halalmoney on Nostr: A longer quote: The principal mechanism used to drain money created by government ...
A longer quote:
The principal mechanism used to drain money created by government spending is bond issuance. Payments to government by purchasers of new bond issues are intermediated through the government’s commercial bank account, funding its deposit account and eliminating any overdraft. When a loan or overdraft is paid down, money is destroyed (eliminating the money created when the loan was made). Issuing new bonds ex post therefore reduces M3, while ex ante issuance prevents M3 expanding. Term deposits directly with the government (for example through NS&I) have the same effect.
And so do tax revenues. Bonds are redeemed as tax revenues are received. When the government’s spending (including bond interest payments) is entirely “financed” by bonds which are subsequently redeemed from tax revenues, the increase in M3 from government spending is wholly offset by the reduction in M3 from private sector purchases of new bonds, and their redemption from tax revenues is a wash. Regardless of how much the government spends, if it is wholly offset by bond issuance subsequently redeemed by taxation there is no net new money in the economy.
The principal mechanism used to drain money created by government spending is bond issuance. Payments to government by purchasers of new bond issues are intermediated through the government’s commercial bank account, funding its deposit account and eliminating any overdraft. When a loan or overdraft is paid down, money is destroyed (eliminating the money created when the loan was made). Issuing new bonds ex post therefore reduces M3, while ex ante issuance prevents M3 expanding. Term deposits directly with the government (for example through NS&I) have the same effect.
And so do tax revenues. Bonds are redeemed as tax revenues are received. When the government’s spending (including bond interest payments) is entirely “financed” by bonds which are subsequently redeemed from tax revenues, the increase in M3 from government spending is wholly offset by the reduction in M3 from private sector purchases of new bonds, and their redemption from tax revenues is a wash. Regardless of how much the government spends, if it is wholly offset by bond issuance subsequently redeemed by taxation there is no net new money in the economy.