As more economists begin to debate whether government deficits are bad or their controls on currency production and inflation can overcome high government spending, many wonder what implications this will have on international currency valuations and markets.

The good or bad of deficit spending (net money creation) is entirely dependent upon the needs of the private sector, not something that can be labeled via reference to a household budgeting process that has no relevance. The deficit spending of the government (red ink) is the only source of “NET” assets (black ink) the private sector has that is able to store value or retire private debt.

The misconception that a sovereign currency issuer is reliant upon taxation or borrowing for its funding, while widely accepted as fact, is in reverse of reality. We need the currency only Congress can create to denominate prices/contracts, but mostly to pay the tax burden the issuer uses to drive demand for the currency. A balanced budget, while being the holy grail of econ ignorant politicians and their equally ignorant supporters, is an effective 100% tax rate that steals resources from the private sector with all compensation clawed back via taxation. Such is the stuff of revolutions.

This is proven true by the necessary order and mechanisms of our monetary system that was designed around protecting a gold reserve and using a dual entry spreadsheet accounting system to track money flows. Spending “must’ precede both taxation and borrowing or there is nothing to collect or borrow. In fact, ditching the gold standard made Treasury bonds a useless function of the system beyond giving the Fed leverage to set interest and providing a floor for investment.

A sovereign currency-issuing government cannot create money via borrowing, as the reserves needed to purchase bonds must be created first, making the process of borrowing unnecessary and only an asset swap for excess reserves. Deficit and debt are terms left over from the gold standard with little relevance to a fiat currency economy except to provide political fodder. Anything that physically exists, or potentially exists, is “affordable” and will not create inflation, making any misery that can be mitigated with spending strictly a political choice.

Using the budget to accomplish economic goals instead of using the economy to balance a meaningless budget number is only logical when the functional reality of our monetary system is properly acknowledged and managed. That can only begin when politicians can be found who are honest enough to give up the propaganda of the currency issuing government being anything like our household budget and “needing” revenue to spend.

Then we can make the wealthy irrelevant to the budget process and taxing them only because they use their concentrated wealth to damage the democratic process, not going to them with hat in hand begging them to “allow” us to spend for the public purpose. It is my thought that this will likely result in much higher tax levels for the 1%.