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> The question is whether the US government can run deficits forever. The answer is emphatically “yes”, and that it had better do so. If you look back to 1776, the federal budget has run a continuous deficit except for 7 short periods. The first 6 of those were followed by depressions—the last time was in 1929 which was followed by the Great Depression. The one exception was the Clinton budget surplus, which was followed (so far) only by a recession.
Why is that? By identity, budget surpluses suck income and wealth out of the private sector. This causes private spending to fall, leading to downsizing and unemployment. The only way around that is to run a trade or current account surplus. <
I think there is a lot of truth in this article, but he takes an admitted simplification, then and turns it into an explanation of pretty complex events. Notice that he assumes that the foreign sector was balanced when he explains the Clinton surplus would lead to recession (by identity)? It's quite possible that this component ruins his whole argument. Also, he ignores the fact that the deficit following Clinton was a matter of policy (massive tax cuts and war spending) as they were due to the bubble that popped.
Finally, debt needs to be serviced. The amount of debt that needs to be serviced makes a big difference as to whether a surplus or a deficit is tenable.