We’re talkin’ about money money.

“Oh lord down in the congress, they’re passing all kinds of bills. From down on Capitol Hill, Money’s too tight to mention. cutback! Money money money money. We’re talkin’ about money money” – Simply Red.

The government simply hasn’t got enough money to its bills, cutback! They say. Or Raise Taxes! Or Raise the Debt Ceiling, borrow more! But wait a minute. Does the government really need to tax or borrow money to pay its bills?

If the tax collector gets money from the tax payer and then hands it over to the Government for spending, once the Government has spent all this money, it’s broke. Then, it needs to borrow money from lenders, going into deficit.

Yet, where did the tax payer and the lender get the money in the first place? Currency is printed by the government, directly or indirectly, so how could the government ever not have enough?

The government, which is the source of currency, can simply fund its spending by creating more currency, regardless of how much it borrows or taxes. That is a fact.

To illustrate this imagine that whenever the government needs to spend, it simply prints money, and whatever money it borrows or collects through taxes or rates is simply burned. Let’s start with the assumption that as a matter of policy what it prints and what it burns are equal, so that its “budget is balanced.” It is clear that this would be identical to only spending what it borrows or taxes. It is undeniable then, that the amount the government spends is limited by this policy of having a balanced budget, not by any imposed fact, or lack of money.

Now, if how much it spends, relative to how much it taxes or borrows is a matter of policy, the government is not spending your tax money, nor does spending imply it needs to borrow.

The government creates money when it spends or lends, and destroys money when it taxes or borrows.

Similarly, your Bank does not lend out your money. The bank creates money by lending, and destroys money by taking cash. The amount it lends is not limited by the amount it receives, any relationship between these two amounts is a matter of policy and regulation, not a natural fact, and has no natural limit. Putting more of your money in the bank will not cause it to lend more, nor will taking your money out of the bank cause it lend less, unless it decides to do so.

When a government creates more money than it destroys, we call this a budgetary “deficit” as if it created too much, and worry about inflation, yet banks need to create more money than they destroy as a matter of operating. If they didn’t, the economy would be starved of working capital. Most money in the economy is created by Banks, and our economy depends on this. Therefore, the amount the government creates is not directly inflationary, and there is no “ideal” relationship between how much the government ought to create and ought to destroy. In other words, there is no ideal relationship between how much you pay in tax and what the government can spend or must borrow. Government spending can exacerbate inflationary conditions, but the government’s control of the monetary base can do little to prevent them, and the reverse is true, taxation and borrowing can exacerbate deflationary conditions, but can do little to prevent them.

What’s more, inflation is not a factor of the volume of money alone, it is an outcome of the ratio of liquidity growth to production growth. Increasing the money supply is not inflationary when it is invested in such a way that causes more wealth to be produced, and decreasing the money supply can be inflationary if it robs the economy of working capital and thereby causes less wealth to be produced.

When the Banks and the government tell you that they are out of money, they are lying to you. The purpose of the lie is to obfuscate the policy choices they are making. Probably because they are making choices that are not in your interest, and thus want to make it seem like there is no choice at all, only a simple fact of “not enough money.”

 

 

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