Rational Capitalist on Facebook

Friday, November 27, 2009

October Budget Deficit

ABC Reports:

The U.S. budget deficit for October surged to $176 billion, a record for the month, the Treasury Department announced today.

The October numbers mark the first month for the new fiscal year after the U.S. wrapped up the 2009 fiscal year that ended on September 30 with a record-high $1.4 trillion budget deficit due to increased government spending to stop the recession and the financial crisis. The final deficit for the 2009 fiscal year was equal to 10 percent of the nation's GDP, the highest shortfall relative to GDP since 1945, the final year of World War II. (emphasis mine)

Quick note: does anyone ever attribute the recession and financial crisis to governement spending? Statements like the one italicized above treat recession as if it is a mystical force with no cause or explanation and serve to rationalize the horrific and dangerous increase in federal spending.

It's as if recession were an approaching army and the government fires at it with deficit spending. The only problem is that they are looking in a mirror.


Rational Education said...

your brief analysis makes a very honest and astute observation of the situation which few understand and even fewer among those who understand have the courage to stand by their independent thinking and conviction to speak the truth-which is really tragic.
Thanks for your post.
I just read the most part of the most recent Reisman speech posted on his blog. I am trying to figure out what the consequences of the method he is suggesting to bring the country back from the brink -specifically his suggestion of 100% reserves - would be on individuals savings, assets, etc would be.
Would like to hear your thoughts.

The Rat Cap said...


Thanks much for your comment.

I will probably do a whole post on Reisman's speech. It provides an opportunity to integrate a lot of current events related to the economy and especialy the Fed's role.

I have a lot to say about all this, but suffice to say that the boom-bust cycle is a consequence of the inflationary policies of the Federal Reserve. They create money, it is multiplied, it leads to malinvestment, then collapses, ad infinitum.

I absolutely agree with his idea because it would destroy inflatoin (the root economic cause), and would provide a transitional approach between the current system and a 100% reserve gold standard which is the ultimate goal. It's important to understand why Dr. Reisman is proposing this and to understand some economic fundamentals.

The proposal would address two illegal, immoral, and destructive pillars of the current financial system. The first pillar is "fractional reserve banking" and the second is "fiat money".

Fiat money allows the government to arbitrarily inflate the money supply and FRB allows this inflation to be multiplied. I wrote a post about FRB:


(real quick: I consider FRB to be an issue in the philosophy of law, namely, in how property rights are defined and upheld by the courts. Specifically, I think a deposit and savings are two totally different concepts. In a deposit, a bank holds your money but you retain the right to the property at all times and, in effect, you pay them a fee for storage. Savings is where you transfer the right to usage in exchange for a future consideration. FRB is an attempt to do both which is a contradiction.)

Even when there was a gold standard, FRB led to various crises and panics because banks would lend out more than they held and when it got extreme there would be runs on the bank. The government would then suspend the banks' obligations to redeem in gold which provided incentives for banks to continue the process when things settled down.

When you combine FRB with the government's ability to create money artifically you have a recipe for inflationary disaster as we are seeing.

Statits know that a 100% reserve gold standard would be the end of the line for them (which is why they overthrew the gold standard to begin with). The government could only spend money it obtained in taxes or that it borrowed from private investors which would serve as a severe limit to its power.

We may never see Reisman's plan enacted in our lifetime but its important to make the argument so that we can push the debate in that direction.

I will follow up with more later. Let me know if you have a specific question or topic that I can try and address.

Anonymous said...

"...does anyone ever attribute the recession and financial crisis to governement spending?"

They never do. I suppose the state sucking up all availble capital has nothing to do with economic investment and expansion. These Keynesian clowns will never learn. It's a religion.