Most everyone seems to assume that in the long run a balanced budget is required. I think that is wrong. Probably I am being silly; I am a quant, not an economist. There are some smart people here who surely know more than me. Please mercilessly destroy my naivety. Key Assumptions :(1) Steady state of real economy (i.e. economic indicators constant in inflation-adjusted terms)(2) Positive risk premium for risky relative to riskless investments(3) Fiat currency with government deficits funded by same currency borrowing(4) Zero lower bound for nominal risk-free interest ratesKey Conclusions:(1) Government must perpetually run a deficit(2) Real risk-free interest rates must be negativeMain argument: positive risk premium requires higher returns for risky investments (stocks) compared to risk-free investments (treasury bonds). But steady state economy requires the total wealth grows only at the rate of inflation. So the return on stocks needs to be higher than the inflation rate while the return on treasury bonds needs to be lower than the inflation rate for the average return to be just the inflation rate. With a zero lower bound the nominal interest rate, the inflation rate must be positive. Positive inflation means an expanding money supply. The money supply is ultimately proportional to the government debt, which much be (nominally) expanding at the inflation rate. Continually expanding debt is a perpetual budget deficit. Further discussion/support for assumptions:(1) We live on a finite planet. Perpetual exponential economic growth is clearly nonsense; the question is only whether we are near enough to any real limits to growth to make consideration of those limits useful. So far in the history of the world, most economic growth has come from population growth. Credible estimates put peak world population in the 2050-2100 time frame; already in the US, Europe, Japan, and China birth rates are well below replacement rates. Other key resources like fossil fuels, minerals, and lumber will also reach peak extraction rates at or before that timeframe. In the long run, the best case to hope for is approach to or oscillation around an economic steady state.(2) Other things being equal, an investor will generally prefer a safer investment with the same rate of return to a risky one. For a market economy to function, it needs to have excess return for investors who participate in the businesses making up the economy. Otherwise everyone would pull their money out of stocks in favor of government debt, and all the private sector businesses would close down.(3) We associate inflation with deficits. With our definition of "steady state" as having all economic indicators grow at the inflation rate this is rather tautological: in particular the money supply grows at the inflation rate and the federal debt grows at the inflation rate. Outside of a steady state, I would suggest inflation is closely approximated by size of the economy divided by size of the money supply times a constant. Furthermore the money supply is sized as government debt times a fractional-reserve multiplier. It is important that borrowing is in the same currency, so that excess borrowing just comes out as excess inflation.(4) If you allow rates to go slightly negative it won't change the argument, as long as the negative rates are less than the equity risk premium. As long as cash in a safe is a possibility, it is hard to have strongly negative interest rates.

Why do you think money supply is proportional to government debt?

In a steady state world, by assumption money supply grows at the same rate as debt grows, so they are proportional. That is the easy answer. In our non-steady current state, it is harder and not exactly true. But still government debt is the hard core of safe assets, and underpins the money supply. My understanding is in the US anyway money supply comes as federal reserve notes backed primarily by government debt, together with additional bank account balances constrained by a fractional reserve requirement. If debt is increased by "printing money" it goes through this mechanism proportionally increasing the money supply. But also the debt can increase by sale of bonds without any new money.For purposes of this argument, lets just say it is a consequence of the steady state assumption.

If you assume that, it sounds like you are entirely assuming your main assertion, which is perhaps not what you want.You seem a little confused about money. If I borrow money, I get people to give me cash and, in return, I give them a promise to return that cash to them in, say, 10 years. In doing this, I haven't created any money at all. If, as the government, I decide to build a new bridge, exactly the same happens. I don't have to have created any money at all. Government is no different from any other entity.As government, I also have the power to print money, but that's not the same as issuing debt in the above sense. The money I print is "debt" in the sense that I am obliged to repay it only if I have a non-fiat currency. If you have 1USD now, you have no right to demand that the government gives you anything other than another dollar. There's no other guaranteed conversion.Another illustration: suppose I am a government without my own currency at all. For example, Ecuador uses US dollars entirely and doesn't have its own currency. Does that mean Ecuador can't issue debt? Of course not. Ecuador could borrow in any currency it wants, so long as investors believe it will repay them.

Steady state is a fine model but it bears little resemblance to reality.A couple of comments on your respective assumptions(1) The planet can be finite but the economy can be unbounded. I might still eat the same amount of food each day, but the variety and complexity of that food can grow without bound. Cars might remain at some fixed mass, but become every more sophisticated and useful. A smartphone or tablet has a much lower environmental footprint than an old TV and does a hell of a lot more. GDP per megajoule can grow. Moreover, the planet is less finite that it seems because the steady influx of solar energy implies that wealth can steadily accumulate on the planet to the extent that energy can be converted into wealth.(2) The preference might be true but it assumes investors are statistically correct in their estimates of risk and that the average discrepancy between perceived vs. actual risk is time-invariant. What is a bubble except a time when perceived risk is far lower than actual risk for a period. A "sure thing" appears, pulls a lot money off the sidelines (investors preferring the perceived high returns at low risk), and results in the conversion of surplus wealth into new assets. Those assets might be the result of misallocation (in hindsight) but they provide a basis for all sorts of innovations and new business ideas that never would have happened if people perceptions of risk were right.The economy is not steady state and can never reach steady state. There's too much money to be made from intentionally creating dis-equilibrium via various beneficial (e.g., innovation) and detrimental (e.g., marketing that churns customers) stratagems.

