I was recently interviewed by Redacted Tonight’s Lee Camp about the myths of money & history that led to the present political crisis:

We couldn’t cover everything so I want to briefly follow-up on how government spending works.

Governments like to claim they can run out of money, but this terminology relates to the gold-standard, which was abandoned by most of the world during the 1930s and by the US in 1971. Governments that issue their own currencies cannot run out of money.

How money is created

Spending is ‘paid for’ when approved by Congress (or the Upper and Lower Houses). The government decides how much. Spending occurs from a Treasury account at the central bank, which it controls, putting additional reserves into the banking system.

Normally, reserves have to be withdrawn again for central banks to control interest rates. Reserves are withdrawn when government bonds are issued. Treasury instructs the central bank to release a certain amount for sale. The proceeds flow out of the economy as reserves move out of the banking system.

Quantitative Easing has meant banks have had excess reserves in recent years, so central banks have instead set rates by paying interest on reserves, meaning there has been no good reason for selling government bonds at all, except to meet the conventions of various legal systems, which were not designed for the situation created by the 2008 financial crisis.

Every dollar the government spends adds to the money supply and bank reserves, every dollar of taxation reduces it. Taxes do not need to be collected before they are spent. Government cannot spend without limit or inflation will increase, however:

a) This is where taxation comes in; and

b) inflation is only a problem when demand for basic resources exceeds supply.

The idea governments can make less money from us if we had more of it is a fallacy. The more we have to spend, the more funds can be collected in taxes.

Remember this next time the government claims it doesn’t have the money.

Claire Connelly

Claire Connelly

Claire Connelly is the lead writer of Renegade Inc. An award-winning freelance journalist, speaker, and founder of subscription journalism experiment, Hello Humans.

Specialising in economics, technology and policy, Connelly is working on her first book due out in 2018.

With more than a decade of experience under her belt, Claire has written for leading publications including The Australian Financial Review, The Saturday Paper, ABC, SBS, Crikey, New Matilda, VICE & others. She is the co-host of The Week In Start-Ups Australia, and features regularly as a commentator on TV and radio shows including Radio National's Download This Show, ABC's The Drum, Ten's The Project, and more.
Claire Connelly

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7 thoughts on “But where will we find the money?

  1. And where does debt come in? As long as all the money is being created by a bank in the form of a loan, there is an interest charge. Since money is created as a loan, but the interest needed to pay back that loan is NOT created, additional loan creation is necessary. So, whenever spending occurs, that means borrowing has occurred, and that means we are short that much more interest. Why do you think taxes and prices keep going up? All of us, from the highest government down to every individual are scrabbling to capture loan principle, so we can pay back our principle plus interest payments. The total money supply, will always be less than the total money supple plus interest. P<P+I

    1. I think the interest is factored into the initial calculation, when borrowing. The repaid interest component on the loan, goes back to the lenders. With commercial banks this interest component is then relent again to new borrowers. With a fiat currency and free floating exchange rates central governments can spend into the economy without having to borrow.

    2. Government created money is a net credit operation, These ops can only occur with the central bank and treasury. The debt is why the creation occurs and the debt is paid off by it. It’s not a loan and not involves interest as the money creation resolves the debt.

  2. Additionally, we always hear that ‘our children will be paying this debt’. This is also a lie. Bonds are issued to raise money, bought by other central banks, and then they sit until traded, or until they expire. They do last a long time, but they are never ‘repayed’ any more than all the notes in your wallet will one day be taken to the Reserve Bank to be exchanged for gold.

    Thanks Claire.

  3. ” Spending occurs from a Treasury account at the central bank, which it controls, putting additional reserves into the banking system. ”

    This suggests that the credits in Treasury’s account at the central bank are a form of money. They are not reserves, because Treasury is not a bank (i.e. not a depository), and clearly they are not bank credit money. In short, Treasury’s account is not a transaction account, but rather, it is an operating account. Money is not transferred from anywhere when the federal government spends. New money is created in an account of the payee, and new reserves are commensurately created for the payee’s bank.

  4. The loan created by money printing is between government request and private central bank delivery. The private bank produces the amount requested and the government raises the funds required to pay the central bank for doing so from taxpayers, a never-ending debt based wonderful scam. There is no need for discriminatory poverty, the basic wage could cover all basic needs needs and be self financing

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