How does government effect its spending? More specifically, how does government carry out spending, if it does not draw on
- (a) some endowment of assets of its own, or
- (b) third parties, as by borrowing or requisitioning through taxation?
Explains Warren Mosler:
Imagine you are expecting your $2,000 Social Security payment to hit your bank account, which already has $3,000 in it. If you are watching your account on the computer screen, you can see how government spends without having anything to spend.
Presto!
Suddenly your account statement that read $3,000 now reads $5,000.
What did the government do to give you that money? It simply changed the number in your bank account from 3,000 to 5,000.
It didn’t take a gold coin and hammer it into a computer.
All it did was change a number in your bank account by making data entries on its own spreadsheet, which is linked to other spreadsheets in the banking system.
Government spending is all done by data entry on its own spreadsheet called “The U.S. dollar monetary system. (p.15)
If I see it right, government has a bank account which it can credit out of nothing with a number that represents money recognised as such in the territory under its jurisdiction.
In an act of origination, the stage of creation ex nihilo, an "empty" government account (with a balance of $ 0) is credited by fiat with, say, $ 1,000 or any other sum of money.
This act of origination is re-enacted any time the government decides to create money.
The next stage, the act of spending, involves a transfer of (some or all of the balance of the government's account) to one or more accounts held by anyone the government chooses as the recipient of its newly created money.
So, the government might debit its own account to the tune of $ 1,000, while crediting the account of, say, a private contractor employed to repair a government building by the same amount.
The government has engaged in a valid and effective economic transaction without the use of any productive resource or service, and without employing taxed, saved or borrowed money.
At the same time, it has enhanced the ability of another non-government participant in the economy to engage in similar valid and effective economic transactions with anyone interested in deals denominated in the government's currency.
To illustrate, in Australia, the central bank maintains a special facility to manage a number of bank accounts on behalf of the government, and when the latter spends, it debits these accounts and credits various recipient bank accounts within the commercial banking system. As a result, deposits show up in a number of commercial banks as a reflection of the spending.
All in all, government spends by creating deposits in the private banking system.
In an act of origination, the stage of creation ex nihilo, an "empty" government account (with a balance of $ 0) is credited by fiat with, say, $ 1,000 or any other sum of money.
This act of origination is re-enacted any time the government decides to create money.
The next stage, the act of spending, involves a transfer of (some or all of the balance of the government's account) to one or more accounts held by anyone the government chooses as the recipient of its newly created money.
So, the government might debit its own account to the tune of $ 1,000, while crediting the account of, say, a private contractor employed to repair a government building by the same amount.
The government has engaged in a valid and effective economic transaction without the use of any productive resource or service, and without employing taxed, saved or borrowed money.
At the same time, it has enhanced the ability of another non-government participant in the economy to engage in similar valid and effective economic transactions with anyone interested in deals denominated in the government's currency.
To illustrate, in Australia, the central bank maintains a special facility to manage a number of bank accounts on behalf of the government, and when the latter spends, it debits these accounts and credits various recipient bank accounts within the commercial banking system. As a result, deposits show up in a number of commercial banks as a reflection of the spending.
Federal government spending ... is largely facilitated by the government issuing cheques drawn on the central bank. [...] When the recipients of the cheques (sellers of goods and services to the government) deposit the cheques in their bank, the cheques clear through the central banks clearing balances (reserves), and credit entries appear in accounts throughout the commercial banking system. In other words, government spends simply by crediting a private sector bank account at the central bank.The source: Deficit Spending 101 - Part 2
All in all, government spends by creating deposits in the private banking system.
Summarises Bill Mitchell:
While the exact institutional detail can vary from nation to nation, governments typically spend by drawing on a bank account they have with the central bank.Source: Overt Monetary Financing - again.
An instruction is sent to the central bank from the treasury to transfer some funds out of this account into an account in the private sector, which is held by the recipient of the spending.
A similar operation might occur when a government cheque is posted to a private citizen who then deposits the cheque with their bank. That bank seeks the funds from the central bank, which writes down the government’s account, and the private bank writes up the private citizen’s account.
All these transactions are done electronically through computer systems. So government spending can really be simplified down to typing in numbers to various accounts in the banking system.
Unlike asset-backed money, where a
unit of money represents (some fraction of) a physical unit of some
asset such as gold or silver, and is limited by this correspondence,
fiat money can be created ad libitum.
Under a regime of fiat money, government does not get the
money it wishes to spend from anyone or anywhere, other than from its
own decree that there be more money.
Hence, fiat money is not an economic good. It is not subject to scarcity.
A matter of uninhibited volition, its provision itself is unlimited. That is to say, in as much as government is the creator of its own currency, it is able to honour any claims against it denominated in that money.
In that sense, government cannot go bankrupt, i.e. it is not facing the risk of insolvency.
Therefore, it can and, indeed, it ought to go on issuing new money, i.e. engage in spending, as long as such spending provides a net economic benefit.
Continued at Government Spending and Taxation - On MMT (3)
Continued at Government Spending and Taxation - On MMT (3)
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