There is a lot of misunderstanding here. Most Americans, including most politicians, yourself and all but a handful of ET posters believe that taxes furnish the revenue the government uses to buy what it wants, and when there is not enough revenue the government borrows the difference from the private sector. This is wrong in fundamental ways that renders premises dependent on these false beliefs incorrect. The first step is to correct the misunderstanding of what occurs in deficit spending: a) Tax revenue allows the government to obtain goods and services and make transfer payments, but when revenue is not enough to cover these expenses the government does not borrow any money, it prints the money it needs to cover the revenue shortfall. Then later Treasury Securities are sold in principal amounts equaling the amount of new money spent into the private sector. b) Government Issued Securities* are structured like debt instruments. When the government sells securities to the private sector, the transaction has the outward appearance of borrowing from the private sector; yet no net, true borrowing is occurring (vide infra). Some government's do have real debt, but not the U.S. Government. According to a commonly held, but incorrect, viewpoint, if the government wants to engage in deficit spending, it first borrows the money and then buys what it wants with the borrowed money. The net result, ceteris paribus, would leave the private sector with exactly the same money supply it had before the transaction but richer by a bond, .i.e., the total money in the private sector would increase by the bond principal. (Recall bonds are not a part of the money supply but are a part of total money). In actual practice however, deficit spending is covered by "printing" of new money. The new money appears in the Private Sector Economy simultaneously with goods and services moving to the Government sector. This causes the money supply to be increased (temporarily) by the amount of Goods and Services sold to the government while Goods and Services move to the Government Sector. But THEN the government sells bonds to the private sector, moving the newly printed money right back to the government side. The Government now has the "cash" needed to pay off the Principal on the bond it just sold. How was the "cash" acquired? It was created out of thin air, i.e., it was "printed! THERE IS NO REAL BORROWING of principal going on because the Goods and Services were bought with printed rather than borrowed money!!! Then, when later the Government sells a bond to the private sector, the net result of the Government's transaction leaves the private sector richer by a bond, and the Government "richer" by the money it just printed! It is as though the Goods and services were bought with a bond. This increases the money total in the private sector although the money supply is left unchanged. The Government ends up with the newly printed money on its books. I don't want to get into the reasons why the government chooses to print to cover deficits rather than borrow, but suffice it to say that bonds do not serve the purposes that most think they do. The government issues bonds for entirely different purposes then the raising of money to spend. This is a topic for another time. So, back to QE. Anyone who can understand what I have posted above will immediately understand why QE is not printing. Instead, it consists of the interchange of Treasury Securities for transactional money. The purpose of QE is to increase bank reserves, put downward pressure on rates, and simultaneously facilitate large deficit spending. In contrast, by following what happens in typical deficit spending, as described above, one can understand why deficits don't normally lead to ballooned reserves and "easy money", nor do they lead to inflation. Bernanke once "misspoke", and in an unguarded moment during an interview said he was "printing." I'm sure he'd take that back, if he could. As the interview's context was QE, it would have been easy for listeners to conclude that QE was causing the printing. He was printing like crazy on behalf of the Congress**, but QE was the causing printing, it was the other way around. _____________________ *Here I am using the shorter, more convenient word "bond" to stand for any Government Security sold by the Treasury, including bonds of course. **Only the Congress can print new money. The Fed normally has no say in the amount printed. They just facilitate the "printing" on behalf of the Congress.
Not misspoke at all. Because it was the truth. Period. No misunderstanding on my part or the former Chairman. BTW I've said nothing about taxes or revenue. Only in some many words what The Fed (the dealer) does, is to allow the gubmint (junkie) to continue its debilitating, profligate, out of control spending. By creating money that the gubmint does not presently have. Presto chango. Only true Keynesians (or MMT in todays day) believe otherwise, that and 2 + 2 = 2 billion.
You're a smart guy so I doubt you read carefully enough what I wrote. It's Ok. I know you don't like long posts. But if you ever want to try and understand MMT or modern government finance, you can always look up my post. Or you can read the, by now, voluminous literature on the subject. Or perhaps get hold of Wray and Mitchell's undergrad economics text. It's the first text to get the "money multiplier" right and it is up to date in other respects. There are a couple grammatical mistakes in my own post. I'll put them in an errata in a separate post. I think my post #61 above may be the first statement anywhere that explains so clearly and very specifically where money printed in deficit spending ends up. Keynes was right for his time. I have no doubt were he living today, he'd have figured out Modern Government Finance long before the rest of us.
Errata in post #61 above: The government issues bonds for entirely different purposes then than the raising of money to spend. ...but QE was wasn't the causing printing, it was the other way around.
Of course the government does pay interest on its Securities. This is treated like any other non-discretionary expense. If the expense can be paid from tax revenue there is no net new issue of Securities associated with its payment. But if the payment can't be made from tax revenue, then the payment represents deficit spending which is always paid by "printing"; not borrowing. The Securities sold subsequent to printing serve to remove newly printed money from the private sector and move it to the government side, where it is available to pay the principle on the securities sold to the private sector. Since newly printed money left in the private sector could contribute to inflation, it's routinely transferred to the government side via Treasury auctions. The Fed can always move money back into the Private sector as its monetary policy requires by buying Treasuries back from the private sector. It is useful to note that the NY Fed carries out its bond purchases and sales via the private, secondary market and not directly via the Treasury, as this would be functionally the same as buying and selling from itself, and then the transactions would not register in private sector bank reserve accounts, as they must to implement monetary policy. The single most important point is that the Treasury does not issue Securities to obtain money to spend, as it would do were it actually borrowing from the private sector. Rather Securities are issued in order to remove newly printed transactional money from the private sector where it might cause inflation unless there was a corresponding increase in productivity. Treasury Securities also serve two other very important functions. They provide a tool of the Central Bank,i.e., the Fed, and they serve as an interest paying store of money. This latter function is critical to the Dollar maintaining its status as a reserve currency. You must put two, linked government actions together in the correct sequence, and then consider what the result of each action is on both the private and government sides, to fully understand the net result of deficit spending on the government and private sectors.. The two actions to be considered are a) simultaneous printing and deficit spending, and b) subsequent selling of securities to the private sector in the same amount as the deficit. It might be helpful to read and study my post #61 above. At least I would hope that would be helpful. This is not easy for me to understand either.