The U.S. national debt is rising by $1 trillion about every 100 days

[StillServing]

Did you really miss the part where Bush 43 created massive deficits? And that about half of those deficits were caused by Bush's tax cuts?

Even Bush's spending on two wars is a relatively small component of the subsequent deficits.

Wow, an argument blast from the past.

Yup, lots of deficit spending. First, there was Medicare Part D spending, then the GWOT, and then the 2008 recession. Interestingly, until 2008, tax revenues increased each and every year of President Bush's two terms.

 

[JohnfrmClevelan]

Why would that be? I mean, surely our deficit is a direct result of taking the amount of revenue by taxes and comparing to government outlays. But I think were the discussion would be is which value is deemed primary. Do we look at our spending and then raise taxes to increase revenue? Or do we look at our revenue and decide we need to decrease spending?

My contention is that we need to keep in mind that whenever we are talking about policies involving people, we are looking at an organic, not a mechanical system. A mechanical system is like the car you are driving right now. If you move the steering wheel to the left, it pivots a steering shaft and gear mechanism that converts the wheel’s rotational input into side-to-side motion, which angles the front wheels and changes the car’s direction. It is predictable every time you do so.

The economy is actually pretty mechanical. GDP in Year 1 is mostly recycled into consumption and investment for Year 2, with some demand leakages and demand injections that (hopefully) add up to a 2-3% increase in GDP.

In the U.S., we have demand leakages of domestic savings and a trade deficit, which is really just savings by foreign parties. On the injection side, we have increased private sector debt and federal deficit spending. Federal deficit spending accounts for about 6-7% of GDP, while growth is only 2-3%, so deficit spending is pretty darned important.

If you want to balance the budget, or even just cut back on federal spending, you had better make sure that those cuts have some positive effects on the economy that outweigh the loss of demand. And I can't think of any positive effects of cutting federal spending.

 

[StillServing]

It is not, I assure you, not as simple as you think it is. Which is to say, it is complex, but not difficult, where complexity is in the number and connections between ideas and difficult is where advanced problem solving is required. Think of it like the difference between a puzzle, where fitting the pieces together is easy, but finding the right fit is hard, and a Rubix cube, where conceptually it is easy to see what needs to be done, but hard to figure out how. Economics is understanding the relationships between ideas, more like a puzzle. Trying to predict in economics, that is difficult.

Let me see if we can have a back and forth conversation and see if I can explain.

First, tell me what all new sources of US dollars are in the US economy. How does new money enter the economy?

Then tell me how US dollars cease to exist? How are dollars destroyed? Assuming you think they are.

(Sorry, I missed this earlier post)

I like the way you’ve framed economics as a puzzle — conceptually simple but deeply interconnected, where the challenge is fitting the pieces together. But I do think the approach we should take is relatively simple

On your question about how new dollars enter the economy, I’d point first to private credit creation. When commercial banks issue loans, they simultaneously create deposits — that’s where most new money originates. The Federal Reserve can also expand the monetary base through open-market operations or lending facilities. Federal deficit spending can add dollars when outlays exceed taxes, but that’s more an accounting effect than a primary source of wealth.

Dollars “cease to exist” mainly when loans are repaid or defaulted, shrinking private credit, or when the Fed reduces the monetary base through asset sales or policy tightening. Taxes, by contrast do not destroy money but reallocate purchasing power from the private to the public sector.

And that distinction matters. Money creation and wealth creation aren’t the same thing. Liquidity may expand when dollars are issued, but real wealth comes from productive activity, innovation, and capital formation. If policy removes too much capital from the private sector — particularly through high taxation on investors and entrepreneurs — it can reduce the pool of funds available for business expansion, equipment, and job creation. Over time, that slows the very process that generates sustainable prosperity.

That’s also why I tend to favor keeping more capital in private hands. Markets generally allocate resources more efficiently than centralized spending, because they’re guided by profit-and-loss feedback. When private firms invest, they’re responding to real demand, competition, and risk — forces that reward efficiency and punish waste. Government spending, while sometimes necessary (infrastructure, defense, basic research), doesn’t face the same feedback loops and can be driven by political rather than economic priorities.

