lonely bird Wrote:
Carlitos Wrote:What non-government surplus would that be?
You can screw around with the institutional structure all you want. Government deficit still equals the non-government surplus. The funds to pay taxes and/or buy government securities still comes from government spending or lending first. Taxes are still about regulating inflation.
To understand this question your asking you have to understand that when government borrows, truly borrows it borrows ONLY from itself.
Selling t-secs like bonds, is not a "borrowing" operation.
First, think of the economy as a bucket and the water in it as a mix of the people, money, commodities and productive capacity. The higher the level of the water the greater the utilization of all of these things. If the bucket overflows then the economy is experiencing inflation.
So the question is, if the government has to spend money to provision or maintain itself, how can it spend trillions in an economy where the bucket is almost full or full?
Economists have long understood this problem and taxes and the sale of t-secs was created to deal with the problem.
If you have a large glass of water you want to add to the bucket, then you get an empty glass of about the same size and remove some water first. As long as the water in the full glass has the same or less water in it, the bucket won't overflow. t-secs are like taking a glass, dipping it in and setting it off to the side, promising to pour it back in at some later time. Ideally before it's put back the capacity of the bucket will have increased.
Ok, so what does it mean to borrow?
Well when you go to your friend and ask if you can borrow a dollar, they must have the dollar in order to lend it to you.
Mathematically it looks like this:
Your Friend $1
You borrow a dollar
Your friend -$1 (now $0)
You +$1 (now $1)
Notice that in order for you to increase $1 your friend had to go -$1 and the sum of the transaction between you was ALWAYS $1
In order for government to create $1 who goes -$1? It's tempting to imagine it's the taxpayer or a bond holder, but one need only imagine a hypothetical government that uses a fiat system similar to our own. If it was day one of this new government and it had not created any money yet, who would it take money from? I mean, remember that all government debt and taxes are payable only in the money it creates.
The answer to the question is; no one. No one has to go -$1 for the government to create a dollar.
The government borrows dollars from itself.
It looks like this
Government creates $1
The governments account at the Fed goes -$1 (this -$1 exists outside the functional economy).
Note that the sum of this transaction is ZERO.
The "debt" is simply an accounting operation.
Now the government spends the dollar into the private sector...
So the private sector goes +$1
The governments account at the Fed is -$1
The private sector is +$1, that is it's surplus because it does not hold the debt for the creation of that money, the government does. So the private sectors surplus is the governments deficit.
When the private sector (consumer) borrows from private sector (bank), banks create the money the same way. They create an asset ($1) and a liability (-$1). They introduce the money into the economy via borrowing by consumers.
Since banks are industries inside the economy and they have the same time constraint as consumers (loans must be repaid on schedule whether the consumer pays or the bank pays), the creation of money by banks ultimately, at a macro level, does not create new money because the sum of the transaction is zero, where government spending creates a positive in the private sector, but the negative is outside the private sector.