(3)*** Studying Modern Monetary Theory (MMT) — The Money That Comes from Nowhere

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Continued from here.

Limited and Unlimited Money Creation

If it is true that government is in no need of borrowing money if it wishes to spent more than it has earned, why do governments nevertheless incur large amounts of debt? There are two reasons for this: 

(1) Only governments that are able to issue their own currency are freed from the need to issue debt instruments like government bonds. A government that has given up its privilege to issue its own currency has forfeited its ability to create money of its own accord. It thereby regresses to the status of a private household that first needs to earn income before it can spend money. All member states of the European Union have regressed to the status of a private household in that respect. Apart from money allotted to them by the currency issuing European Central Bank, for these states to command money they must raise it through taxation and borrowing.

(2) For states that had subjected themselves to the Gold Standard by tying their currency by a fixed ratio — like 1.5 g (23.22 grains) of gold — to the amount of gold held by the central bank, more money would be forthcoming only if the supply of gold increased naturally or if the state received taxes or borrowed money to fund an expansion of the supply of gold it commands. Many economists and governments incurring public debt still believe or act as if they believed in the presence of this constraint that, in fact, has disappeared with the rise of fiat money.

The idea that money must come from somewhere is still deeply ingrained in contemporary economic thinking. However, under a fiat money regime, money comes from nowhere. It is no longer tied to a finite physical underlying, like gold or silver. Instead it is being created by fiat (Latin: "Let it be done"), by the mere command that there be money. The ability to create money ex nihilo, from nothing, is the hallmark of what in MMT is called the sovereign currency issuer. The sovereign currency issuer contrasts with currency users, by which term we mean economic agents that are unable or not allowed to issue money, let alone the national currency. You, dear reader, are a "mere" currency user: you may issue your own money, but how many people will accept it? And, of course, you are not allowed to issue the national currency.

The State — Rule Maker and Accountant of the National Money System

As for the state, the matter is different. Under a fiat money regime, the state is both 

(a) the maker of some of the rules that regulate who has how much money, and 

(b) the accountant of who is having how much money in the economy. 

Regarding (a), the state can create money out of thin air and determine that person X shall be the beneficiary of this money (receiving a welfare check or a check rewarding a government contractor etc.). At the same time, it may decide that person Y must surrender some of his money by paying taxes, a special fee or a fine to government.

Money from Nowhere

Regarding (b), consider this: 

11:0 is an unusually high score for a soccer match. Are scores that high or even higher so rare because there is a finite amount of score points, of which one tends to run out at around 20 goals per match? Of course, not. Score points come from nowhere, meaning. they are abstract symbols of which our mind has an unlimited supply.

Fiat money is like that, an abstract symbol that is available in infinite quantity. In principle, there is no restriction on government to propagate this symbol without limit. There are practical reasons not to overdo money creation, especially the threat of inflation. But it is equally important to understand that government is free to create as much money as it desires, whenever a genuinely beneficial need arises.

So, there is no finite pool from which government must get the money it wishes to spend. Fiat money is an accounting abstraction that involves no physical components other than computers and the human mind.

Government spends and lends money simply by changing numbers in bank accounts. The system of fiat money is a network of interconnected spreadsheets accounting for the stocks and movements of money among all the accounts held at banks and the central bank (more on that later).

Next, we shall explain why government does impose taxes even if they are not required to fund its spending.

Continued here.