QuoteOriginally posted by: crmorcomIf you assume that, it sounds like you are entirely assuming your main assertion, which is perhaps not what you want.I am saying something very simple, so it isn't very far from assuming the main assertion. I do mean to assume that "steady state" means that there is a common growth rate (inflation rate) with debt, deficit, money supply, market capitalisation of the market all nominally growing at the same rate. The only step from there to the conclusion of a perpetual deficit is to argue why the debt should be positive instead of 0 or negative. That is where the other assumptions come in.QuoteYou seem a little confused about money. Quite probably (I do think money is confusing, if you get into M1 vs M2 vs ..., and I would tend to say "I have money invested in stocks" which isn't really money at all by those definitions), but I think that is a distraction from the point I am trying to make. I am connecting inflation with a budget deficit. Certainly a budget deficit financed by "printing money" would give inflation, but I am going the other way and saying perpetual inflation in a stable economy can only come from a deficit. I guess you could imagine otherwise, that the fed could create inflation by printing money and helicopter-dropping it on people (or somesuch) as opposed to giving it to the treasury in exchange for bonds. If you are willing to view the fed as part of the federal government, the distinction would go away: helicopter-dropping new money is functionally equivalent to giving it to the government in exchange for bonds and then the government distributing the cash as social program spending.

QuoteOriginally posted by: travisf......Certainly a budget deficit financed by "printing money" would give inflation.....First, it's also only true if that marginal supply of new money isn't simply absorbed into the sidelines by hoarding of cash or expectations of deflation. How much inflation did the various trillions of QE produce?Second, that is only true if that marginal supply of new money is not absorbed by a marginal supply of new types of goods (or new value in existing types of goods).

QuoteOriginally posted by: Traden4Alpha(1) The planet can be finite but the economy can be unbounded. I have trouble with that. So you get to a steady population consuming a steady amount of food and energy, but creating ever-nicer products to sell to one-another. In broad category (food, entertainment, transportation, etc.) the new fancier goods are substitutes for older ones. The total earning power, in hours of labor available, stays constant. For the market to balance it must be the same number of hours of labor to buy the new good as it took for the older good it replaced. The dollar value of that labor grows at the inflation rate, so the dollar value of the goods also must grow at the inflation rate. No? Quote(2) it assumes investors are statistically correct in their estimates of risk and that the average discrepancy between perceived vs. actual risk is time-invariant. The story I want to tell isn't that investors are any more sophisticated than people today. Just they should know, in the steady state limit I describe, that if you leave your money sitting in a bank or under your mattress, inflation will steadily eat it away. So you are better off to invest in something active. Then you do your best to pick what to do, with the same mixed results we are familiar with, bubbles and all. All it assumes is that investors know holding cash is a sure way to lose.

QuoteOriginally posted by: travisfQuoteOriginally posted by: Traden4Alpha(1) The planet can be finite but the economy can be unbounded. I have trouble with that. So you get to a steady population consuming a steady amount of food and energy, but creating ever-nicer products to sell to one-another. In broad category (food, entertainment, transportation, etc.) the new fancier goods are substitutes for older ones. The total earning power, in hours of labor available, stays constant. For the market to balance it must be the same number of hours of labor to buy the new good as it took for the older good it replaced. The dollar value of that labor grows at the inflation rate, so the dollar value of the goods also must grow at the inflation rate. No? Does the market balance in the way that you think? Denominated in labor hours, a great many goods and services (from eggs to automobiles to round-the-world transportation) have fallen in cost over the last 100 years. The amount of labor it takes to make (and to buy) these goods have fallen and new goods have been added. A few decades ago, a cellular phone was a luxury item reserved for the wealthy. Now most of the people on the planet have one. How much labor (and materials) did it take to multiply a trillion numbers in 1915? How much labor (and materials) did it take to multiply those same trillion numbers in 2015?And even if one holds the quantity of material and energy constant, the variety of goods available (and the variety of goods that each person buys and owns) can grow without bounds. What does it mean when we go from a Sony Walkmen (6-10 songs in your pocket) to Apple iPods (>1000 songs in your pocket)? The material cost of another song (or app) is essentially zero. And the consumption of these digital goods can also grow without bound. Forty years ago, a personal computer could only run one app at the same time (and those apps had very limited capabilities). Today, a computer can run dozens or hundreds of apps simultaneously. Yet both the price and the power consumption of these devices is down by a factor of 10 to 100 while the performance is up by a factor of 10,000 to 1,000,000.QuoteOriginally posted by: travisfQuoteOriginally posted by: Traden4Alpha(2) it assumes investors are statistically correct in their estimates of risk and that the average discrepancy between perceived vs. actual risk is time-invariant. The story I want to tell isn't that investors are any more sophisticated than people today. Just they should know, in the steady state limit I describe, that if you leave your money sitting in a bank or under your mattress, inflation will steadily eat it away. So you are better off to invest in something active. Then you do your best to pick what to do, with the same mixed results we are familiar with, bubbles and all. All it assumes is that investors know holding cash is a sure way to lose.If people knew this, wouldn't M1 (and probably M2) be nearly zero? These days, the cost of converting from cash to more active investments is nearly zero. It seems that not everyone knows that holding cash is a sure way to lose. Moreover, they might be right at times. Anyone who estimates that inflation is zero (or negative) might stay in cash. Anyone who estimates that returns on active investing is negative (worse that inflation) would also tend to stay in cash. The numbers of these two types of people are time varying with no steady state value because economic cycles conspire to make inflation zero at times and returns on active investing negative at times.