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What is Money?

Since you are convinced i am not arguing in good faith, there is not point in further discussion between us. If you goal is to stop me from questioning you, you have succeeded. (In other words, i question your good faith too).
If you ask a question, I will answer
 
It is clear that when you say "public sector" and "government" you mean different things. I am used to "public sector" meaning governments, federal, state and local collectively. Can you please clarify what you are using the term to mean?
In sectoral balance analyses, the 'government' is any part of state, regional or local government. So, when the government spends into another limb of government, the spending nets off against the cash asset and cancels out. It doesn't show up on the chart. The government has, if you'll forgive the analogy, moved a £10 note from one pocket to another and is neither in surplus or deficit in net terms.

This changes when the government money makes it to a 'household' or a 'business'. At this point the £10 note has left the government's pockets, and the government is in deficit and the Household/business is in surplus. Households and businesses are described as the 'private sector'.

For completeness, the 'trade balance' is represented. This is described as the 'external sector' or 'rest of the world'. There is always a net flow of British pounds in or out of the domestic economy. The British and US economies of the last 40 years have generally run trade deficits, and this shows on sectoral balance charts as an external sector surplus. This means that, in terms of financial value, UK or US residents bought more from external countries than those external countries bought from the UK or US. The corollary of this is that UK pounds have left the domestic economy, and are saved in the external sector somewhere.
pubchart

In summary, the sectoral balances charts are a simple way to show a simple fact: every financial transaction has a buyer and a seller (or a borrower and a lender). So when money leaves the government sector, there will always be a counterparty in either the 'private sector' or the 'external sector'. The same, in reverse, is true when the government taxes. Most sectoral balances charts look at a financial year (because the data are available) and they express the net position of each sector at the end of all the transactions in that period. A government deficit means that money has flowed to the private/external sector.
 
If you can't illustrate the concepts with a small figure demonstration, I must admit I'm suspicious that things don't actually add up. But that's mere suspicion, we may continue unraveling.
The reason I didn't do any reconfiguring of that number chart is because it didn't tell us anything in regard to the question. It was better to move to the discussion of sectoral balances to get a better picture of what it means for the private/domestic sector for government to be operating a fiscal deficit.
I also don't just want to drop into 'equations'. Sure enough there'll be enough people who can read them, but they are only a shorthand for an argument already formulated upon certain premises. So discussion is required first.
It is clear that when you say "public sector" and "government" you mean different things. I am used to "public sector" meaning governments, federal, state and local collectively. Can you please clarify what you are using the term to mean?
Terminology is always a problem. Right. I said 'private sector' in the first paragraph, which is the private business and private domestic sector. In the bottom one I was referring to 'the public' as in people on the street, 'not the government sector'.

If you happen to work in the government sector directly, yes it is popularly called 'the public sector'. The terms we'll use for sectoral balances are:
  • Government sector - the currency issuer, imposing tax liabilities, largest purchaser, econ policy developer; charged with fulfilling the public purpose.
  • Private/domestic sector - me, you, our neighbours (as private citizens) and private business. Currency users, people who have to meet a tax liability by acquiring the currency through employment.
  • Foreign sector. For the domestic economy we mostly deal with the first two, though 'foreign sector' is considered where is has an influence.
Somewhere down the line I (and perhaps laughingboy is likely to?) can do a more detailed post on the sectors and national accounting using some simplistic numerical representations (if I can find certain signs on this keyboard!), but we first have to know what's what.
 
The corollary of this is that UK pounds have left the domestic economy, and are saved in the external sector somewhere.
Though the balance is held in the BoE accounts of the purchasers. This is a beneficial factor of these large currency issuers who issue a currency people want to hold (especially for bond purchases). So that so often the foreign sector payment outflows don't really leave the UK.
 
I also don't just want to drop into 'equations'. Sure enough there'll be enough people who can read them, but they are only a shorthand for an argument already formulated upon certain premises. So discussion is required first.

I for one cannot do numbers, it seems to me that numbers and equations are a shorthand, but if you don’t know what they’re shorthand for, they are meaningless.

However, to go back to Don’s numbers, is it that part of what he says is true in that the money that the government spends into the economy is what funds the money in the economy? What happens after that is accounting and has no functional purpose to the creation of money. Tax always happens after the spending event and has no function in the creation of money. Tax is taken out of the bottom, and weighed, then it drains away, it does not feed back in at the top. In other word, yes the government spends $x into the economy, what happens after that has no consequence on the next $x that government spends?
 
