To fully understand the relationship between government spending, borrowing, and taxation it is important to toss out all conditioning and training you may have received to allow you to see it all from a correct perspective.
Firstly, the US monetary system, along with the UK and most modern nations, was built around the need to defend a gold reserve. The most economic efficiency was achieved if the government never held “money” that could be converted to gold, leaving the bulk of the value of the gold in the private sector. The government couldn’t hold both gold and representation of the gold concurrently, so tax revenue was extinguished as it was collected by the cancellation of its convertibility even before digital record keeping. In this system, which was only slightly changed when the gold reserve was abandoned and the currency became fiat, the definition of deficit and debt always left the private sector with the buffer stock equal to the gold reserve at a fixed exchange rate.
When the world went to fiat currencies and floating exchange rates in ’71 this buffer was no longer part of the accounting and any spending not clawed back in the same accounting period by taxation is now considered to be in deficit. A “balanced budget” is a 100% tax rate when viewed from the macro perspective of the entire economy. Treasury bonds, while never “funding” spending, did remove currency from circulation by making it nonconvertible to gold for a set period and allow policy space for spending above the value of the gold reserve during that period. Without the buffer of the gold reserve in circulation, “any” deficit spending is now subject to the mandate to “match”, not fund, any spending not destroyed by taxation in the accounting period.
It isn’t rocket surgery to see that the “national debt” is nothing more than an accounting of such spending not taxed out of existence in the economy since 1913. Given that demand for bonds is always equal to, or greater than, the excess reserves created by government spending in deficit a more accurate view is that spending “funds” bonds, not the other way around. From this perspective, the utility of bonds in leveraging interest rates at the Fed is questionable in light of the generalized fodder for propaganda and misunderstanding they present. Their only saving grace is that they keep accumulated wealth from doing mischief in the economy by offering a guaranteed return on investment.
Private sector banking has been free from any restraint of fractional reserves since we ended domestic convertibility of currency to gold in ’34 and now creates reserves to 100% match aggregate private debt principle only to enable interbank transfers. Such private debt is limited in that it can never “net” retire the debt that created it or be “net” saved within the system. Both require public money which only Congress can create and which is diminished within the system when the government has a budget surplus.
The only way such conditions can exist without immediately crashing the economy is if GDP growth and inflation allows for “rolling over” private debt at a rate that doesn’t produce excessive default. This GDP growth, while not always productive, accounts for any lag between the cause (budget surplus/balance) and effect (recession/depression) in the economy. As we saw from Clinton’s surplus and the resulting recession later in the ’90s, very little downturn in the business cycle is required to send the anemic economy into recession that is then only mitigated by safety nets meant to preserve supply chains and requiring large injections of public money via automatic stabilizers.
Clinton’s recession was not allowed to run its course before Bush massively blew up deficits and the debt with spending and tax cuts. Those certainly aided the economy, but it was his “ownership society” policies for the bank industry that gave defacto permission for it to take on risky debt with the knowledge that Fannie and Freddie would pick up the tab. The rest is history as lax oversight and quick profit potentials resulted in the ’08 crash. However, it was Clinton who set up the potential by curtailing bond issues to prevent the safe capture of investment capital and deregulating the industry with the repeal of Glass-Steigal.
