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The Confusion Regarding Our Deficit (Does Size Matter? Really?)

The Confusion Regarding Our Deficit (Does Size Matter? Really?)

| February 03, 2022
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A lot of people are flailing their arms over the U.S. being 30 Trillion dollars in debt. That’s a lot of money. I’ve been in debt before and I wasn’t even close to that.

 

However, the U.S. isn’t really in 30 Trillion dollars of debt. Sometimes the numbers sound way worse than reality, and sometimes, the debt we do have isn’t as bad as it seems.

 

About 8 Trillion dollars of that 30 Trillion is just money the government has set aside for itself, such as to pay future Social Security payments. That’s not a bad thing. Isn’t it often better to save up the money than to borrow it? So the government is setting aside monies for future obligations, but they’re counting that as part of the deficit. Already that eliminates a large chunk of that 30 Trillion dollar debt.

 

And yet, the remaining 22 Trillion is still more than I ever owed. I’m starting to feel better about myself.

 

Most of the remaining debt isn’t just the U.S. spending or giving away money. Every time a baby is born and someone purchases a Savings Bond… that increases the U.S. debt. When you buy a bond, the government needs to pay you back in the future (with interest). Other countries buy our bonds. They’re investing in the U.S. But when they purchase our bonds, we’re going to need to pay that back eventually. So their purchases and investments add to our debt because we owe that money back. But is that a bad thing? Not really. It's more a matter of what we do with that money in the meantime.

 

During the pandemic, the Government, stretched out over two administrations, gave away a lot of money. People couldn’t work, and most recipients used that money to either build a cushion or pay bills. It was pretty direct. It was either the Government going a little more in debt, or the citizens, the small family units going more in debt.

 

Does the size of our debt cause or add to the inflation we’re experiencing? Not really. What the government spends money on can effect inflation, but the size of our deficit doesn't necessarily effect inflation. We’re not tied to the gold standard. Many moons ago, if the Government added twice as much money into the system than the day before, a chunk of gold would have cost twice as much. That was inflation caused by adding money into the system. The U.S. had a certain amount of gold, and a certain amount of money, which represented that gold. When we added more money into the system, it just made each individual dollar worth a little less.

 

Now however, we’re not tied to a gold standard. Adding debt has less to do with inflation than one might think. At least directly. Indirectly, over time… eventually the ripples, or what we do with that money, can play a part in adding to inflation. But not directly.

 

What does add to inflation, among other things, is supply and demand. Supply and demand plays a large part. All the things preventing the supply from showing up on our shelves plays a more direct part than the size of the deficit. When the demand is strong, and supplies are short, prices go up. Low interest rates can speed up business, eventually leading to inflation. That’s why the Fed raises and lowers rates…. to modulate inflation and the markets. To keep them stable.

 

Again, everything is interrelated, so what the Government spends our money on may or may not cause inflation, and may increase the deficit. But that spending may also increase opportunities and business in the private sector, which may increase tax revenue. It’s all interrelated.

 

What does not affect inflation, in the very moment, is the size of our deficit.

 

30 Trillion dollars? That’s a lot. And it can be dangerous all on its’ own. But our debt isn’t really 30 Trillion dollars, and a lot of the money is spent for truly viable reasons, as noted here.

 

That doesn’t mean it won’t come back to bite us, but the size of our deficit is not what’s causing the current inflation, and not necessarily a danger to us, as citizens. 

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