Monetary Realism

Understanding The Modern Monetary System…

Take interest in net interest

To pay off what I mentioned last night, Pete Peterson has different think tanks competing for the best way to choke out the US economy— doe we raise taxes, cut entitlements or do we maximize the carnage by doing both? Of course, the budget deficit really doesn’t matter nearly as much as the trade deficit, yet somehow gets 100 times the attention (its odd that money loaned to the government is called debt and is the mark of a doomed government but money loaned to a bank is called deposits and is the mark of a successful bank).

But if cut the deficit we must, the US Govt is projected (by the CBO) to pay an absurd amount of money in net interest on publicly held debt over the next decade– $3.8 trillion to $4.8 trillion– approx the same goal set for Peterson’s economic sabotage teams. Let’s zero that amount out of the budget and we can go back to worrying about actual problems. Of course, as happens all too often, I’m just reiterating a point (pdf) made by Jamie Galbraith.
“The prudent policy conclusion is: keep the projected interest rate down. Otherwise, stay cool. There is no need for radical reductions in future spending plans, or for cuts in Social Security or Medicare benefits, to achieve this”.

There are several different ways to zero out net interest, most of them either require either an Act of Congress or the willingness to do something that looks and possibly is illegal (if Tsy funded spending by overdrafting its Fed account, it would look to the public like a check kiting scheme). However, Tsy could take net interest costs off-budget if it started funding it with an off-budget revenue stream. As it happens, I have one in mind. :o)


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