At the same time, I don’t believe in indiscriminate spending cuts. Fiscal discipline shouldn’t mean dismantling essential programs. Instead, it should focus on reforming or eliminating initiatives that are demonstrably ineffective, riddled with fraud, or rooted in cronyism, while slowing the overall rate of spending growth rather than cutting core functions outright.

If federal spending grows more slowly than the economy itself, the expanding tax base can increase revenues without raising tax rates, allowing for deficit reduction driven by growth and efficiency, not austerity. That approach keeps incentives aligned for innovation, investment, and employment, while restoring fiscal sustainability over time.

Finally, in a global economy, the U.S. can’t be viewed as a closed system. The dollar isn’t just domestic currency; it’s a global reserve asset whose value depends on international confidence, trade balances, and capital flows. Expanding dollars faster than real output can weaken that confidence, raise import costs, or push investment elsewhere.

So while government spending and credit creation can increase the number of dollars in circulation, sustainable wealth still hinges on productive investment, efficient allocation, and growth-based fiscal discipline — both domestically and globally. Dollars can be printed, but value and trust have to be earned.

 

[Visbek]

Let's see. According to the Monthly Treasury reports, in April 2018 before the Trump tax cuts our nation had $510 Billion in revenue. In April 2025, we brought in $850 Billion.

1) Obvious cherry-picking is obvious.
2) Someone doesn't understand inflation.
3) Those numbers don't tell you how much revenue was lost because of the tax cuts. ($1.8 trillion over 10 years btw)
4) And yet again, your proposal freezes the US at around $2 trillion in annual deficits.

In 2024 dollars:



Let's take a longer-term view, yes? Receipts usually increased gradually over time, dipping slightly during recessions. The Reagan tax cuts caused revenues to drop enough that he rolled some of them back. The Bush tax cuts caused a drop in revenues almost as big as the 2008 recession. And it's pretty clear that 2021 and 2022 were impacted by the pandemic.

In fact, annual revenues have never decreased year-over-year since the Trump tax cuts.

They have. Twice, in fact: 2020 (pandemic, obvi) and again in 2023.

That is, if you can be bothered to adjust for inflation.

In addition, these graphs don't tell you something critical -- again, how much revenue was not collected because taxes were cut -- or because of underfunding the IRS.

And again, the lost revenues due to the 2017 tax cuts is around $1.8 trillion over 10 years. Just FYI.

2017 Tax Cuts Continue to Lose Revenue | Committee for a Responsible Federal Budget

2024-04-15-UPDATE (June 2024): This analysis has been updated for CBO's June 2024 baseline

www.crfb.org

 

[Visbek]

When you raise taxes on people, they act in their own interest.

...except that neither human behavior nor taxes are nearly as simple as you think.

For example, let's say the government reduces taxes by 2%, and updates your paycheck's federal withholding accordingly. Are you going to notice it? Almost certainly not. Will you act in your best interest, and use the extra cash to pay down debt or for savings? Almost certainly not, you'll probably just spend it.

However, if you hear that the 2% tax cut was temporary, you're very likely to both look for it, and to feel much worse about it than whatever positive feelings you had over a 2% tax cut. Yep, that's a well known negativity bias.

Conversely, you're really going to notice relatively small price increases on goods that occupy a small part of your household's budget (such as food) -- but you're very likely to ignore something like a reduction in price in an expensive object you rarely purchase (like a refrigerator). You probably won't even remember how much you paid for that previous fridge without looking it up.

Without actually looking at your returns and doing the math, can you determine if your tax rate went up or down every year for the past 10 years? And then chart out exactly how it affected your spending? I rather seriously doubt it.

What happened during the pandemic? Many households received big checks and/or tax cuts. Did they all behave the same way? Nope. Some people paid down debts; some people saved it; some, who lost their jobs, spent it on necessities; some frittered it away on speculations in stocks or crypto or collectibles.

Does cutting taxes result in more economic activity? A little bit -- but not much. E.g. the 2017 tax cuts did not cause any increase in GDP growth rates; it seems all they did was increase income and wealth inequality.

