As I understand the existing system, borrowing by the central government creates new money (the amount the Fed has the Treasury print for the Fed to use to purchase new debt).
That is actually backward from the operational reality of money creation. Only Congress can direct Treasury to create new currency, which it does via spending appropriations. The Fed simply acts as a clearing bank for Treasury and marks up accounts as it is directed.
All spending at the federal level is done via new currency creation and taxation/bonds simply cancel currency as it encounters the “debt” that is created in the government sector when new money is created in the private sector to comply with dual entry accounting practice used worldwide to track money. The monopoly issuer of the currency has no use for what it creates on-demand, so it never “has” money. The government sector always holds debt in direct balance with the M1/M2 money supply in the private sector. It can borrow to reduce that debt, but only until the new debt instruments mature.
Treasury debt (bonds) was a workaround for Congress to game the gold standard when we did that nonsense. Knowing that its issues would always sell, Congress could exceed the value of the gold reserve in spending to anticipate revenue. Any such spending would create excess reserves in the system that recipients were glad to exchange for interest-bearing Treasury issues. Since the spending always preceded borrowing (one cannot borrow what doesn’t yet exist) the revenues from those issues were simply allowed to be voided by the debt in accounting and the gold reserve was protected.
Sans a gold reserve to defend and assuming any artificial “ceiling” will always be raised (even Congresscritters aren’t stupid enough to allow default unnecessarily), Treasury debt serves no useful function in “funding” spending. It is now just an incentive for thrift and welfare for banks and wealthy traders. Given that the Fed shares a balance sheet with Treasury, it can always purchase any level of such debt at no cost, so the idea that we depend upon any “markets” to fund our deficits is just political propaganda.
Are you saying that “borrowing” is the other side of the coin of taxation, that “borrowing” is but a mechanism for restoring to the economy money that taxation has taken from it?
Borrowing is simply a temporary form of taxation, kinder and gentler, that serves the same purpose of removing demand from the economy. A bond is just another form of currency with less liquidity and a small premium at maturity. The same purpose would be served by attaching the premium to excess reserves and abandoning bonds completely, and that premium can be anything the Fed dictates, including sub-zero, to direct investments.
At the end you seem to be saying that spending by the central government should be funded by simply creating the money for that, without using the fiction of debt. Taxes would still exist, but only to draw money out of the economy to avoid an infinite accumulation of money in the economy.
Not “should be”. That is how it works now. The concept of taxation “paying for” spending is, and always has been, a fiction. Federal revenue can either draw down debt or fund spending, but not both. It’s just a lot cleaner and more compliant with standard accounting practice to let revenue delete debt and use new money creation for all spending. There actually isn’t a function at Treasury or the Fed to allow anything different.
Given the vast amount of money that literally unlimited spending by the central government could entail, that tax bill would be HUGE. All of the issues that have forever been associated with taxation would be hugely exaggerated. So it seems to me that taxation remains the Achilles heel of this paradigm.
MMT doesn’t prescribe unlimited spending, as it is the availability of real resources and productive labor that limits such without incurring hyperinflation. What it does say is we are functioning far below our capacity by demanding that every dollar created in the private sector is matched with a dollar of “revenue”. As long as resources and labor exist to realize a goal that currency is deployed to accomplish prices will remain stable in a competitive system.
Seeing that a “balanced” budget is actually a 100% tax rate that leaves no store of value in the economy from our commerce with the government, such foolishness should be scorned far more than anything MMT suggests. Even coming close to achieving such a goal has resulted in deep recessions or depressions every time (7) it has occurred. Without public money creation, private debt cannot be net retired and growth cannot be funded, but fewer public dollars in circulation drives more private debt, as Clinton found out with his surplus budgets that liberals still laud highly.
We simply can’t cut our way to prosperity at the currency-issuing federal level because the red ink of the federal government is the only net source of black ink our economy has to function with. This can be masked with constant GDP increases that “rollover” private debt, but at great cost to the environment and the imposition of misery on the majority to enable the level of profits our current system demands. Each downturn in the business cycle ends up requiring massive injections of federal dollars to “bailout” some segment of the economy, whether that is from automatic stabilizers or direct cash injection. Such misery and destruction is “always” a political decision, not economics.
I find it incomprehensible that someone who understands the monetary component of the macro economy as well as you and has seen my similar (to my understanding of your ultimate version of MMT) but so beautifully simpler paradigm prefers a Rube Goldberg contraption based on MMT.
MMT requires no changes to our existing system because it “IS” an accurate description of our existing system. It simply needs to be properly understood and managed to the advantage of the majority of the people. Considering the problems in even accomplishing that against the headwind of econ illiteracy and political corruption, I find it incomprehensible that anyone would attempt any major changes when none are necessary.
