Wednesday, January 08, 2014

Diagrams and dollars

How money really works

DIAGRAMS & DOLLARS: modern money illustrated (Part 1)
DIAGRAMS & DOLLARS: modern money illustrated (Part 2)

The government creates money; it does not need to collect taxes or borrow money from the private sector (or other countries) to pay for what it wants. The only way for people in the private sector to get money is for the government to give it to them; the government can create money and either and buy stuff with it or give it to people. Taxes are used to give value to money and to drain excess money from the private sector to control inflation. Government "debt" is just a mechanism to move large amounts of money out of circulation to control inflation, and government "debt" is just net private financial wealth.

1 comment:

  1. A very nice pair of posts those but I couldn't help thinking that "as long as price inflation is undercontrol" was a band aid on a sinkhole in the sense that keeping price inflation under control introduced many of the limits which start pushing you back to something that looks a little more like the first diagrams in essence.

    Still, a very interesting and enlightning couple posts. Thanks for pointing them out.


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