It's pretty hilarious that you're trying to say economics isn't mechanical, and then treat human beings like Simple Economic Machines.

Take the Luxury Tax of 1991. It was imposed to raise revenue and rich people's yachts seemed like a politically easy thing to do. Except, this one act largely destroyed the American Yacht Industry which had previously been one of the biggest in the world, over 10,000 Americans lost jobs and the government later would find it actually lost revenue.

Did you... did you really not notice that there was a recession in 1991? And take a wild guess who came up with the alleged loss numbers due to that tax.

By the way... The tax on expensive boats was lifted in 1993. Oddly enough, there wasn't a subsequent huge jump in boat purchases. I wonder why? Could it be that the luxury tax was nowhere near as painful as the lobbyists claimed...?

For example, if the 2018 tax cuts had not been extended, a married family of 4 with an total income of $80,000 per year would have seen their tax liability increase by $3370. That's nearly $300 a month they would no longer have available to pay for groceries, gasoline, rent, etc. Like I said, that's a pretty darn big deer.

It is... but the impact of Trump's tariffs is worse. The tariffs are likely to cost a household with an $80k income around $4,000 per year that they need to spend on groceries, gasoline, rent etc. That's a pretty darn big deer, yeah?

That is why I think we are at the point where we need to begin limiting the increases in government spending to allow for the economic growth to provide more revenue without touching rates to where the defict/GDP begins to shrink.

So how is freezing the US at a $2 trillion deficit supposed to provide any benefit?

Oh, and what's going to happen when payroll taxes are insufficient to pay for Social Security benefits, and the surpluses are all used up? That's probably going to happen in the next 5-8 years, by the way. Got a plan for that?

 

[cpwill]

We have a spending problem, not a revenue problem.

This is simple.

Freeze all government spending to the past year + inflation and population % increase.

Cool.... the problem being... how do you enforce that in Medicare, Medicaid, Social Security, and paying interest on the Debt?

 

[cpwill]

Thank Trump for that.

Him too!

 

[Econ4every1]

On your question about how new dollars enter the economy, I’d point first to private credit creation. When commercial banks issue loans, they simultaneously create deposits — that’s where most new money originates.

That's right, that's great! But what the AI didn't explain (and I think it's great people are using AI), is the difference between government money, private sector credit, and the role of the Fed. Remember what I said about concepts that are easy to connect, the trick is "seeing" all of the connections.

You can think of new money entering the U.S. economy from two distinct sources: the government and private commercial banks. It’s best to imagine them as two different kinds of "money faucets."

Faucet #1: The Government (Creates "Outside" Money)

When the U.S. government spends, it creates new money that didn't exist before. This is the only source of new dollars. Conceptually, think about a tub with about 1" of water in it. Now pour in some bubble bath and whip up the water until the tub is full of bubbles. The bubbles are private sector credit and the water is government dollars. You can't make bubbles without water just as banks can't create loans without government spending dollars into the economy first.

This is "exogenous" or "outside" money. It's a net new financial asset for the private sector. A person or company is richer, and no one in the private sector took on a new debt to make it happen. This is a unique power of a monetarily sovereign government. Taxation works in the reverse, removing this money from the economy.

So here is the first link, government money to bank money....

Faucet #2: Commercial Banks (Create "Inside" Money)

This is what your answer described. When you get a loan from a bank, for a car, a house, or a business, the bank doesn't lend you someone else's savings. It creates a new deposit in your account with a few keystrokes. At that same instant, a loan is created on the bank's books. Bank credit.

This is "endogenous" or "inside" money. It's created within the banking system. Unlike government spending, this form of money creation is a credit/debt swap. You have a new asset (the deposit), but you also have a new liability (the loan). For the bank, it's the reverse. The important thing to understand is that they net to zero, but because loans exist until they are repaid. Bank loans add money like this:

(total lent) - (amount repaid)=Bank credit in circulation.

Last time I looked it was $144 trillion lent and $77 trillion still outstanding.

Recap....

