No, Congress and Banks Do Not Sustain the U.S. Economy
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In a recent opinion piece for Barron’s, Paul Sheard (former Vice Chairman of S&P Global) purported to list myths about budget deficits that “deserve straightening out.” Sheard only succeeded insofar as he created his own.

He contends that government doesn’t need to borrow “in order to spend and run deficits.” Actually, government has no resources other than its ability tax or borrow the fruits of actual production. Absent its taxing power, there would be no deficits. Deficits don’t boost growth as economists imagine, rather they’re a consequence of producers having lighter pockets born of government’s long fingers.

Sheard laughably asserts that as opposed to “’raising revenue,’” government taxes “variously to correct for negative externalities, to redistribute income, and to modulate aggregate demand.” More realistically, the consequence of taxing and spending is by definition a slower economy as individuals with names like Pelosi, McConnell, Biden and Trump substitute themselves for information-pregnant markets on the matter of resource allocation. Government IS the “negative externality,” not its mitigation.   

Sheard imagines that government “creates money” when it spends. Actually, government does no such thing. Money is everywhere that production is (a truth vivified by the dollar’s central role in commerce well outside of the U.S.), which is just a reminder that absent government spending the money would still circulate, albeit in market-driven fashion. Money is the “language” or agreement about value among producers that is always and everywhere abundant where production is, and always slight where production is slight. Sheard believes money instigates, which is him putting the cart before the proverbial horse. He must be an economist.

Sheard then pivots to a “related myth” that “government needs to repay its debt.” A visit with finance ministers in China, Japan, and other size owners of Treasury debt would cure him of at least some of his naivete. If that’s not enough, let’s never forget that compounding is easily the most powerful force in investing. To then say that investors blithely purchase Treasuries without a care about the income streams paid out is hard to countenance.

All of which rejects Sheard’s assertion that governments can create as much spending power as they like via the printing press. The latter implies that markets are stupid, that any government can create “money” at will, and spend at will. See a largely dollarized world to properly understand the fatuity of Sheard’s analysis. The reality is that investors decide how much debt countries can have. Put another way, Haiti’s microscopic debt relative to the U.S.’s is not rooted in the parsimonious orientation of Haiti’s political class.

Sheard suggests that governments create inflation through spending whereby “too much money chases insufficient goods and services.” In truth, there’s no demand without supply. Government can only redistribute “demand” insofar as suppliers have lighter pockets. Sheard’s models imagine government can take from the productive without taking from the productive.

Sheard believes that banks, like governments, “create money” as opposed to them “’taking in’” deposits. Supposedly banks “create money when they lend.” Just don’t try this at home, or better yet, try it! Start a bank and quickly lend out a billion that you don’t have so that you have a billion in “assets.” See if investors agree.

About the U.S. economy, Sheard concludes that “the money needed to sustain this giant prosperity-generating machine comes from the government running deficits and banks extending credit.” Which is Sheard suggesting that we would be living in caves sans Marco Rubio and Elizabeth Warren, along with routinely bailed out financial institutions like Citibank. And even though deficits wouldn’t exist without economic growth, they’re apparently necessary for that growth? Yes, Sheard must be an economist.  

John Tamny is editor of RealClearMarkets, President of the Parkview Institute, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors ( His latest book is The Money Confusion: How Illiteracy About Currencies and Inflation Sets the Stage For the Crypto Revolution.

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