Friday, December 18, 2015

I Still Say the Federal Government Does Not Borrow

My understanding of treasury securities operations are rudimentary at best, and I invite comments, but from my exposure to Monetary Sovereignty and MMT I presume that the federal practices of taxation and treasury security sales function not to fund federal spending (as the government and most economists would have us believe) but to neutralize the inflationary impact of federal spending,

Here is what I mean. Assume the federal government spends (disburses) $4 trillion in a given fiscal year. Assume also that federal tax collections for the year are $3 trillion (federal taxes, as we know, are dollars removed from circulation and accounted out of existence). Because, by definition, federal spending over and above tax collections constitutes a "deficit", that leaves a federal deficit of $1 trillion for the fiscal year. In accordance with a federal ruling (which I am unable to cite), the treasury must sell securities equal to the deficit amount, in this case $1 trillion. The treasury sells the securities and parks the $1 trillion paid for them into accounts at the Fed, thus removing the $1 trillion from circulation. Consequently, for the fiscal year, the entire $4 trillion spent by the federal government goes out of circulation. The $3 trillion in taxes is gone forever and the $1 trillion spent on securities will reenter circulation on expiration of the securities but, in all likelihood, will roll into new securities. Bank reserves, of course, remain in play for the $1 trillion in securities, but bank reserves do not circulate.

My observation, then, is that federally spent dollars float in circulation for a year and disappear into taxes and securities accounts leaving only bank-created dollars in circulation. By that reckoning, I conclude that any money supply influence on inflation comes from only the amount of bank-created money in circulation. The federal rules, laws, mandates, statutes, or whatever, that require the Treasury to sell securities to match the deficit seem to dictate the removal of federally spent dollars from the hands of private sector spenders.

From this, I conclude that tax collections are not spent, that selling treasury securities is not really federal borrowing, and, because selling treasury securities does not constitute borrowing, that the federal debt is not really debt. And for those inflation-phobes who fear federal money "printing", I propose that there is more likelihood that the private sector will "print" too much money than there is in the federal government sector doing so.


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