Keith Evans
3 min readAug 12, 2022

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Of course taxes and bonds finance government spending. Govt does not print money each year to finance itself. You’ve been reading Austrian strudel economics I think.

Neither was ever intended to "fund" spending for the federal government. They do nothing more than reducing reserves in the system. When we did that gold standard nonsense they created policy space that allowed Congress to spend within the artificial limits imposed, but they never moved money in such a way that it served both to reduce the debt that it was created from "and" survive to fund new spending.

When you pay a federal tax obligation, fine, fee, or anything that can be considered revenue, that payment stops being money when it moves into the government sector where it originated as a law/spending appropriation. It served its purpose and is "uncreated" by the debt it was created from. Its only surviving memory is a thank you note from Treasury and an "accounting" entry (not money) showing the payment.

If there are not sufficient "accounting entries" of revenue to cover an expenditure, Treasury must issue a bond for the difference/deficit before the Fed can clear a payment. The proceeds of that bond sale are then accounted for and destroyed, just as the tax payment was except that the bond is re-capitalized back into reserves with a small dividend upon its maturity.

A little simple logic and some knowledge of dual entry spreadsheet accounting will show that this is the only way to comply with the worldwide standards for tracking money between sectors. Firstly, where did the money come from to enable payment of tax obligations or "borrowing"? The money must be spent into existence before either can take place, and there is only one source of net money in the private sector, which is Congress.

In a nutshell (because it's late and I'm old) what it boils down to is; You don't "fund" your government. Your government "funds" you, including your ability to pay taxes and net save (bonds) in the government's unit of account. Taxation drives demand for a currency and controls the amount of that currency in circulation, and bonds allow the Fed to set base interest rates and provide secure storage of savings.

It is easy to think that our government must function as all other entities do in the use of money, but those entities aren't the sole legal "issuers" of that money that is self-funding when spent and needs no "funding". This requires unlearning a lot of deeply ingrained concepts, which is why it usually is gained in an "ahaa" moment of epiphany when the pieces fall in place.

The advantage of this correct view of federal finance is that it lets one see that the "national debt" that has everyone clutching at their pearls is just the total of dollars spent into existence but not yet collected to pay a tax obligation. It is the money supply in short. One can then extrapolate the maths/logic another step and see that Congress isn't revenue bound in its spending.

It can "afford" anything it can resource from the private sector and is for sale denominated in dollars it can create at will. There is no "infinity+1" that makes Congress better able to spend because it received some amount of its unit of account back.

Here is a great place to begin your search for that "ahaa" moment. You owe it to yourself and those you offer advice to.

https://www.google.com/books/edition/The_Deficit_Myth/Rom-DwAAQBAJ?hl=en

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Keith Evans
Keith Evans

Written by Keith Evans

Meandering to a different drummer.

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