Where is the Money Coming From?

As was discussed in the two previous posts, there is no financial need for these governments to borrow at all in order to fund their deficit spending.

The government has no need of funding. It is in a position to create and destroy its own money as it pleases. Whenever it transacts with the private sector – a ‘vertical’ transaction – money is either created or destroyed. Whenever the government runs a budget deficit or surplus, there is a net change in private-sector holdings of financial assets. In contrast, when private sector agents transact among themselves – a ‘horizontal’ transaction – there is no net change in financial assets, because such transactions always create a private asset and a matching private liability, netting to zero. The government can create or destroy net private financial assets at will; the private sector cannot.

The horizontal and vertical transactions are best illustrated by the following diagram.

vertical_horizontal_relations

So when reporters are asking where money is coming from to fund programs offered by political parties they are severely misguided.

The best example of this erroneous view can be pulled from this ABC 7.30 report: Funding black hole confronts both sides of politics where Chris Uhlmann states:

There are only two options to pay for them. Raise taxes or cut costs. Both carry risks.

This is a common mistaken refrain in wondering where the money is coming from as shown in the first 9 seconds of this video and highlighted in this article and some other more  recent announcements. Now Uhlmann is not wrong in saying the options he provide carry risks, he goes on to state the specific risks but for the private sector people on the end of either those option both are the equivalent of a tax hike.

That is not to say cutting costs is without its merit if it cuts cost on what is considered wasteful spending.  What is wasteful spending?  Well that’s a political decision.  Previously the Government has said some Defence expenditure is and currently the Coalition says the Schoolkids bonus is.

There is a third option called deficit expenditure and it carries a risk too.  That risk is high inflation.

So “Where is the Money Coming From?” is a really naive question.

Advertisements

One response to “Where is the Money Coming From?

  1. Great post! MMT is the wave of the future.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s