(Article changed on March 31, 2013 at 09:38)
As far as I understand it, in our economic system, there are two ways that dollars can enter the system. There is the budget that we elect our officials to set up, and there are banks that lend money to people based on their credit/collateral. We can also export goods to other countries to bring money into our economy. These are all ways of getting money into the economy through money creation. But it's not just printing money; it's actually getting it into the hands of people who can then spend it.
The annual federal budget has been somewhere in the low trillions for the last few years--somewhere close to 3 trillion a few years ago, and, more recently, closer to 4 trillion. This means that, at the same time we inject a few trillion dollars into the economy, we suck out even more dollars in taxes (Wikipedia 2012 numbers). So we have a deficit there, right? If we bring in more than a trillion dollars less than what we give out, we end up borrowing a bunch of money from the USA's bank (the Federal Reserve). So, in essence, all the new money that is actually injected into our economy comes through banks' lending out credit and creating debt. This is true whether it applies to ordinary people going into debt through private loans, or the country incurring deficits by taking loans to meet its budget.
Theoretically, the government could always take in the same amount of money it consumes, thereby never incurring a debt. Unfortunately, we do not have a system like this in place. There is leakage. The U.S. leaks money all over, for instance through imports and by basing labor forces outside of the country for manufacturing goods. Other countries leak money into us also, but the end result is we do not generate enough tax revenue to cover our budget. In our system, no matter how hard we try, we will not achieve that zero balance as long as we leak.
There may be problems with our budget, but those problems really only add up to billions of dollars--or maybe somewhere over a trillion at the most, if you've got a really big problem with it. However, that is no biggie in the broad scope of things, when there's a derivatives market out there with a notional amount estimated somewhere in the hundreds of trillions, to over a quadrillion dollars; meanwhile, the Gross World Product in 2011 was approximately $79.39 trillion in terms of purchasing power parity. This notional amount of the derivatives market isn't all actual money existing in our economy presently, but more like a value of all the futures of whole contracts (as opposed to just the profits made on contracts) that are combined and traded.
Investors pay for these exchanges, assuming that the initial deal made is secure and that the variable rate of interest will favor the investor buying the fixed rate. This means that a deal made between two parties, which should bring profits for years and years when traded as a long-term investment, becomes, in the short term, one that creates a profit for a broker. (See an informative article that explains better than I can the economic risks of the derivatives market and how it works. The article also briefly explains why you can more realistically understand the state of our current economy by assessing it at around 1% of its notional value. This is estimated to be around 20% of the world's economy.)
In a perfect world, where these contracts all end up making the money they should, our economy wouldn't be in horrible shape. In the real world, though, we have a market that fluctuates (bubbles that pop), and those futures deals end up not making money in the end, because the real estate market crashes. Then the economy becomes a game of "hot potato," and the honest guy who put his money into a "safe" investment, because he didn't want it to just sit around and lose value to inflation, ends up losing everything. In the end, he gets caught up in the biggest pyramid scheme in history.
The Nub of the Problem
If you ask me, the main problem isn't how the government and we spend our money. It's just the fact that one of the premises of the way we inject money into our economy is that it needs to be paid back so that we don't inflate and ruin the dollar.
The point that's usually overlooked, however, is that the dollar has already been defiled by irresponsible banks and derivatives trading. The budget has nothing to do with that (unless you add bailouts to the equation). The big minus isn't in the country's debt from the budget when it's creating actual jobs; it's in the accumulation of all the loans the banks have given out around the world and the huge derivatives market that will fall apart because of all the bad loans. And that negative results from the fact that the people we elect to represent our best interests focus far too much on covering up their pyramid schemes to save the credibility of the Almighty Dollar.
What we need to be focusing on is not saving the current value of the dollar and covering up the pyramid scheme, but on what we are going to do when the dollar starts to fail because it's backed by nothing but the U.S.'s credibility. Currently, the U.S. and its banks don't have credibility, because of what they have done. Only the people who work for the dollar are sustaining its credibility at this point, and we need to transition into a healthier, more evenly distributed, economy that doesn't rely on cheating to keep our currency strong.
At this point, the pyramid scheme has run far too long, and we need to figure out a way to take control of the economy out of the hands of the people who corrupted it. We could make a start by creating jobs for everyone willing to work; the investment involved would be part of the budget, but we shouldn't make a big deal out of trying to pay down any resulting deficit. What work might be done in a jobs program can be debated, but REAL work that results in actual products or services will strengthen the dollar, as opposed to work that involves exploiting the financial system in damaging ways. If everybody works, there is more tax revenue, because it puts more cash into circulation. We know that working people spend most of their money, or they wouldn't work in the first place. They aren't playing a game, trying to achieve a high score. As long as people create and inject their money into our economy, we should get more money back in tax revenues. That means the economy will be healthier, even if the deficit increases.
I'm not an economist or any sort of economic expert. This is just what I understand from the reading and research I've done, along with some of my own opinion. I could be wrong, and I encourage you to correct me if you think I am. I really would like to learn, so I can keep others informed. This is my first post, and I apologize in advance for any screw-ups.