Pearls of Wisdom: Is Deficit Spending A Good Thing?

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The United States of America has a budget deficit. Is that a good thing or a bad thing?

Some of our leaders suggest that American families must live within their income and balance their budgets – and that should apply to the government too. That is simply not the case. The government of the most powerful country on the face of the earth is fundamentally different than a typical family.

Instead of comparing the United States government to a family, let’s compare it to a big thing that we are reasonably familiar with: Starbucks.

Making and serving coffee is very different than operating a military force, some hospitals and other public services but there are some things in common.

  • They employ many people all over the country

  • They are growing

  • They are very stable: no one doubts that both will still for years into the future

  • They continuously take in and spend large amounts of money

  • They both run a budget deficit

What, Starbucks is making a huge profit (over 660 million dollars in the last three months), how can they be running a deficit? Well, their corporate debt is higher now than it was a year ago (6.9 billion dollars versus 6.6 billion dollars). They have over 1.4 billion dollars worth of Starbucks cards outstanding (all of these number are from the 10-K and 10-Q forms that Starbucks filed with the SEC). The way that the United States government deficit is calculated, that is a deficit.

But Starbucks accumulates all kinds of useful stuff – like building stores, buying coffee, paper cups, and investments in real estate. Well, that applies to the United States government too. The government uses the money they collect to build navy ships, interstate highways, VA hospitals, and other tangible assets – but the way the government does accounting for say, building a hospital (which will be used for decades) is considered an immediate expense, just like pay salaries of FBI agents.

Do you think that there are some deficit hawks in the executive offices of Starbucks yelling and screaming about how dangerous all of those outstanding cards are and how their grandchildren are going to be making coffee for Chinese tourists forever? Probably not.

Everyone knows that this stored value card system is great for Starbucks. You give them cash. They give you a few cents worth of plastic (or maybe not if you use your iPhone, but that is a different story) and a promise that you can get some coffee later. I will take Starbucks’ side of that deal (For full disclosure: I actually do take their side of the deal, as an investor in Starbucks stock). The case is even stronger for the United States government. When the lenders show up to collect on the fancy notes and bonds that they were issued, they don’t even get coffee, all they get is more pieces of paper with fancy printing.

Why am I not frightened about the massive inflation that the balanced budget hawks have been warning me about for my whole life?  By the prospect of the United States Dollar losing its status as the reserve currency of the world? Because that is essentially impossible. Financial entities all over the world want their money in United States dollars, in the United States, under the jurisdiction of the United States because that is where it is safest. Would you feel comfortable planning your retirement based on money you have been saving in a Russian bank? Neither do most rich people in Russia. That is why there is demand for instruments denominated in United States dollars, and instruments guaranteed by the United States government from people who are very happy to lend their money to the United States government and barely earn any interest at all.

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