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Why governments can't balance their books - EVER!
Without a radical reform of the monetary system, deficit spending and accumulation of public debts will continue to accelerate regardless of who is in power. The problem is systemic.
By Alex Krainer | July 3, 2025
After weeks of polarizing debates, the US Senate just passed Donald Trump's "One Big Beautiful Bill Act" with opinions split almost evenly among those who want it to pass and those who believe that it will push the United States closer to its ultimate bankruptcy. Elon Musk has been one of the most vocal opponents of the bill. Earlier this week, he posted the chart of US Federal Debt from 1900 through 2020 with the caption, "When are they going to flatten this curve?"
Well, I can offer a qualified answer to that question: NEVER. The qualification: unless you enact a radical reform of the monetary system. Under the prevailing monetary system, no government can give up escalating debts and deficit spending.
The curve can't be flattened
In any given electoral cycle, conservative politicians want to cut government deficits, balance the books, pay down public debts and pursue the "small government" ideal. But for as long as our economies operate under fiat currency with fractional reserve lending, it doesn't matter whether governments uphold conservative economic policies or whether they’re outright socialists: the “curve” can’t be flattened.
The monetary system, in fact, predetermines the outcome with certainty: conservatives AND socialists will descend along a similar trajectory to the system's ultimate collapse. Government sector of the economy will gradually displace more and more private enterprise, the government's role will expand, along with debts and deficit spending. All these symptoms stem from an obscure economic effect called the deflationary gap.
The deflationary gap
The following few paragraphs may seem convoluted but please bear with me, this is one of the most important principles of economics to understand, which is why it has been entirely obscured and omitted from economics curricula in all Western universities.
To understand the deflationary gap, we need to consider a closed economic system that produces a certain quantity of goods and services. By “closed” I mean that we'll assume the system has no foreign trade. The total of all the price tags attached to the goods and services produced is the aggregate cost of the system's output: it represents the amounts of money expended by the businesses on things like raw materials, wages, rents and interest plus the entrepreneurs’ profits.
These sums are income to those who receive them and also comprise the system's total purchasing power. On the whole, the aggregate costs, aggregate incomes and aggregate prices are all the same, because they represent the opposite sides of the same transactions. The prices at which the system's output can be sold in the marketplace are determined by the total amount of money which is available for spending in a given period of time. For the system to be in equilibrium, aggregate prices should exactly absorb the system's total purchasing power.
But a problem arises because in the current monetary system, there are two factors that significantly reduce the system's purchasing power: (1) savings and (2) debt repayments. Namely, people don't always spend all of their income. Instead, they prefer to set aside a part of it as savings which has the effect of reducing the total purchasing power available in the system.
So, if there are any savings, the available purchasing power will be less than the aggregate asking prices. For the system to remain in balance the savings would have to reappear in the market in the form of investments, but if total investment is less than total savings, the purchasing power will still fall short of the amount needed for all of the output to be sold at asking prices. This shortfall of purchasing power in the system, the excess of savings over investment is the deflationary gap.
The other systemic drain on purchasing power (hat tip to author Liam Allone for pointing this out to me) are debt repayments: since (nearly) all currency enters into circulation as debt, paying down debts extinguishes the currency and the purchasing power with it.
Without government intervention we get a depression
The system can be balanced either by lowering the supply and prices of goods, by enhancing its total purchasing power, or a combination of both. Lowering prices and production of goods will stabilize the economic system at a low level of economic activity. Increasing the purchasing power in the system will stabilize it on a higher level of activity.
Please go to Alex Krainer's substack to continue learning more.
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