Geithner again displays his ignorance of our monetary system!

Treasury Secretary Tim Geithner is on a trip to our Gulf "allies" embarrassingly trying to reassure them on the subject of America's finances, when no reassurance is necessary. We don't need these allies, except, perhaps, when it comes to their oil, but we certainly don't need them for their money. In reality, it is our economy that "funds" them, not the other way around.

Anyway, here is a comment he made, which displays once again, how little he understands when it comes to our monetary system:

“...the global economy probably will suffer setbacks during its recovery as nations adapt to a loss of wealth and a surge in public debt."

You'd think someone at Treasury--particularly the Secretary himself--would understand that modern money IS debt. And for every liability (debt) there is an asset. Therefore, government debt is an ASSET to the non-governmental sector, which means it is an asset to you, me, businesses and everyone who is not the government.

The rise in government debt is RESTORING wealth to the public if you assume that the definition of wealth is assets minus liabilities (which it is!) IT IS NOT TAKING AWAY FROM IT!!

This is a basic accounting identity, yet Tim Geithner doesn't understand this.

Moreover, remember the equation:

Pvt = (Y + NFI + TR + IR - T) - C

Where,

Pvt = Private savings
Y = All private wages and salaries
NFI = Net foreign income
TR = Gov't transfer payments
IR = Interest gov't pays on the debt
T = Taxes collected by government
C = Consumption

From this equation (which you would learn in a basic macroecomics class in college. Presumably Geithner took this course at Dartmouth), it is obvious that at least 3 of the six variables that make up private savings are affected by government (TR, IR and T). Actually, you could even say that "Y" is influenced by government because government pays quite a bit of wages and salaries.

In other words, about 70 percent of private savings comes or is influenced by, what the government does. And if it pays salaries, raises transfer payments (unemployment insurance, medicare, medicaid, social security, etc), pays more interest on the debt (like during the Reagan years) and collects less taxes, then private savings most likely go up and by definition, so does investment. (And that creates more wealth!)

Remember... Savings equals Investment (S = I)!

Therefore, increases in government debt that come about as a result of deficit spending make us WEALTHIER by definition, Tim!!

Only if government taxes us more on the mistaken assumption that a) the government doesn't have the money or b) the deficit is bad and taxes must be increased to bring the deficit down, does the private sector lose wealth.

Unfortunatly, Tim Geithner's boss believes both those things.