I prefer this graphic on Sectoral Balances from Professor Stephanie Kelton. It’s got nice big arrows to show me what to look for!

52247906662_331251f6aa_z.jpg


public/domestic sector deficit = recession.

Government surplus = recession
 
If you can't illustrate the concepts with a small figure demonstration, I must admit I'm suspicious that things don't actually add up. But that's mere suspicion, we may continue unraveling.

Your link sends me to a chart I do not understand, so it seems I must study sectoral balances, which are new to me. Will do, but there will be a bit of a delay.

It is clear that when you say "public sector" and "government" you mean different things. I am used to "public sector" meaning governments, federal, state and local collectively. Can you please clarify what you are using the term to mean?
What are you trying to add up?
 
In sectoral balance analyses, the 'government' is any part of state, regional or local government. So, when the government spends into another limb of government, the spending nets off against the cash asset and cancels out. It doesn't show up on the chart. The government has, if you'll forgive the analogy, moved a £10 note from one pocket to another and is neither in surplus or deficit in net terms.

This changes when the government money makes it to a 'household' or a 'business'. At this point the £10 note has left the government's pockets, and the government is in deficit and the Household/business is in surplus. Households and businesses are described as the 'private sector'.

For completeness, the 'trade balance' is represented. This is described as the 'external sector' or 'rest of the world'. There is always a net flow of British pounds in or out of the domestic economy. The British and US economies of the last 40 years have generally run trade deficits, and this shows on sectoral balance charts as an external sector surplus. This means that, in terms of financial value, UK or US residents bought more from external countries than those external countries bought from the UK or US. The corollary of this is that UK pounds have left the domestic economy, and are saved in the external sector somewhere.
pubchart

In summary, the sectoral balances charts are a simple way to show a simple fact: every financial transaction has a buyer and a seller (or a borrower and a lender). So when money leaves the government sector, there will always be a counterparty in either the 'private sector' or the 'external sector'. The same, in reverse, is true when the government taxes. Most sectoral balances charts look at a financial year (because the data are available) and they express the net position of each sector at the end of all the transactions in that period. A government deficit means that money has flowed to the private/external sector.
Thank-you, very helpful explanation.
 
It never seems to work out well when you and I try to discuss things. Let it go. Best for both of us.
OK, but even if you don’t want to ask questions of me, asking yourself questions might be a good idea, questions like why you like the idea that taxes do fund spending and why the idea that they don’t, conflicts?
 
The reason I didn't do any reconfiguring of that number chart is because it didn't tell us anything in regard to the question. It was better to move to the discussion of sectoral balances to get a better picture of what it means for the private/domestic sector for government to be operating a fiscal deficit.
I also don't just want to drop into 'equations'. Sure enough there'll be enough people who can read them, but they are only a shorthand for an argument already formulated upon certain premises. So discussion is required first.

Terminology is always a problem. Right. I said 'private sector' in the first paragraph, which is the private business and private domestic sector. In the bottom one I was referring to 'the public' as in people on the street, 'not the government sector'.

If you happen to work in the government sector directly, yes it is popularly called 'the public sector'. The terms we'll use for sectoral balances are:
  • Government sector - the currency issuer, imposing tax liabilities, largest purchaser, econ policy developer; charged with fulfilling the public purpose.
  • Private/domestic sector - me, you, our neighbours (as private citizens) and private business. Currency users, people who have to meet a tax liability by acquiring the currency through employment.
  • Foreign sector. For the domestic economy we mostly deal with the first two, though 'foreign sector' is considered where is has an influence.
Somewhere down the line I (and perhaps laughingboy is likely to?) can do a more detailed post on the sectors and national accounting using some simplistic numerical representations (if I can find certain signs on this keyboard!), but we first have to know what's what.
Again thanks. This business of taxes=cancellation of money, and bond sales not being government funding is very anti-intuitive to me, and I am groping to come to a conclusion, at which point it will either makes some amount of sense...or else it won't.
 
Again thanks. This business of taxes=cancellation of money, and bond sales not being government funding is very anti-intuitive to me, and I am groping to come to a conclusion, at which point it will either makes some amount of sense...or else it won't.
It's perhaps counter-intuitive to almost everyone who came of age in the last 45 years or so. Or who only turned attention to such things within that time-frame. It's good, if not easy, to approach it with an empty glass. Be aware though, that whether a person wants to accept or not what the nature of e.g. bond sales are, this won't change their reality.
 