Here's the critical link: The government's "outside" money provides the fundamental building blocks, called reserves, that the banking system operates on. While a bank can create a loan before it has reserves needs to acquire reserves to settle transactions with other banks (to make sure our checks clear). Government spending is what seeds the entire system with these essential reserves (the water at the bottom of the tub).

The Fed sits in the middle as the master regulator of these reserves. It doesn't typically create money through spending. Instead, its job is to manage the quantity and price (interest rate) of reserves in the system to keep payments flowing smoothly and implement monetary policy. Through open market operations, it can swap reserves for bonds (or vice-versa) (swapping water for bubbles or bubbles for water), influencing interest rates without changing the net wealth of the private sector.

In summary: The government creates the foundational, debt-free money for the private sector through its spending (the "debt" is held on the government side). On top of that foundation, the private banking system builds a much larger volume of "credit money" through lending. The Fed manages the system to ensure it all works. Your response was spot on, but left out the government's role, the very origin of the money that underpins the entire banking system.

Now, going back to the post I was responding to, if you limit government spending (reserves or the water in the bottom of the tub) to taxes collects, you limit the amount of credit that can be created without increasing leverage (more bubbles per volume of water). This is exactly what played out in 2008.

From 1993-2000 the government reduced reserves (water in the tub) and the private sector responded by making more bubbles, this increased leverage and risk as smaller fluctuations had bigger impacts and risk was carried by private institutions, not the government.

On the other hand if spending and taxes are equal and leverage is managed, the economy stagnates because the capacity to create more increases (more people more technology), but money stays the same. Deflation is the result as more and more people compete for the same pool of money.

 

[Visbek]

Yup, lots of deficit spending. First, there was Medicare Part D spending, then the GWOT, and then the 2008 recession. Interestingly, until 2008, tax revenues increased each and every year of President Bush's two terms.

Lots of spending AND trillions in lost revenues due to tax cuts (and a little bit from recession). The tax cuts made up about half of the increase in deficits.

I would ask "how did you miss that?" but I think I know.

 

[StillServing]

Lots of spending AND trillions in lost revenues due to tax cuts (and a little bit from recession). The tax cuts made up about half of the increase in deficits.

I would ask "how did you miss that?" but I think I know.

Because the empirical data shows increasing revenue, yet it was spending that wildly outpaced the growth of revenues.

As for “lost revenues” these are only losses based projections which are almost always incorrect.

 

[StillServing]

That's right, that's great! But what the AI didn't explain (and I think it's great people are using AI),

Ha, guilty as charged. I had the opportunity to use Grammarly on my laptop to correct what is usually horribly sloppy and opaque syntax and structure.

is the difference between government money, private sector credit, and the role of the Fed. Remember what I said about concepts that are easy to connect, the trick is "seeing" all of the connections.

You can think of new money entering the U.S. economy from two distinct sources: the government and private commercial banks. It’s best to imagine them as two different kinds of "money faucets."

Faucet #1: The Government (Creates "Outside" Money)

When the U.S. government spends, it creates new money that didn't exist before.

Technically, while Congress authorizes spending, it is the Fed that creates the reserves.

This is the only source of new dollars. Conceptually, think about a tub with about 1" of water in it. Now pour in some bubble bath and whip up the water until the tub is full of bubbles. The bubbles are private sector credit and the water is government dollars. You can't make bubbles without water just as banks can't create loans without government spending dollars into the economy first.

Ahhh... This is where I thought you were going. Is it Kelton who described the economy as a bathtub? You're talking about MTT.

This is "exogenous" or "outside" money. It's a net new financial asset for the private sector. A person or company is richer, and no one in the private sector took on a new debt to make it happen. This is a unique power of a monetarily sovereign government. Taxation works in the reverse, removing this money from the economy.

So here is the first link, government money to bank money....

Faucet #2: Commercial Banks (Create "Inside" Money)

This is what your answer described. When you get a loan from a bank, for a car, a house, or a business, the bank doesn't lend you someone else's savings. It creates a new deposit in your account with a few keystrokes. At that same instant, a loan is created on the bank's books. Bank credit.

