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Federal Deficit Spending Part I

There's much talk, argument, and debate about the federal deficit. Although all of it is not nonsense, in truth much of it is. Businesses and big corporations spend on deficits all the time. In fact, a business spending more than it takes in is considered healthy, normal, and safe.

Large corporations, through loans from banks, takes the savings of the public to build new plants and purchase new equipment. Much of the time, a business' expenditures on capital equipment are greater than its sales, although that info is hidden from stockholders. Instead of calling this spending behavior a "deficit," they call it "investment." In a posting last week, we looked at why a business must spend more than it takes in.

Businesses run deficits as long as they want because once their bonds come due and must be paid back, corporations issue new bonds of equal value to the old ones, then sells the new bonds and uses that money to pay off its old bondholders.  Through this behavior, businesses keep good credit ratings, increase their tangible assets (machines, equipment, plants, etc.), while ensuring healthy financial longevity. 

Why can't government do the same? It can justify its rising debt with real assets too, like dams, roads, and a strong military. Just as businesses think it proper to finance private investment by borrowing, we should think proper for the federal government to do the same. Instead of arguing and debating the issue of deficit spending, we ought to change those to talks of about how much Public Investment do we want and of what kind.

Thanks for reading, 
Matthew



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