@morganist thank you for your thread and thank you @piezoe for the point/counter point. It is like Economic 2.0 for us average Joe.
Name a single government without government bonds! You might want to re-think what you just wrote. cash-currency whats the difference. Is there going to be anything fundamentally different when we all move to a "cashless society"???
You are saying that the currency is based on the debt the government issue and not as a commodity in its own right. The government debt does not equates to the money in circulation, the money in circulation is a commodity that has a set supply that is different to the quantity of government bonds. You still can't get round the fact that money is currency and traded on an exchange, which is what gives it is value and operational dynamics. The explanations you give are either using debt or taxation income to determine its value or some form of Quantitative Easing.
I will try another position to explain to you why government debt is more than simply a deficit as you call it. When money is traded on an exchange it operates like a commodity that is bought and sold, which it has become. The currency is held to the factors that impact commodity prices and is set to follow the dynamics that a product traded on an exchange is subject to. Currency is a commodity it is not just a number on a balance sheet or a Treasury bond or a piece of paper. When the government has debt it can impact the trading operations of the its currency, which is a traded commodity on an exchange. It doesn't matter how you view the debt, the fact is when government debt rises it has an impact on currency value and subsequently trade and investment. Simply the fact that due to money being a currency that is subject to market forces, government debt becomes a factor that impacts its price. You cannot see government debt as a deficit or something the sovereign has complete control of when the price of the currency is impacted by the level of government debt. Government debt or the government unnecessary deficit has to be managed to prevent the currency value from moving in an uncontrollable direction.
Let me quote from Wray as it expresses what I believe is the correct view. (I'm not inclined to get into a discussion of the forex markets. I'm interested in the more fundamental concepts I have been posting on.) If government spending is 'financed' through creation of fiat money, and if taxes are designed to call forth things for sale to government -- rather than to 'finance' government spending -- then why does the government sell bonds? Of course, governments believe that they must sell bonds to borrow the funds necessary to financing spending. However, this is an illusion, as the spending must come first. As we will argue, bond sales (whether by the treasury or by the central bank) function to drain excess reserves; they cannot finance or fund deficit spending. This view builds upon Lerner's second law of functional finance; 'the government should borrow money only if it is desirable that the public should have less money and more bonds'.* More specifically, bond sale are designed to substitute an interest-earning government liability for non-interest-earning government fiat money, and is properly thought of as a monetary policy operation. [The 'Lerner' referred to is the great Aba Lerner, a famous mid-Twentieth Century economist.] ____________________ * I sometimes refer to this as 'sidetracking' as it temporarily removes outside money from the economy.
You are still explaining your view of what money is as opposed to how money reacts to market forces and the impact that has on an economy to operate. Currency traded on an exchange is subjected to the market forces a traded commodity are subjected to. This means any change in the factors that impact price will impact the currencies ability to trade at the same level. Traders of the currencies are not going to be interested in whether the government debt is a debt or a necessary or unnecessary deficit, they are interested in the price of the currency. This will determine international trading ability and foreign investment, but having a high government debt no matter which way you see it will impact on the currency value. Your position of how the money is issued or accounted for has no bearing on the currencies price and how it is impacted by a country having a high government debt. Regardless of how long the country can continue to run up a higher government debt regardless of how the money is raised or created it does not mean that it will not impact the currencies operations. By having a different view of what the government debt is does not mean that the currency which is traded on an exchange is not subject to the same market forces it was with a different view of what the government debt is. It will still impact the currencies trading value and as a result create problems if the government debt or deficit increases in the future.
However the money was issued it is traded on an exchange so the value is the price that the market sets. You would therefore trade the currency at the price the market is willing to buy or sell the currency for. There will be various factors that impact the currency price, for example if a country's government debt increases it is likely a trader will foresee there will be an increase in taxation in the future which will have a dampening effect on the currency's value. The important aspect is the currency has been issued with a certain set supply and then it is traded on an exchange. The price will alter for various reasons like the example above, it will also alter if the supply of the currency changes. The currency is now a commodity and behaves like a commodity. Any action taken by the government that alters its trading price will impact the nation's ability to buy and sell goods internationally. So it is important when a currency is traded on an exchange to balance the economy's debt and hit economic targets. When the targets are not met or large deficits occur the price of the currency will likely fall. When the currency began to be traded on an exchange the nation's economic output and performance became a factor in the currencies pricing on the Forex exchange. When there are bad results or disequilibrium the currency will be negatively impacted.