Tuesday, April 25, 2017

Trade Offs

Do deficits really matter?
Budget deficits arise when the federal government issues bonds to investors instead of balancing all of its spending with taxes and fees on households and businesses. They can be increased when tax cuts reduce revenue and aren’t offset with spending cuts. They fall when the government increases the amount of money taxed relative to spending, which reduces the share of the budget funded by bond-investors.

Since Treasuries are dollar denominated, there is no risk that the United States government will not be able to repay its debt, as the government can always pay debt issued in the currency it controls. The only risk to the economy that deficits create is higher inflation. Despite several years of historically high deficits, all indicators say that inflation will remain quite low for decades to come.

During a meeting inside the Oval Office last week, President Donald Trump said that he wants massive tax cuts, The Wall Street Journal reported Monday. He ordered them to prepare a plan to slash the corporate tax rate to 15%, prioritizing tax cuts over attempts not to increase the deficit, according to “a person familiar with the directive” who spoke with WSJ.
Debt does matter, and should be avoided, as anyone who's ever borrowed knows...

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