Monday, 10 November 2014

Fiscal deficit funds are liability-free money for the private sector

A promise made and unfulfilled we call a debt. The US dollar, the japanese yen, the british pound, they are just government issued liabilities, they are a tax-credits, they are government IOUs. All money is debt. The two of us can create our own IOUs, but we'll have a hard time finding others to accept them in transactions, that's why private IOUs are not the same as public IOUs. The government levies a money tax or fee upon its citizens, not to finance spending, but to determine the citizens to accept the government's money in exchange for their labor, goods, and services. Government taxation creates unemployment of money paying jobs and public spending employs the unemployed previously created by taxation. Naturally, the government doesn't wish to hire all the labor force. In order to allow the private sector to hire everyone else, it needs to run an adequate fiscal deficit. Ergo, the government needs to spend more than it taxes, it needs to leave more money into the private nongovernment sector via spending than it takes away/destroys via taxation. The correct size of the fiscal deficit is that which achieves and maintains full employment and price stability. Private banks can do what they do now because the legal framework allows it; all of them operate under the CB's charter, and the CB itself is a creature of parliament.
Problem with the banking system today is that they're fully covered on the liabilities side by gov deposit insurance, but they're not regulated on the asset side. Overall, modern money is endogenous - the money supply grows and shrinks according to private sector behavior. The MS grows when private debt is contracted, and it shrinks when those private debts are paid off or are defaulted upon. But money creation within the banking system does not create NEW NET financial assets, nor does it destroy them. Only the government can do this via fiscal policy.
(S-I)+(G-T)+(X-M)=0
The government fiscal deficit equals the net financial savings or net financial surplus of the nongovernment sector to the penny in a given fiscal year.
The government is supposed to run the deficit, so we, the people, can run the corresponding surplus. Why do you think the institution with the biggest negative capital in the USA is the US treasury? Where do you think the money for the pension funds come from? It comes from the government debt. Government spending finances government taxation; vice-versa is not only illogical, it is operationally impossible.
One of the main reasons the americans decided to rebel against the british was that they were tired of paying their taxes to the crown in gold.

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