Economic Reform Australia Blog

The Tea Party hasn’t a clue about macroeconomics

    It has become increasingly clear that the irrational U.S. tea party movement, now fully integrated into the structures of the Republican Party, has an almost hysterical preoccupation with the supposed evils of public debt. What their very vocal advocates never address (perhaps do not realise?) is that we all live and work within a debt-driven economy, in which most of our money supply is created as debt by the private sector.  So-called public debt is not, and never has been, the problem.  The real problem is private debt, whose magnitude has always far exceeded the level of public debt, and still does.

    It was the explosion of private debt on the back of asset inflation during the past decade – as a deliberate economic policy engineered by Fed Chairman Alan Greenspan – followed by the inevitable contractionary phase (the great recession), which subsequently persuaded the U.S. administration and other governments around the world to engage in stimulus spending (much of which was wasted because it was used for bailing out commercial banks and investment banks, but that’s another story) in an attempt to avoid massive deflation on the scale of the 1930s depression.

    The current “problem” of large public deficits is in reality not a problem at all in circumstances where there are idle workers looking for employment and idle productive capacity. However its existence may be regarded as an inevitable response to (and symptomatic of) the real problem.  Within the context of a debt-driven economic system, whenever budget deficits begin to rise significantly this is because private spending is weak and output growth is weak or contracting.  Such rising budget deficits are inevitable in these circumstances.  They are systemic within any debt-driven system, meaning that they are not engineered (contrary to what Tea Party members believe) as a direct result of government policies or government spendthrift tendencies.  The Tea Party interpretation of how public debt operates is a myth, believed only by those who have very little understanding of macroeconomics