A primer on deficit spending and its ability to continue

July 12, 2023 | Categories: Articles & Columns | Tags: |  Print This Article

A primer on deficit spending and its ability to continue

Paul Craig Roberts

Deficit spending is when government overspends its revenues and issues Treasury bills/bonds to borrow the money to fill the gap. If the debt instruments cannot be sold at the interest rate the Fed is maintaining, the Fed buys the bonds.

The US dollar being world currency means that foreign central banks are content to hold their reserves in interest-bearing US Treasury bills/bonds.  Thus it has not been a problem to finance US trade and budget deficits.

US Treasury debt is denominated in US dollars, so US bills/bonds can always be redeemed by Federal Reserve creation of US dollars.

The problem arises if the dollar loses its reserve currency role.  Foreign central banks would no longer need dollar reserves.  This would deprive the US of financing for trade and budget deficits.  Moreover, the drop in demand for US dollars would lower the dollar’s exchange value.  As offshoring of US manufacturing and “globalism” have made the US import-dependent, the result would be domestic inflation that traditional methods of fighting inflation cannot address..