But banks don't actually need this "outside" money to lend. They only need solvency and reserves after the fact for the clearing of these loans. I think you're overstating the link to government spending for banks to temporarily increase money supply this way.

This is "endogenous" or "inside" money. It's created within the banking system. Unlike government spending, this form of money creation is a credit/debt swap. You have a new asset (the deposit), but you also have a new liability (the loan). For the bank, it's the reverse. The important thing to understand is that they net to zero, but because loans exist until they are repaid. Bank loans add money like this:

(total lent) - (amount repaid)=Bank credit in circulation.

Last time I looked it was $144 trillion lent and $77 trillion still outstanding.

Recap....

Here's the critical link: The government's "outside" money provides the fundamental building blocks, called reserves, that the banking system operates on. While a bank can create a loan before it has reserves needs to acquire reserves to settle transactions with other banks (to make sure our checks clear). Government spending is what seeds the entire system with these essential reserves (the water at the bottom of the tub).

It's true that reserves come from the Federal Reserve, but the reserves are actually not lent out. Moreover, this is a function of the Federal Reserve, not necessarily by fiscal deficits.

The Fed sits in the middle as the master regulator of these reserves. It doesn't typically create money through spending. Instead, its job is to manage the quantity and price (interest rate) of reserves in the system to keep payments flowing smoothly and implement monetary policy. Through open market operations, it can swap reserves for bonds (or vice-versa) (swapping water for bubbles or bubbles for water), influencing interest rates without changing the net wealth of the private sector.

In summary: The government creates the foundational, debt-free money for the private sector through its spending (the "debt" is held on the government side).

Yes, but this overlooks that this is actually a product of not only government spending, but also the Fed's role in the equation.

 

[StillServing]

On top of that foundation, the private banking system builds a much larger volume of "credit money" through lending. The Fed manages the system to ensure it all works. Your response was spot on, but left out the government's role, the very origin of the money that underpins the entire banking system.

Now, going back to the post I was responding to, if you limit government spending (reserves or the water in the bottom of the tub) to taxes collects, you limit the amount of credit that can be created without increasing leverage (more bubbles per volume of water). This is exactly what played out in 2008.

No. While most of what I have noted above are little quibbles that matter only in precision of what we are talking about. Here I have to push back. The M2 rose from $6.3T in 2002 to $7.8T in 2008. While the defict was declining in the years prior to 2008, this is due to an economy growing at 5-6% netting increased tax revenues. This was not an issue of reduction in government spending.

The reason for the 2008 was a lack of transparency in the market, excessive speculation as opposed to investment, and faulty regulation.

From 1993-2000 the government reduced reserves (water in the tub) and the private sector responded by making more bubbles, this increased leverage and risk as smaller fluctuations had bigger impacts and risk was carried by private institutions, not the government.

Actually this is not correct. The total reserves in 1993 was 58.4B and in 2000 it was 60.4B. So reserves increased. Now, I think you are actually referring to deficits, not actually Federal Reserves, right? And yes, we did see the deficits disappear and even saw a surplus. This was due to perhaps the greatest revolution in business since the invention of the railroad--the computer. Yet, it wasn't due to government austerity--we still continued to spend more and more each year from 1993 to 2008.

Moreover, I think it's difficult to defend that the surpluses of the 1990s led to the 2008 recession when we were already back into deficit spending after 2000.

 

[StillServing]

On the other hand if spending and taxes are equal and leverage is managed, the economy stagnates because the capacity to create more increases (more people more technology), but money stays the same. Deflation is the result as more and more people compete for the same pool of money.

Perhaps if your conditions are met, but it's the last condition which is faulty. In the real economy, the government isn't managing the leverage wihtin the economy. The economy will continue to expand due to lending in the private sector. Businesses will seek opportunities to expand and borrow money to do so. Banks will provide this lending provided the borrower is creditworth and there is sufficient captital--either through private investment or the federal reserve accomadations.

It is important to understand that I am actually not calling for a cut to spending. I'm not even calling for a fixed limit to federal spending. I'm calling for a principle that increases to federal spending be conditional to the CPI and population change of the preceding year. This is because we do not operate in a bubble of just the United States. The value of our monetary system is not insular to the rest of the world. As a sizable of our debt is owned by private individuals and foreign entities, the value of our monetary system is subject to being discounted due to concerns about runaway debt.

