Why the Deficit Does and Does Not Matter

Sat­ur­day night I was at a char­i­ty casi­no night. Buy a tick­et, get an assort­ment of chips and try and increase them. I got my ini­tial chip allowance of “$30,000” and head­ed for the roulette wheel. At the end of the evening I had “$740,000” in chips.

This was not entire­ly luck. I used a sys­tem. One chip on odd. When I won, I bet one chip on odd again. When I lost, I dou­bled the bet. So two chips, then four, then eight, etc. Soon­er or lat­er the ball was going to land in an odd num­ber and I would win. (Try this with real mon­ey at your own risk). After a while, instead of start­ing the process with a “$1,000” chip, I start­ed with a “5,000” chip. I raised the ini­tial amount once I felt com­fort­able that I had enough mon­ey to sur­vive a like­ly (i.e. short) los­ing streak. Even­tu­al­ly, I was start­ing with a ““$15,000” bet.

I believe the clos­est I came to bust was when, start­ing with a “$15,000” bet, I did not win until I had bet “$120,000”. So I had lost three times in a row. If I had lost that fourth time, I would have been start­ing over. I did not have any­where near “$240,000” in chips left to dou­ble my bet with again.

What does this have to do with the deficit? As long as there are var­i­ous enti­ties ready and will­ing to buy bonds from the Unit­ed States, then the deficit is not a prob­lem. But when there is no more mon­ey to put back us.…

This years deficit is irrel­e­vant. It might be made rel­e­vant if the gov­ern­ment decid­ed to spend three or four more tril­lion this year (maybe a lit­tle less, maybe a lit­tle more), but giv­en the prob­a­ble deficit, even with no cuts from con­gress, the deficit is irrel­e­vant. Next year’s is too.

The peo­ple mak­ing the deci­sions on whether to buy or not buy our debt are ful­ly aware of the pro­ject­ed deficits. But even so, they still loan us mon­ey. This tells us that the mar­ket­place (where con­ser­v­a­tives usu­al­ly wor­ship) believes that our present deficits are not that much of an issue.

How­ev­er, it is rea­son­able to assume that at some point the total debt com­bined with the pro­ject­ed deficit will become too much for those deci­sion mak­ers and they will start putting their mon­ey else­where. Then we are screwed (just as I would have been screwed if the wheel came up even four times in a row). The mon­ey will no longer be there.

In the mean­time, the eco­nom­ic recov­ery con­tin­ues, slow­er than we would like, but con­tin­ues none the less. Some of the rea­son for this growth is a large fed­er­al gov­ern­ment spend­ing deficit. That deficit is stim­u­la­tive. Con­tin­u­ing eco­nom­ic growth is very impor­tant for the deficit/​debt issue as a strong econ­o­my will do much to ame­lio­rate the problem.

The Repub­li­cans want to slash cur­rent spend­ing which will have a depres­sive effect on the econ­o­my and cost jobs and will have a small effect on the cur­rent deficit and might eas­i­ly increase the deficit over the next cou­ple of years (due to the slowed econ­o­my). It is dif­fi­cult to under­stand exact­ly what the Repub­li­can objec­tive is oth­er than they want to hand­i­cap the eco­nom­ic recov­ery hop­ing for a dou­ble dip reces­sion and that the vot­ers blame Obama.

It is their only hope for win­ning the white house in 2012.