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It’s certainly C-I and we/I need a Jack and Jill book for this as the terminology can be dense. I am close to giving up as I can’t spare the time required to master it. I get the simple idea behind it and will leave it there for a while.
Thanks for doing your best. I very much appreciate LeB / KS and Laughing boy for investing the effort in the face of some…resistance ;)
 
It’s certainly C-I and we/I need a Jack and Jill book for this as the terminology can be dense. I am close to giving up as I can’t spare the time required to master it. I get the simple idea behind it and will leave it there for a while.
Thanks for doing your best. I very much appreciate LeB / KS and Laughing boy for investing the effort in the face of some…resistance ;)
I know exactly where you’re coming from. Though for me it was getting my head around fairly simple concepts that seem counterintuitive. The hard part was turning everything I thought I knew upside down. Part of that is turning language upside down. We’ve been taught that deficits are bad and debts are bad. Which they are if they are our our debts and deficits, because we do actually depend on an income. But government does not depend on an income, it creates currency, it creates the money in our pockets. The money in our pocket is the government deficit. No defict, no money in our pocket. Government deficit is what we need to fund public services
 
A square of sponge with a blob of buttercream on top, the whole thing enrobed in fondant icing. Decorate to taste. Flavour the components as you see fit. They are very, very sugary indeed.

Off topic - but that is positively poetic. You silver tongued food-industry charmer :)
 
It's a good video for the consumer, but it doesn't really address the central problem. He said a strange thing:
'we have to look at the banks here, their debt interest rates are going up, but their savings rates are not going up as much.'
Aside from the unusual comparison, the banks don't lend savings, and they are the ones issuing the credit, they don't have 'debt'. The 'debt' they hold is an asset. It's of no real worry to them if the interest rate is just above zero, they only care about being paid back after a loan is extended.

What he misses in that video is what government should be doing to address rectifying the hit to supplies. And whilst some of this is out of their hands (Russia/Ukraine) and will require better organisation by some individuals, it does involve expenditure to fix long-standing problems like housing insulation, which has been left fallow for many of those those not able to pay for it themselves. Another is solar energy take-up, which again is only exploited by people with the means (and private home) to make use of it.

Money is scarce for users, not for issuers.
 
Again thanks. This business of taxes=cancellation of money, and bond sales not being government funding is very anti-intuitive to me, and I am groping to come to a conclusion, at which point it will either makes some amount of sense...or else it won't.
I thought maybe it was worth another go?

I just had a conversation where someone asked about Scandinavian countries having high taxes and 'therefore' higher spending. The implication being: the taxes....therefore the spending. And also, something which has turned up in other posts here, 'if taxes aren't funding then, why aren't taxes just eliminated?' They're legit questions to ask.

Taxation and spending do have a relationship, but it is not one where the taxation 'funds' the spending. The taxation level in e.g. Sweden points merely to the level of taxation, not what its function is. It is money cancellation, so if they redeem more, more gets cancelled. Which means more 'fiscal space'.

As for the 'cutting taxes to the bone'... Let's say that govt spending in Sweden represents 30% and that tax redemption (the money drain) is 28%. The net injection of gov spending is then 2% of GDP. If you cut out all the taxes the net injection of spending is now 30%, which is a massive rise in aggregate demand and if maintained as such will lead to inflation. If they stop spending to reduce it, the monetary economy ends.

Secondly the elimination of tax as a 'liability' - as something which forces you to need the currency - also extinguishes the only driver of currency acceptance and therefore its value.
There was a facet of the question linking the word 'income' as tax being 'income' for the government. Unfortunately this term is standard in economics, so clashes with the general notion of 'income' (or private sector 'saving'). Income for you (me, Joe Bloggs) is something you have to acquire, because you can't issue currency. For the sovereign government it isn't. We know this because practically everyone knows now that the government can issue fiat money at will. So the problem for government is not or never 'getting' money, but how to get rid of it out of the system once it is issued. That is what taxation does, one of its major functions. It is not their source, their source is the central bank's computer.

So yes, higher taxes, or better levied taxes, often means a government can spend more freely, but not because they use this as 'income' (since it is always above taxation and their source is self-created), but because more space is cleared.
 


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