Government budgets are nothing like family budgets
Source Charles Brown
Date 11/04/26/22:40
The debt is not nearly as scary as you think: Government budgets are nothing like family budgets

We have to live within our means. That's what President Obama repeatedly tells us, echoing a point Republicans have been making for years. Like households, governments must husband our resources and balance our budgets, or future generations will surely pay.

There's a problem here. The analogy is ridiculous. Government budgets - and the U.S. budget in particular - are absolutely nothing like a household budget.

Here are five reasons why:

1. Households can't levy taxes.

True, governments, like households, have revenue coming in and expenses to be paid out. But if the breadwinner in a family has a job, he doesn't get to decide what he's paid for it. The U.S. government can charge its employer (the taxpayer) pretty much anything it wants to.

2. When households owe money, they owe it to other people. The U.S. debt is owed mainly to ourselves.

Contrary to popular belief, the U.S. debt is not mainly owed to China. In fact, roughly 70% of it is owed right here at home. Even more remarkably, the vast majority of that is owed to the government itself - mainly to the Federal Reserve or other government accounts. Granted, the Fed is a semi-independent entity, but the President appoints its chairman and its purpose is to serve the U.S. public. Money owed to a bank you ultimately control is simply not the same as money your family owes to Citibank.

3. When households owe money to other people, they can't just print it. The government can.

This is how it works: Technically, it's not the government but the Fed that prints the money, then "lends" it to the Treasury. But the effect is ultimately the same, since the Fed can print as much money as it likes and the government doesn't really have to pay it back.

The only real limit is the danger of inflation: If we flood the economy with too many dollars, the dollar itself might begin to lose its value. This is the scare story the deficit hawks always trundle out. The irony is that at the moment we have exactly the opposite problem: Not enough money is circulating, so the Fed right now is printing dollars with reckless abandon.

4. When someone in your household writes a check, the recipient tends to cash it. Not so when the U.S. sells Treasury bonds to banks in Brazil or China.

They rarely cash them in, but mainly just sit on them, rolling them over each year. This is because U.S. Treasury bonds have come to substitute for gold as the world's reserve currency. So our foreign debt isn't exactly debt, either. True, some economists worry that if we print too many dollars, other nations might eventually find something else to use as reserves and start cashing in their T-bonds. But that's an unlikely prospect, because it would mean having to create an entirely different global banking system.

5. If a household doesn't pay its debts, creditors can take them to court or call the cops. Internationally, we are the cops.

Why are countries like Brazil or China effectively giving us money and pretending they are loans? Well, consider this: A major reason the U.S. has a deficit to begin with is that we spend more on our military than all other nations in the world combined. But the military backs up the entire financial system. Think of these "loans," then, as the salary we're being paid for acting as the world's enforcers.

There's every reason to believe politicians know all this - that in private, they'd tend to agree with Dick Cheney's famous assessment: "Deficits don't matter." Most probably know that if we ever really did balance the budget, it would likely throw our economy into a tailspin. So why are they suddenly telling us that when it comes to their solemn promises to the rest of us - for instance, Social Security and Medicare - they just don't have the money?

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