The federal deficit will continue to grow so long as we have a current account deficit (trade deficit). There’s nothing wrong with either deficit; we just happen to not be a net exporting nation. In order for the net financial assets of the domestic sector to increase, the federal budget deficit must necessarily be larger than the current account deficit. Look at net exporting nations like Germany and Sweden: they typically run a fiscal surplus since the savings desires of the domestic sector can be met via exports. Dollars are ‘flowing in’ via trade in those nations, whereas they are ‘flowing out’ of the US.

The crucial thing to understand about the federal debt is that it is NOT something that needs to be ‘paid back’ via taxes. The national debt is just a portion of the money supply (reserves) plus outstanding treasury securities, which can be accurately thought of as ‘future reserves’. It’s hard for people to get their heads around this because it contradicts how most people understand money. It IS important to understand though, because otherwise you cannot think rationally about public policy. You will be constantly thinking of spending in terms of how it will be ‘paid for’, which is a non-sequitor.

Corporate accountant and former auditor with degrees in philosophy and accounting.

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