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.