Alright, as I always say... all I do is care about the truth. And today I learned that I have been telling some fraudulent lies just like Willie and Snoop.
Taxes can in fact be used to pay off the debt!!
Where I went wrong was forgetting that the Treasury can in fact create reserves in the system by creating deposits. So as long as the Fed has securities to back up the deposits in the system, then the Treasury can replace T-Deposits with Reserves. How can I miss that???
BUT, paying off the debt still decreases the net equity of the private sector and in fact makes everyone poorer. Let's dive in to the world of how I came to this conclusion. Now this might jiggle people's light bulbs. You notice that the country has to be in debt in order for money to be created?
Alright, let's take a hypothetical approach of what it would be like to start a fiat driven economy like America's system. Fiat money has to be "created" out of nothing. So pretend you and I were in the country and we had a hypothetical Government.
The Government wants to pay us to start building roads. Now we have to introduce fiat money in to the system.
So there are two ways a fiat money system can work. The Government can just credit our accounts and take seigniorage over the currency or, we can do it how we do it, in which the Government introduces the currency via debt.
So in our hypothetical country... the country wants to pay us $1000 a piece to build some roads. They issue $2000 in debt. But no one has $2000 to lend them.
Soooo... we go to Bank A, who says alright we will lend you $2000 in exchange for an account with the Treasury. So bank A's balance sheet looks like
A | L
Treasuries $2000 | TT&L Account $2000 (Money the treasury can spend)
So now there is no real money in the economy. Just paper being exchanged. So the chicken and the egg approach would need the Federal Reserve.
So now the Federal Reserve pays the bank $2000 for Bank A's Treasuries. This is how reserves are created. But you notice that the Federal Reserve didn't create any real $.
Bank A's new balance sheet
A | L
Reserves $2000 | TT&L Account $2000
Now the Federal Reserve has
A | L
Treasuries $2000 | Reserves $2000
Now the Government wants to give you and I $1000 a piece, so they spend the $2000 from the TT&L Account. Bank A now looks like
A | L
Reserves $2000 | Deposits $2000
Notice how we have $2000 and the Government is $2000 in debt. The country has to create the fiat money before anyone has the money in which to pay taxes or purchase debt from the secondary market.
Now the Fed's issue $1000 in currency so that the banks can lend us some money
Fed balance sheet
A | L
Treasuries $2000 | Reserves $1000 + Currency $1000
A year goes by and the Government issues out $5000 in debt and once again Bank A lends money to the Govt for them. Now what happens?
Bank A
A | L
Reserves $2000 | Deposits $2000
Treasuries $5000 | TT&L Account $5000
Now what does the Country's balance sheet look like?
United States of America
A | L
Negative Equity - $2000 | Treasuries $7000
TT&L Account - $5000
So now the Government pays us $5000 total.
Bank A
A | L
Reserves $2000 | Deposits $7000
Treasuries $5000
Once again, the Government is now $7000 in debt, yet we have $7000 in our accounts. Now say that you purchase the $5000 of Treasuries on the secondary market from Bank A. Watch the magic that happens
Bank A
A | L
Reserves $2000 | Deposits $2000
Now the private sector (aka you and I) have a balance sheet like this
A | L
Deposits $2000 | Equity $7000
Treasuries $5000
So now, the Government taxes $2000
Bank A
A | L
Reserves $0 | Deposits $0
Federal Reserve
A | L
Treasuries $2000 | TT&L Account $2000
Private Sector
A | L
Deposits $0 | Equity $5000
Treasuries $5000
Now, if the Treasury used their TT&L Account to pay off the $2000 of maturing debt... what would happen?
Bank A
A | L
Reserves $2000 | Deposits $2000
Private Sector
A | L
Deposits $2000 | Equity $5000
Treasuries $3000 |
Federal Reserve
A | L
Treasuries $2000 | Reserves $2000
Country
A | L
Neg Equity $5000 | Treasuries $5000
As you can see though, the destruction of debt, destroys the equity of the private sector. The creation of debt increases the equity.
So I was very wrong about the taxation issue, but I'm still correct about debt being the basis for money creation. The fact of the matter is, paying off the national debt would drain all money out of the economy.
