(part 1) (part 2)
In the terms of double entry book keeping money is always and everywhere a contract binding a debtor to a creditor. When I possess a dollar it is my asset and a government liability: the US Treasury is the sole issuer of the dollar and every dollar represents a Treasury liability. Every dollar held by a non-government entity is an asset for its holder backed by the full faith and credit of the US Government, for whom it is a liability. When I purchase something with that dollar my asset is converted into whatever it is I have purchased and the governments liability is passed along to whoever sold me my purchase as an asset for them. The reason dollars are used to denominate trade within the dollar denominated portion of the world economy is that everyone who produces and exchanges within that system must pay taxes with dollars and expects the US Government to enforce its tax regime.
Double entry book keeping is a tool to keep track of the assets and liabilities of individuals and institutions that participate in money denominated exchange, but it also makes clear some underlying properties of monetary systems that are not intuitively apparent. A paper dollar or a gold coin are both fairly useless objects. What gives each its value, to the extent it has one, is that others expect it to port their exchanged wealth from one transfer to the next. When viewed this way, that gold has some intrinsic value seems a much less supportable proposition than that the coercive force of the US Government makes paper dollars valuable. That it will only accept the cancellation of its own liabilities as payment of tax both defines what a dollar is and convinces me to use it. So long as there is a US Government, it will be bigger than me and expect its taxes paid. Beyond that, in extremis paper is more edible than shiny yellow metal.
Viewed this way it becomes clear that every dollar of value that exists in the dollar denominated global economy is the result of prior US Government spending: no dollars exist in the world without having first been spent by the US Government, the sole creator of dollars. To the extent there are dollars of wealth in the world they are the result of periods in the past in which the US Treasury spent more than it collected in taxes. In this light, the US Federal Deficit, the stock of national debt as distinct from the trade deficit, a different but related thing, is the stock of privately held dollar denominated wealth in the world. And thus, to want to reduce the US Federal Deficit is the same as wanting to reduce the amount of privately held dollar denominated wealth. The entire Washington, New York Consensus on American global economic policy is built around the notion that it will be somehow beneficial to the world if there is less dollar denominated wealth in it held by non US Government entities.
How this consensus meshes with a vision of a prospering and free US and world economy is left completely unexamined in terms of double entry book keeping or any other coherent rationale. But anyone who has any dollar denominated wealth and who would like to keep some should start insisting on explanations of how it will be possible for them to do so in a world in which the US Federal Deficit is reducing. An economy is a circular flow of transactions that produces popular goods when popular demand is expressed in markets with the freely made spending decisions of people who earn enough that they are free to decide by some judgement other than necessity what to purchase. People make these market defining decisions when they are not up against the wall of desperation. Reducing the outstanding liabilities of the US Government necessarily means reducing the privately held dollar denominated wealth in the system and pushing more and more people up against that wall.
To reduce the privately held dollar denominated wealth of Americans and the world in general will greatly reduce the freedom of private individuals and non government institutions here and abroad to express demand in a manner that will call forth the benefits of markets. Instead it will starve markets just as we are seeing now in Spain and Greece where attempts to cut deficits have led to contractions in tax revenue greater than the initial spending cuts yielding in the end even larger deficits. The only way to make cuts in government spending actually reduce government debt is to cut off all support for people left destitute by economic contraction. To actually starve the population to death is the only means by which cutting government budgets can reduce government debt. Such insanity has actually been pushed to this extreme in Greece and Spain so far. Latvia escaped only by exporting a third of its population, its books only balanced for a significantly smaller and weaker nation. Our bipartisan consensus in Washington wants to bring this benighted policy here. Both parties agree in their platforms that many Americans need to starve but they don't have the courage of their convictions to state it in plain english. Instead they want a "Grand Bargain" to cut the Federal Deficit.