Moreover, there are some additional issues with the idea that MTT espouses--that prosperity can be achieved through government spending. First, as I noted above, the only way that possibily could work if we did operate in isolation of the rest of the world, which we don't.

Second, there is a real danger in this approach which is inflation. Inflation is nearly always a lagging indicator, and if the government is infusing too much spending too quickly--as many, including myself, believe occurred in 2001-2002--we create inflation with the only remedy available being the Federal Reserve to raise rates, shifting the onus to home buyers and others trying to make purchases with credit.

Three, while there is a mechanism for the market to correct itself for poor decisions, we rarely see this in government spending. You noted concern in another thread over Tesla's market captializtion being far more than what you (and many others) feel is proper. As I discussed then, I believe this is largely because investors are looking toward the non-automotive future that Tesla is seeking. If these ultimately do not pan out, the market will move its investment elsewhere. We've seen countless once-promising corporations go from hero to zero when investors no longer see the value. When is the last time you bought a roll of film from Kodak, rented a movie from Blockbuster, bought your kids a toy at Toys ' R ' Us, or took a flight on PanAm? Yet, government spending often continues based upon political pressures even when evidence of their actual contributions today are limited: ethanol subsidies, Head Start, or the TVA, among others.

Four, government spending is not organic to the market and while it infuses money into the economy, it rarely results in the production that is desired by the market. What often happens is that the government spends to satisfy political objectives (both right and left) in a way to socially engineer the economy. I earlier discussed the difference between how a steering wheel turns a car (mechanical) with how traffic works (organic). Government spending too often provides money as a financial lever to make a particular action. Yet, what we have found is humans are really, really bad at introducing things to fix an organic environment. It's not that we often get it wrong, we almost always get it wrong. Just ask a Australian how they love the toads in their country.

I've loved the discussion. Sorry for the typos...on my phone and my thumbs are way too big.

 

[Econ4every1]

Technically, while Congress authorizes spending, it is the Fed that creates the reserves.

Yes, that's absolutely true, but, you have to understand, in order to create reserves the fed has to take something in trade. Every transaction has at least two entries (double entry accounting), though they can be offset slightly in time (days or weeks), so the Fed creating and adding reserves is the result of transaction somewhere else moving an asset onto the Feds books in return. The vast majority of the Feds assets are in government treasuries that only exist because the government created and spent dollars into the economy first. Because......Treasuries can only be purchased with US dollars.

When the Fed buys treasuries it moves reserves into the system, and when it sells them it moves dollars out of the system.

Ahhh... This is where I thought you were going. Is it Kelton who described the economy as a bathtub? You're talking about MTT.

MMT*

To be honest, while I think that MMT's explanation is operationally correct, I don't "talk about it" because the ideas that I discuss stand (or don't) on their own merit. People tend to get caught up in names and "economic schools" and it's just not necessary to identify as part of a tribe IMO. The MMT community can get side-tracked and start confusing MMT as a description of how economies work, with to a prescription on what government should do in light of an understanding of MMT. I find the economics difficult enough, we shouldn't be fusing it with politics.

Let me explain that a little more. An understanding of physics and engineering can tell a person how to build a bridge. It can help determine the best available materials given the real constraints, but what no understanding of physics can do is tell you if you should build a bridge.

So while engineers can advocate for the social benefits of building a bridge and have a fantastic understanding of the social and economic costs of doing so, it is not his understanding of physics alone that led to a conclusion. Similarly, an understanding of what I'll call, economic reality, certainly helps in understanding the consequences of doing something, or how it can be done, it can't tell you if it should be. Those are moral and ethical questions. How much does it cost to save a child whose parent cannot afford medical care? MMT can tell you how you might be able to pay for it, but any decision to save that child is often based or moral and ethical questions.

Which is why I don't "identify" as a card carry member of the MMT fan club, I think that Mosler, Kelton and Wray, just to name a, few have a fantastic understanding of economics, I prefer to explain things on their own terms without the ideological baggage.