Taxes can in fact be used to pay off the debt!!
Where I went wrong was forgetting that the Treasury can in fact create reserves in the system by creating deposits. So as long as the Fed has securities to back up the deposits in the system, then the Treasury can replace T-Deposits with Reserves. How can I miss that???
BUT, paying off the debt still decreases the net equity of the private sector and in fact makes everyone poorer. Let's dive in to the world of how I came to this conclusion. Now this might jiggle people's light bulbs. You notice that the country has to be in debt in order for money to be created?
Alright, let's take a hypothetical approach of what it would be like to start a fiat driven economy like America's system. Fiat money has to be "created" out of nothing. So pretend you and I were in the country and we had a hypothetical Government.
The Government wants to pay us to start building roads. Now we have to introduce fiat money in to the system.
So there are two ways a fiat money system can work. The Government can just credit our accounts and take seigniorage over the currency or, we can do it how we do it, in which the Government introduces the currency via debt.
So in our hypothetical country... the country wants to pay us $1000 a piece to build some roads. They issue $2000 in debt. But no one has $2000 to lend them.
Soooo... we go to Bank A, who says alright we will lend you $2000 in exchange for an account with the Treasury. So bank A's balance sheet looks like
A | L
Treasuries $2000 | TT&L Account $2000 (Money the treasury can spend)
So now there is no real money in the economy. Just paper being exchanged. So the chicken and the egg approach would need the Federal Reserve.
So now the Federal Reserve pays the bank $2000 for Bank A's Treasuries. This is how reserves are created. But you notice that the Federal Reserve didn't create any real $.
Bank A's new balance sheet
A | L
Reserves $2000 | TT&L Account $2000
Now the Federal Reserve has
A | L
Treasuries $2000 | Reserves $2000
Now the Government wants to give you and I $1000 a piece, so they spend the $2000 from the TT&L Account. Bank A now looks like
A | L
Reserves $2000 | Deposits $2000
Notice how we have $2000 and the Government is $2000 in debt. The country has to create the fiat money before anyone has the money in which to pay taxes or purchase debt from the secondary market.
Now the Fed's issue $1000 in currency so that the banks can lend us some money
Fed balance sheet
A | L
Treasuries $2000 | Reserves $1000 + Currency $1000
A year goes by and the Government issues out $5000 in debt and once again Bank A lends money to the Govt for them. Now what happens?
Bank A
A | L
Reserves $2000 | Deposits $2000
Treasuries $5000 | TT&L Account $5000
Now what does the Country's balance sheet look like?
United States of America
A | L
Negative Equity - $2000 | Treasuries $7000
TT&L Account - $5000
So now the Government pays us $5000 total.
Bank A
A | L
Reserves $2000 | Deposits $7000
Treasuries $5000
Once again, the Government is now $7000 in debt, yet we have $7000 in our accounts. Now say that you purchase the $5000 of Treasuries on the secondary market from Bank A. Watch the magic that happens
Bank A
A | L
Reserves $2000 | Deposits $2000
Now the private sector (aka you and I) have a balance sheet like this
A | L
Deposits $2000 | Equity $7000
Treasuries $5000
So now, the Government taxes $2000
Bank A
A | L
Reserves $0 | Deposits $0
Federal Reserve
A | L
Treasuries $2000 | TT&L Account $2000
Private Sector
A | L
Deposits $0 | Equity $5000
Treasuries $5000
Now, if the Treasury used their TT&L Account to pay off the $2000 of maturing debt... what would happen?
Bank A
A | L
Reserves $2000 | Deposits $2000
Private Sector
A | L
Deposits $2000 | Equity $5000
Treasuries $3000 |
Federal Reserve
A | L
Treasuries $2000 | Reserves $2000
Country
A | L
Neg Equity $5000 | Treasuries $5000
As you can see though, the destruction of debt, destroys the equity of the private sector. The creation of debt increases the equity.
So I was very wrong about the taxation issue, but I'm still correct about debt being the basis for money creation. The fact of the matter is, paying off the national debt would drain all money out of the economy.
