"Money is a spreadsheet"
James Galbraith, in a forward to Warren Mosler's forthcoming Seven Deadly Innocent Frauds, on how money really works. (Clue stick: Not in the way that the banksters, most financial [cough] journalists, the legacy parties, or the career "progressives," are telling you.*)
The common thread tying these themes together is simplicity itself. It's that modern money is a spreadsheet! It works by computer! When government spends or lends, it does so by adding numbers to private bank accounts. When it taxes, it marks those same accounts down. When it borrows, it shifts funds from a demand deposit (called a reserve account) to savings (called a securities account). And that for practical purposes is all there is. The money government spends doesn't come from anywhere, and it doesn't cost anything to produce. The government therefore cannot run out.
In the jargon, when a government is sovereign in its own currency, spending is not operationally constrained by revenues (unlike, say, households, US states, and Greece). The government can't run out of money any more than a bowling alley can run out of points. And how is money created?
Money is created by government spending (or by bank loans, which create deposits). Taxes serve to make us want that money – we need it in order to pay the taxes. And they help regulate total spending, so that we don't have more total spending than we have goods available at current prices – something that would force up prices and cause inflation. But taxes aren't needed in advance of spending -- and could hardly be, since before the government spends there is no money to tax.
A government borrowing in its own currency need never default on its debts; paying them is simply a matter of adding the interest to the bank accounts of the bond holders. A government can only decide to default – an act of financial suicide – or (in the case of a government borrowing in a currency it doesn't control) be forced to default by its bankers. But a US bank will always cash a check issued by the US Government, whatever happens.
Nor is the public debt a burden on the future. How could it be? Everything produced in the future will be consumed in the future. How much will be produced depends on how productive the economy is at that time. This has nothing to do with the public debt today; a higher public debt today does not reduce future production -- and if it motivates wise use of resources today, it may increase the productivity of the economy in the future.
Public deficits increase financial private savings -- as a matter of accounting, dollar for dollar. Imports are a benefit, exports a cost. We do not borrow from China to finance our consumption: the borrowing that finances an import from China is done by a US consumer at a US bank. Social Security privatization would just reshuffle the ownership of stocks and bonds in the economy – transferring risky assets to seniors and safer ones to the wealthy – without having any other economic effects. The Federal Reserve sets interest rates where it wants.
All these are among the simple principles set out in this small book.
Remember the "always wrong about everything" meme? As it turns out, that doesn't apply only to Republicans; it applies to Versailles generally. Quelle surprise.
NOTE * Career "progressives" seem to think that rational policy outcomes can be achieved by reasoning from faulty principles; about money, among other things. Me, I say, GIGO. As the election of 2008, and the subsequent heartbreak among the "Obama worshippers"-- (hat tip, Digby; we racists welcome you! -- amply shows.