited to import tariffs. The result might have been horrendous inflation except for
the fact that our country was growing, expanding, and producing more and more goods. As long as the printed money did not
exceed the pace of increasing production, there was little inflation and no need
to tax.
But that is
not where we now are. This seems
to be the age of bailouts and stimulus packages. Meanwhile, our production is actually decreasing because of
unprecedented outsourcing of manufacturing. The Federal spending is far outpacing the tax revenues, on top of which there are less
domestically produced goods to buy. Heavy inflation is the eventual result of these policies – or lack of
policies.
This is the
deficit that is described variously as the debt we owe ourselves, or, the debt
we are passing on to our children, or , The National Debt. The reason this excessive printing of
money is called “borrowing” instead of “printing” is because of the legal
fiction that exists between the Treasury Department and the Federal
Reserve. The Federal Reserve is
the actual printer of the money, but they are responding to so-called bonds
issued by Treasury that is the Federal Reserve’s authority to start the printing
presses.
This is all
nonsense. There is nothing at all
that resembles a debt from anyone to anyone. The result of printing money, and not taxing, is
inflation. Unless there are increasingly
more domestically-produced goods to buy.
This is the
deficit that is totally controllable. It can be controlled by printing less money (curtailing Federal
Spending), taxing more (taking more money out of circulation), or producing
more goods. If these controls are
not exercised, the unstoppable result is inflation.
THE
OTHER DEFICIT
The more
serious deficit comes from an imbalance in international trade and
finance. There are two aspects to
this balance: 1) balance of trade,
and 2) balance of payments.
Balance of
trade is easy to imagine: two countries
purchase each other’s goods and the relative value of these goods are equal, as
determined by the exchange rates between the currencies of these two
countries. It may be that there is
not a balance in the goods exchanged, but the difference can be made up by
profits brought home by the lesser producer. It doesn’t matter; as long as the currencies are equally
exchanged as defined by their exchange value.
If the
trade is not equal, and a country accumulates an excess of a second country‘s
currency, that is a deficit to the second country. It is a completely different deficit than the deficit
incurred by spending more than is taxed. It is different and less controllable, and potentially more devastating than the inflation of case
#1.
The United
States today is running an international trade deficit. It does not have enough returns from
foreign investment to compensate for the tremendous trade disparity. This deficit can not be neutralized by
increased internal taxation. It
has nothing to do with our money supply or our Federal spending.
The danger
of a constant international deficit is that more and more of our dollars are
being held by foreigners (did we mention China yet?). Theoretically, China can make these dollars available to the
rest of the world by putting them on the international exchange market. Another possibility is that perhaps
China will use these dollars to buy American goods and thereby return to an
equal balance of trade. China does neither; it simply keeps our dollars and buys
our T-bills with them.
The problem
here is that America no longer produces much that is wanted by any foreign country. American production has voluntarily shut
down and moved to China. In the
last 10 years over 40,000 American factories have closed and moved mostly to
China, but also to Mexico and other low-cost producing areas. With 40,000 factory closings over 4
million factory jobs have also been lost. With the service-to-production ratio of about 3:1, this accounts for an
unemployment figure of 12 million.
This is the
deficit, the untamed beast that is
NOT talked about. This is the one
that will turn around and bite us. This is the one that is out of control. This one can not be fixed by less spending or more
taxing. This can only be fixed by
less importing and more exporting. The problem can also be fixed by forcing (or persuading) certain foreign
countries to allow their currencies to float freely in the international
market, and stopping their controlled, under-valuation which makes it attractive
to buy their artificially low-priced goods. It is estimated that the controlled Chinese yuan is
artificially held at a value about
45% below market. Allowing it to
float would increase the price of Chinese goods by 45% and thereby reduce foreign
purchases of Chinese goods and restore some balance to the balance of
trade. It might come as profound
shock to our millions who have become accustomed to the artificially low
Walmart prices. Our trade
negociators who are trying to persuade China to allow the yuan to float are
probably very fearful that they might succeed.
One might
well ask why the Chinese are promoting exports at a low dollar price, in order
to obtain US dollars which they obviously do not want. They buy almost nothing from us and instead
take their dollars back to our Treasury and buy our T-Bills. Whatever their reason, they are surely
destroying our industrial capacity as effectively as a most successful bombing
campaign.
Because so
many of our industries have moved to China, and because we now have so little
to export, the value of our dollar is so low that foreigners find it very
profitable to buy these cheap dollars and come back to the USA and buy our
companies and our real estate. It
is easy enough to visit the internet and with just a bit of smart probing you
can find out how much of our wealth is now controlled by foreigners, with
absolutely no federal control over this invasion.
Our federal
government has permitted this to happen, and only our federal government can
stop the bleeding. And yet, there
is almost nothing being done except periodic visits to China by our Secretary
of State, and our Secretary of the Treasury, to plead with the Chinese to
continue buying our T-Bills.
What can
possibly be in the minds of our leaders. What can they possibly see as the outcome of this intolerable situation.
The problem
cuts across party lines. The
problem started in the Clinton administration, was continued by the Bush
administration, and is not yet being addressed by the Obama administration. Who is representing the American people
in this struggle for economic survival?
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