Then comes the second blow. In times of recession or depression business people will usually not invest simply because it correctly seems to be unreasonable to invest in money losing operations when revenue is already down. So private investment drops towards zero. Good assets are being sold to cover the losses, driving down the price of all assets.

This dynamic was well described by Irving Fisher in his paper Debt Deflation Theory of Great Depressions So the ONLY ways out of such a debt-deflation death spiral was, under the gold standard, a new gold rush or a national emergency such as war, which led countries to abandon the gold standard. This was why John Maynard Keynes called the gold standard a barbarous relic - it prevented governments from effectively relieving wide spread suffering.

Ironically, a workable prescription for handling such crises had been available since 1873, when Walter Bagehot published Lombard Street A Description of the Money Market.. Bagehot's prescription for dealing with financial crises was to lend without limit but at a high rate and against good securities.

In 1929 The Federal Reserve was paralyzed by a dispute between the Board and the New York Fed and, effectively, did nothing. The result was the Crash of '29 and the Great Depression. In 2008 the Federal Reserve under Ben Bernanke in coordination with Hank Paulson, Sec. of Treasury, implemented the 'lend without limit', but ignored the 'at a high rate' part. The result was to prevent a financial collapse but to leave a lot of problems unresolved.

The primary task of a Central Bank is to defend the payment system. If the payment system collapses the economy will follow. Collapse is what happened in '29. But the Fed had to and did save the world's payment system in 2008. That is the price of having the world's de facto reserve currency.

In the 1990's, building on Keynes and other monetary economists, consciously or not, the developers of Modern Monetary Theory, MMT, including Warren Mosler, Bill Mitchell and Randall Wray began to take a closer look at how money creation ACTUALLY OPERATES in countries that have their own fiat currency that is freely traded in international markets. It is not that others had not come to such conclusions themselves, but they had not attempted to make the findings widely known.

MMT notes that money is FIRST created and spent into the economy and THEN a portion of that money is taxed back, that tax money being destroyed upon receipt. If the money were not first spent by the government there would be no money to tax. The difference between what the government spends into the economy and what it taxes back and then destroys is the money that remains in the economy. The effect is cumulative over time. And the sum of all government purchases since the nation's founding is equal to the national debt - which is really the national net worth.

The US Federal Reserve has clearly understood this since Marriner Eccles Marriner_Eccles was made head of the Federal Reserve under FDR in November of 1934. Eccles had independently developed an understanding of money creation similar to that of Keynes while running his own bank group in and around Utah. The USA and the UK, during WW II, fully took full advantage of these understandings to put the productive capability of the US and the UK into overdrive without creating inflation. Successive Chairmen of the Federal Reserve have clearly stated that the Federal Reserve, in coordination with the US Treasury Department, creates money out of thin air via bookkeeping operations on its computer accounts system. Money is created by key strokes. Alan Greenspan and Ben Bernanke have both stated this truth before Congress. So it is simply not true that the US Government uses taxes to 'pay for' expenditures. And the limit on government expenditures is inflation, not tax revenue.

In times of recession or depression it is vital that Congress deficit spend sufficiently to make up for the lack of private investment. It was the failure to adequately deficit spend after 2008 that led to the anemic recovery under Obama. The 2008 meltdown had left approximately a $1.6 Trillion hole in the US money supply, but the Obama Administration only provided an $800 Billion stimulus. So the recovery began from a baseline $800 Billion below what it had been before 2008. Thank Larry Summers' numbers phobia.

It is easy to see why deficit spending is usually needed. Let us, for purposes of analysis, divide the US economy into three parts:

PART ONE is the Federal Government. It is unique in that it possesses the ability to create money at will via keystrokes on the Federal Reserve's book. It consists of everything that the Federal Government pays for directly - the salaries of all government employees and all government purchases. As the Federal Government can create money at will to cover its obligations it can never be forced to declare bankruptcy except as an act of political vandalism.

PART TWO is the Private Sector. This includes state and local governments, all corporations not part of the Federal Government, all private citizens and all privately operated businesses. These are money users. They cannot create money at will and they can and will go bankrupt if they operate at a loss long enough.

PART THREE is the Foreign Trade sector - everything we import and export, both goods services and US currency. To keep things simple let us look at the situation where there is balanced foreign trade. Then it equals Zero and drops out of the national accounts budget.

So, in the case of balanced foreign trade the equation for the US National Account System is:

Public Sector + Private Sector = Total Economy.

The actual amount of the total economy does not matter for purposes of this analysis, so let set it to zero. Then the equation becomes:

Public Sector + Private Sector = Zero

From this it is obvious that The National Account is like a teeter-totter.  if the Public Sector runs a surplus then the Private Sector must run a corresponding deficit. If continued very long a Federal surplus, such as the one of which Bill Clinton was so proud in the late '90s, will lead to a recession, such as the one George W Bush inherited. This is because the net effect of federal spending and taxation when the Public Sector runs a surplus is to extract money from the economy. Tight money leads to recession or depression. On net Private Sector entities lose money and start to go bankrupt. And they cannot create the money to pay their obligations. Only the Public Sector can do that.

When the Public Sector runs a deficit - A FEDERAL DEFICIT, then the Private Sector runs a surplus. Businesses and individuals, on net, MAKE money and prosper, while the Public Sector, the dreaded Federal Government, runs a deficit - which it can cover by simply creating the money to close the gap. Sadly, this requires Congress to do the right thing and run a deficit, which they are often unwilling to do if so doing would make the party in power look good.

All of the above is well laid out in Stephanie Kelton's The Deficit Myth. Kelton received her PhD at UMKC under Randall Wray.

Fortunately the Biden Administration is following the MMT prescription at this point and spending big to meet the present and future needs. They will, however, have to keep an eye on inflation, which is the true guide star of fiscal policy. Increasing taxes, especially on the rich, is one way to counter inflation. Fortunately it also counters increasing wealth inequality.