Operationally, Government Spending is Not Inherently Revenue Constrained. Any such Constraints Are Necessarily Self-Imposed
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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4 Responses 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…
John
June 28th, 2010 at 14:56
Mr. Mosler – I understand and agree with your explanation of the U.S. monetary system. I also agree that the Gov’t is not revenue constrained. I’ve also watched you explain these things on youtube. However, here’s my concern about soft money economics. Perception is reality. Even if our deficits are only paper deficits and we are not going to default because it’s our currency and we can just print as much as we want, isn’t the constraint that if our, say, Debt/GDP ration becomes big enough, ratings agencies like Moodys will eventually downgrade U.S. paper, then we have to pay higher interest rates to attract people to buy our debt? Eventually then, don’t we enter a debt spiral, where higher and higher interest rates that the bond vigilantes will continue to demand, will put us higher and higher in debt, with continued pressure on our debt ratings, etc? So even though soft money theory says we should not fear deficits, I think we have to at some point, otherwise we lose our credibility and ability to borrow.
Dan
September 8th, 2011 at 14:52
Help! I am confused. If we can print our own money… why do we need to borrow?
Robert Searle
December 5th, 2011 at 13:13
As I understand it Mosler believes in Modern Monetary Theory which can be summed up in a few words. It believes that governments should have the power to create new non-repayable money for public expenditure, and taxation should only be used as a means to reduce excess money, and hence, inflation.
My project of Transfinancial Economics is similiar, but is more advanced, and revolutionary than MMT.
Ofcourse, Dan makes the vital point that why should governments need to borrow…if they can actually create enough of it by themselves?
…This is a very important question. The problem here is that the global bond market for government debt is huge. It is a vested interest which would probably stop any attempt to reduce, or eradicate its power as it earn investors large profits….even though ofcourse now there is great uncertainty in this market notably in connection with the Euro Crisis.