As far as the "bathtub", yes the concept of the tub has been used before in MMT circles, the "bubbles" is my own personal addition because it explains that water (reserves) "seeds" the tub and each tiny bubble represents a consumer or business loan. New bubbles appear and old bubbles pop....The fed can manipulate the number of bubbles just by adding or removing a little bit of water at the bottom.

But banks don't actually need this "outside" money to lend. They only need solvency and reserves after the fact for the clearing of these loans. I think you're overstating the link to government spending for banks to temporarily increase money supply this way.

Government must spend so that there are reserves that the fed can credit to accounts. I don't want to get too far down a rabbit hole, but in 1933, the Fed was largely seeded with gold, and as long as the US was a net exporter, they could send out goods and draw in foreign dollars which in turn could be traded for gold from the nation that the dollars came from. Everything is ok until there is a trade imbalance and goods are going one way and gold is going the other. It was the 60's still swimming in post war savings had a larger appetite for goods that the country could supply. Dollars flowed out and good flowed in.

France called the US bluff and wanted to trade back all the dollars that flowed to France to buy French goods for gold and Nixon suspended convertibility soon after. Now that's overly simplistic because I'm going to run out of room....

 

[Econ4every1]

It's true that reserves come from the Federal Reserve, but the reserves are actually not lent out.

Again, quite right, the role of reserves is to ensure that our transactions clear at the end of each day. The economy can do trillions of dollars of business in a single day, and only move a few hundred billion in reserves. Other nations refer to reserves as "settlement balances", which I think is much more accurate.

That said, if you want to discuss how banks make loans we can, though if you already know that banks don't lend reserves, perhaps you already know, so, I'll just say, no disagreement here.

Yes, but this overlooks that this is actually a product of not only government spending, but also the Fed's role in the equation.

You're going to have to explain better why you think that's the case, but again, I think we are largely in agreement.

While the defict was declining in the years prior to 2008, this is due to an economy growing at 5-6% netting increased tax revenues. This was not an issue of reduction in government spending.

Ahhh...A bone with some meat on it!

From a purely mathematical view, for an economy to grow, more spending needs to take place. I think we can agree on that?

If the government cuts spending, say for BRAC (Base Relocation and Closure) under Clinton, then the government is not supplying as many dollars to the private sector. That is a reduction in spending, but if the economy grew, then money must have come from somewhere else and that's exactly what we see in the data!

This image is from a Fed report, let me see if I can find the original link (the look has changed, but the data is the same) but it shows aggregate debt by sector. Notice how when the government starts to run a deficit surplus the private sector's debt explodes. now look at the stable period prior.



Now, your assessment of speculation and awful risk assessment and mitigation is spot on, but I would assert that these were down stream effects caused by a reduction in government spending. Acctually, caused is probably not the right word, I'll say that government cuts were the precipitating event. If the market had been disciplined and appropriately managed risk and avoided speculation and the removal of rules, laws and institutions meant to prevent what we saw, the recession of 2001 would have been longer and the economy would have shrank as the government cut (if I remember correctly) spending equal to 6.6% of GDP (again, I think that was for the years 1993-1997). And the recession of 2001 would have been a doozie, much longer than it was, but, I think it would have been much smaller than the crash of 2008.

The result was inevitable, but was avoided in 2001 when it should have happened because the private sector took on massive debt and began the start of the housing bubble. We got predatory lending, NIJA loans, credit default swaps, mortgage backed securities and ratings agencies falling asleep at the wheel. No wait, it was Sub primes (that last bit was sarcasm). Sub primes contributed and numerically made up most of the bad loans, but accounted for 1/3-1/2 of all failures depending on your source.

 

[Econ4every1]

Actually this is not correct. The total reserves in 1993 was 58.4B and in 2000 it was 60.4B. So reserves increased. Now, I think you are actually referring to deficits, not actually Federal Reserves, right?

Correct. Reserves grew, but mostly on the back of private debt.

Moreover, I think it's difficult to defend that the surpluses of the 1990s led to the 2008 recession when we were already back into deficit spending after 2000.

