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Level Money to the rescue Remember when you used to carry around cash, and pay for things that way? No, me neither. Author Posted Desirae Odjick FB. The state can now purchase the goods and services it requires, redistributing resources to itself from the private sector. Private individuals need to acquire state money to pay their debts to the state.
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Second, the state is able to use its net spending to manage aggregate demand. It must net spend sufficiently to allow the non-government sector to meet its tax liability and satisfy net savings demand at the full employment level of income — otherwise, it will allow deflationary forces to exert downward pressure on income. Excessive net spending will generate inflationary pressures . However, the key insight provided by MMT is that government must spend or lend before it can tax or borrow.
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Taxes do not fund spending in a functional sense. This logic is clear in a system where the state predominantly spends in coins. Clearly, a private sector taxpayer cannot mint her own coins without state permission. The state would need to spend them before she could acquire them. In the modern financial system, the government spends by data entry and the working of the financial system can cloud the issue; however, the logic still applies.
It may appear that a private individual can pay their tax bill using bank money, however, on further reflection, this view can be seen as an illusion. Before the private sector can pay its taxes the state must have spent or lent the money. The provided reserves originated from state spending. Thus it is apparent that state spending or lending precedes taxation; the only other way would involve counterfeiting of state money by the private sector! If the state wishes to spend more it can only do so without limit by data entry. Taxing or borrowing simply reduce the purchasing power of the non-government sector and serve to give value to state money and provide a means to manage demand.
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That is how totally her deception has taken hold. Money is created by the appropriations bills passed by Congress. It actually happens when the deficit spend takes place.
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The spend pays the debt by being credited to his reserve account at the Fed and at the same instant the debt is extinguished. So the government has no lingering debt. There is no debt any longer]. Thanks for your insights- interesting point on the US system. I would say that my analysis conceptualizes the process at a deeper level of abstraction; the specifics of various systems which vary across countries are important but the underlying logic remains- the state must spend or lend prior to taxing or borrowing. A bank-created loan pound will be redeemed by the state in settlement of a tax obligation as readily as a pound spent into the economy by the state.
They are not two kinds of pounds, but bank issuance is balanced by bank debt such that banks cannot increase the level of net financial assets in the economy. Only state currency issuance can do that. You must be careful on these points. Bank deposit money is not redeemable in payment of taxes.