There are three things that control the amount of dollars in the economy and they can source and sink dollars, two of them are not really controlled by Congress.
I should have stated “net” dollars, but that is hair-splitting.
is Monetary Policy, it is mostly controlled by the Federal Reserve Board
The Fed creates dollars to match bank loans, but the reserves created are liabilities to the lending banks so they must keep them in balance with loan principal in aggregate. This is only to allow interbank transfers of loan proceeds. They pay those liabilities with dollars created by Congress as the borrowers reduce their principal until the loan is retired, at which time the Fed created currency has been destroyed/replaced.
International currency trading, with the Dollar being the Reserve currency preferred internationally
Dollars never leave the US banking system except for small amounts of cash allowed for travel. Ownership of reserves and bonds may change within the Fed system, but the dollars do not physically move because they are not a physical “thing”. Accounts at the Fed are simply marked up or down electronically, but those account transactions must remain in balance.
I have always stated that trade deficits are a currency drain, but not in total dollars. They only result in less currency being available to US consumers. However, that drain is no different than wealth accumulation in its effect on the economy. The dollars still exist, but we have no access to them. We also benefit from trade when we receive goods in trade for dollars, but that is only effective if Congress spends in deficit sufficiently to allow consumers to obtain dollars to purchase those goods.
The fixation Congress has on total dollars is killing our economy. Balancing the “budget” means clawing back all currency created via taxation, which leaves nothing in the private sector to pay for goods and services the government uses, or to compensate for the drains of trade and wealth. As the available currency is depleted by those drains the ability of the people to retire their private sector debt is reduced and business has less currency to store value from its commerce and pay shareholders.
They returned to dollars into circulation, they acted as a supply of dollars into the U.S. economy. China is or at least is threatening to weaken it currency relative to the dollar, basically not return the dollars it earns back to the U.S.
Trump’s tariffs reduce the benefit of cheaper goods from trade and may harm our trading partners with reduced demand, but do much greater harm to our economy if those dollars aren’t replaced by deficit spending or middle-class taxes reduced sufficiently to compensate. Given that almost half of Americans don’t pay federal taxes there is little economic benefit to simple tax cuts, leaving only deficit spending as an effective economic stimulus. Taxing the wealthy is also not an effective stimulus unless it is done in a way to motivate them to spend or invest in productive economic activity to avoid the taxes. Idle wealth, Treasury bonds, are effectively no different than trade deficits.
What we need are smarter politicians that realize that taxation has the same net fiscal effect as trade deficits except we gain no real resources from taxation as we do with trade. The mistaken concept that taxes are “revenue” to a government that neither needs or uses the revenue to spend lies at the heart of most of our economic decline. We should be using the budget to control the economy to the benefit of the people, not fixating on meaningless numbers of deficit or debt.
Avoiding inflation and extreme inequity are the only reasons to tax in a modern fiat economy. We could double the deficit for a decade and not cause any meaningful inflation if Congress appropriated spending wisely, keeping in mind real resource and labor availability, not the money. Then trade would become a beneficial source of resources, not an economic drain.
