In: Flash Cards
Explanation why: The government spends by writing checks on the US Treasury General Account at the Fed. When the check is deposited by the private recipient, the check is cleared directly with the Fed that debits the account of the US Treasury and credits the reserves of the bank that has cleared the check. These reserves are accepted because they are the only means of settlement that the government accepts for any residents’ liabilities to the Federal government or to States. The settlement of this payment by the Fed is based on the monopoly power (monetary sovereignty) of the nation and does not require the possession of any real or monetary resource, unless the Nation has voluntarily adopted a constraint. Examples of self-imposed constraints include a gold standard (when the money issued must not exceed some proportion of gold reserves), or a currency board (when the money issued must not exceed some proportion of foreign currency reserves). Another example of a self-imposed constraint is the payment is debited on a US Treasury account on condition this account shows a positive balance. One more self imposed constraint in the US- the debt ceiling Congress has to approve. Another example of a self-imposed constrain is that although the General Account can go in the red, payments should not lead to a situation of macroeconomic excess of aggregate demand on existing production capacity, as this may be inflationary.
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1 Response to Operationally, Government Spending is Not Inherently Revenue Constrained. Any such Constraints Are Necessarily Self-Imposed
Robert Searle
February 25th, 2010 at 13:29
I think when we are talking about banks, and money we are actually discussing ELECTRONIC DATA.
This is a simple point but is very important especially in my evolving project of Transfinancial Economics…