Money, deficit and some more
The economists under suspicious supervision of politicians discovered during the twenties century the connection between government debts and the Money. This understanding enabled the historical decision of the Nixon era to disconnect the US Dollar from its golden foundation. Since then money lost its value as expression of a commodity value, and rather became a central tool for economic policy.
Money has in principle two economic functions. The first is to be a scale measuring relative value of items created and marketed among the people, and the second, to be a security for keeping and if possible with small addition the purchase power value for the future. The cumulative value of money ownership exchange , or the aggregative value of money flow by definition have to be equivalent to the aggregative product value flow. (products include services and merchandise, what in its potentiality can be consumed or thrown to the dust bin, like all the Christmas presents:). So the manipulation with the value of the money flow is crucial for economic activity volume. If the potential capacity of the economy is overflowed by the money flow value, necessarily the product prices will grow, or inflation will happen. To influence the value of money flow in the economy the government can increase or decrease the budget deficit, and by that increase or decrease its aggregative debt. The more flexible way to influence the value of money flow in the economy is by monetary policy its major instrument is interest rate in the economy, that influences the volume of investments and the tendency to consume now or postpone the consumption for the future.
Traditionally it was excepted that the interest rate is major tool to influence economic activity, so when the bust came at 2008 the interest rate was flatted in the US and Europe, hoping that it will cause a substantial increase in the demand for consumption, and in parallel inflation, that would decrease the real value of the debts, the governments, corporations, banks and private households have, and with it the economy will return to equilibrium of economic growth. But it didn’t happen and it is a big question why. To my opinion the answer is in several issues. The first is the increased life expectancy of the people, whose savings in long term pension funds was planned for a shorter life expectancy, so in principle they are in deficit. To overcome this deficit, people in pension age or close to it, the fastest growing population sector in the world, increased their savings. Add to it the debt shock of the private households, that emerged with the 2008 economic crisis, and degradation of the middle class income, that damaged the income of the largest part of the population and you have a perfect explanation why there is no increased demand for consumption and with it inflation, even if the Government debt and with it the potential money in the economy grew with no precedent.
I understand the fear of most of the people from the future developments, when the mountains of money accumulated because of the government deficit will suddenly flood the economy. It may happen, and it will be damaging mainly to those who hold their savings in some form of savings. Sorry the pensioners again. But this problem can be solved, if the government will take responsibility to this sector of the society. It will be just, politically popular, and with very little impact on the economy. After all what will be the occupation of most of the people in the future, when the AI and the robotics will take over the production of merchandise and services? Taking care of the elderly population, who need human touch, what the robots still can’t provide.
Other phenomenon i would like to mention is the changing position, function and attribute of money with relation to the economy. If historically with the industrialization and urbanization of the world population, growing parts of economy introduced money exchange in almost every economic activity, (no self produced consumers items as in the pre-modern agrarian societies), this trend goes thru sudden dramatic change. Today many products are purchased on the internet without or with very little payment, sometime donations. Other phenomenon is possibility of investments into self producing energy equipment, with the new efficiency of battery and photovoltaic cells, etc.
I would add one more issue, the money with no government influence, as bit-coin, that by now is marginal but in growing trend, threatens the very foundations of the existing monetary system, based on government monopoly on the money creation.
My conclusion; To see the accumulated government deficit as the major macroeconomic problem, the US and the world leaders have to cope with is a very narrow view.
I am aware that this simple model i described doesn’t take in account the influence of the ex-national territory influences on the money flow and money variables as interest rate and the economic activity of the products, still i believe it gives reasonable picture about the connection between the government deficit and the economy.