Quite right, however it's hard to calculate the knock on effects of spending reductions due to BRAC were many times what the government cut in spending as many bases would the lifeblood of the communities they were in. $1 dollar in spending reductions could lead to multiple dollars of lost revenue in the private sector.

The economy will continue to expand due to lending in the private sector. Businesses will seek opportunities to expand and borrow money to do so. Banks will provide this lending provided the borrower is creditworth and there is sufficient captital--either through private investment or the federal reserve accomadations.

If the fundamentals are sound, yes, but the private sector has a debt creation constraint based on our capacity to repay debt,

In other words, if I make $120k ($10k per month), a large but healthy debt ratio might be what, 1/3? Whatever it is, there is a real number and the music stopped in 2008 because the private sector had hit it's limit.

Without government to add money to the economy that is increasing in people, and efficiency (more people over time, but less people needed needed over time thanks to technology.

So if we have 100 people with an average potential output of 1, then this group can make 100 units. 10 years later we have 300 people with average output of 2, so we have 3 times the people and 6 times the potential output. Because prices (remember that salaries are a price for labor) move fairly slowly, without the government adding money and creating demand, the private sector will, all other things being equal (debt ratios are similar), the economy will stagnate.

 

[StillServing]

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Ahhh...A bone with some meat on it!

From a purely mathematical view, for an economy to grow, more spending needs to take place. I think we can agree on that?

If the government cuts spending, say for BRAC (Base Relocation and Closure) under Clinton, then the government is not supplying as many dollars to the private sector. That is a reduction in spending, but if the economy grew, then money must have come from somewhere else and that's exactly what we see in the data!

This image is from a Fed report, let me see if I can find the original link (the look has changed, but the data is the same) but it shows aggregate debt by sector. Notice how when the government starts to run a deficit surplus the private sector's debt explodes. now look at the stable period prior.

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Now, your assessment of speculation and awful risk assessment and mitigation is spot on, but I would assert that these were down stream effects caused by a reduction in government spending. Acctually, caused is probably not the right word, I'll say that government cuts were the precipitating event. If the market had been disciplined and appropriately managed risk and avoided speculation and the removal of rules, laws and institutions meant to prevent what we saw, the recession of 2001 would have been longer and the economy would have shrank as the government cut (if I remember correctly) spending equal to 6.6% of GDP (again, I think that was for the years 1993-1997). And the recession of 2001 would have been a doozie, much longer than it was, but, I think it would have been much smaller than the crash of 2008.

The result was inevitable, but was avoided in 2001 when it should have happened because the private sector took on massive debt and began the start of the housing bubble. We got predatory lending, NIJA loans, credit default swaps, mortgage backed securities and ratings agencies falling asleep at the wheel. No wait, it was Sub primes (that last bit was sarcasm). Sub primes contributed and numerically made up most of the bad loans, but accounted for 1/3-1/2 of all failures depending on your source.

Now we get into some fun!

First, as much as BRAC made for some interesting TV watching on the West Wing for an episode, it's real impact was very minor. Overall, about $6B was saved throughout each of the rounds between 1991 to 2000. While symbolic, its fiscal savings — roughly $6B across all rounds in the 1990s — amounted to less than 1% of the DoD budget and under 0.15% of GDP, making it far too small to meaningfully shift aggregate demand

Second, we still saw increasing government spending throughout this period. As I noted earlier, according to CBO data, federal outlays still rose each year from 1993–2000 — from roughly $1.46T to $1.79T — even as spending’s share of GDP fell due to rapid economic expansion. However, as a share of GDP, it was not a 6% reduction, but only 2.5% from 1993-2000 (21.4 to 18.9%).

Third, the larger reason for budget surpluses was due to revenues as this was during the computer boom which transformed not business in a manner unlike anything we've ever seen since the introduction of the railroad. This increased economic growth and led to higher government revenues.

The reduction of government spending could hardly be deemed a significant factor for the increase in private lending, and even less of a causal factor for the 2008 financial crisis.

I just got in Europe and sitting at Heathrow. I'll check in from time to time, but might have a few days of gaps.