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Robert J. Legowski, Fargo, Published September 08 2012

Letter: A simple review of how national income is created

Federal deficits. Why? We can begin to answer this question with a simple review of how our national income is created.

There are three sectors of our economy – consumers, businesses and governments. They buy and sell goods and services to one another. That is how wealth and our national income account are created.

However, not everything that is earned is spent. Something is saved. Consumers save little, especially the poor. Business, on the other hand, has been carrying large cash balances of late. Think $100 billion for Apple. God knows how much for banks.

Granted, any institution that can belly up to the Fed’s discount window and borrow at an absurd rate of 0.25 percent must maintain reserve requirements, but ersatz investment banks like J.P. Morgan Chase would prefer to use their huge cash balances to engage in proprietary trading, rather than lend to Main Street. And if a

$5 billion derivatives swap goes bust, no problem. Just belly up again.

(This is not meant as a Ron Paul-ish criticism of the Federal Reserve System. If the Confederate States of America had a central banking system, they might have maintained the value of their currency, continued to sell cotton bonds on the London exchange, purchased more arms and supplies, kept the Rhett Butlers very, very busy and won the Civil War.)

So, consumers save little, businesses save much, and where does that leave the third sector – the federal government? Given that accounting is accounting, something must balance and markets must be cleared. Who has the necessary power to create money, clear markets and keep the commonweal spinning?

That’s right. Only the federal government can do that, and without deficit spending, we would be in a hell of a fix – a deep, dark hole of economic depression. So much for Macroeconomics 101.

Now, the simple dynamics above can become badly skewed by regressive taxation, unfunded foreign wars and interest on same, unfunded “Part D” Medicare (interest on same, and a gift to big pharma), and less than punishing taxation of short-term capital gains that do little but add volatility to capital markets and make money for traders. The latter is not wealth creation; it is simply score-keeping.

High interest rate credit cards and the absence of usury laws also suck money from the system. (Rapid City, S.D., the late Gov. Bill Janklow, the South Dakota Legislature, Citibank and T. Denny Sanford all must thank the Supreme Court’s Marquette Bank v. Twin City Federal decision that made knee-buster rates possible.)

So much to say; so little time and space – save for “Ah, boys. That’s where my money goes.”