4 ms·

On a purely logical level, for sovereign nations issuing their own currency, taxation is completely decoupled from spending. You can increase taxes if there's

On a purely logical level, for sovereign nations issuing their own currency, taxation is completely decoupled from spending. You can increase taxes if there's an economic reason for doing so, but it is not a prior constraint on spending.

dllthomas 13y ago
Not if you think runaway inflation is a problem. With fractional reserve banking, printing $1 adds well more than $1 to the economy (look at charts of M0 vs M1 vs M2). The government only gets to spend that $1. Meanwhile, threat of inflation makes it harder for the government to borrow money, meaning it needs to print more to cover the increased demands for interest. This is not to say that printing any money ever is a disaster, but simply that there are absolutely constraints imposed by economic realities.
- kaonashi 13y ago
  This assumes an erroneous loadable funds model where loans are supply driven; loans have always been demand driven. It's the same reason why QE isn't inflationary, just because there's more reserves in the system doesn't magically make creditworthy borrowers show up.
  - dllthomas 13y ago
    Doesn't adding dollars to the economy (through payment rather than loan) increase the ability to repay loans of those paid, those paid by those paid, etc, and thus their corresponding creditworthiness? Also, if people have money to spend, companies will borrow to service their needs. It's not about the ability of the banks to loan the money out (which is part of why QE isn't very meaningful).
    - kaonashi 13y ago
      It depends entirely on where it's added. If it is added where it will directly translate to demand (e.g. eliminating payroll tax) then you will get more spending, which will cause businesses to hire, take on loans to meet the new demand. At some point if you keep adding, you will surpass the ability of the market to absorb the demand and you will get inflation. If it is added on top of already flush corporate balance sheets (e.g. eliminating corporate taxes), then you most likely won't see much difference in the current environment. They won't use it to hire more people because the demand isn't there. Loans in and of themselves don't add net dollars to the private sector, as they create a liability for the exact amount of the loan (plus interest). For the domestic private sector to experience a net increase in financial assets, either the sovereign government (whoever's name is on the money) or the foreign sector must increase its deficit.

dllthomas 13y ago

Not if you think runaway inflation is a problem. With fractional reserve banking, printing $1 adds well more than $1 to the economy (look at charts of M0 vs M1 vs M2). The government only gets to spend that $1. Meanwhile, threat of inflation makes it harder for the government to borrow money, meaning it needs to print more to cover the increased demands for interest. This is not to say that printing any money ever is a disaster, but simply that there are absolutely constraints imposed by economic realities.

kaonashi 13y ago
This assumes an erroneous loadable funds model where loans are supply driven; loans have always been demand driven. It's the same reason why QE isn't inflationary, just because there's more reserves in the system doesn't magically make creditworthy borrowers show up.
- dllthomas 13y ago
  Doesn't adding dollars to the economy (through payment rather than loan) increase the ability to repay loans of those paid, those paid by those paid, etc, and thus their corresponding creditworthiness? Also, if people have money to spend, companies will borrow to service their needs. It's not about the ability of the banks to loan the money out (which is part of why QE isn't very meaningful).
  - kaonashi 13y ago
    It depends entirely on where it's added. If it is added where it will directly translate to demand (e.g. eliminating payroll tax) then you will get more spending, which will cause businesses to hire, take on loans to meet the new demand. At some point if you keep adding, you will surpass the ability of the market to absorb the demand and you will get inflation. If it is added on top of already flush corporate balance sheets (e.g. eliminating corporate taxes), then you most likely won't see much difference in the current environment. They won't use it to hire more people because the demand isn't there. Loans in and of themselves don't add net dollars to the private sector, as they create a liability for the exact amount of the loan (plus interest). For the domestic private sector to experience a net increase in financial assets, either the sovereign government (whoever's name is on the money) or the foreign sector must increase its deficit.