Friday, October 4, 2013

Jamie Galbraith: Government Doesn’t Have to Borrow to Spend

When the Treasury writes a check, a bank credits an account. That's money creation. Treasury bonds absorb money, but aren't needed.

Jamie Galbraith on endogenous money and US Debt in NYTimes:
The debt ceiling was enacted in 1917 for one purpose: to fool the rubes back home. Just as Congress started running up debts to pay for the war, they voted in the ceiling to pretend otherwise. And that is why whenever reached, it must be raised.

The debt ceiling is also an anachronism. It is based on the idea that the government must raise money from elsewhere, before it spends. That was true in the days of gold. It hasn't been true, for this country, since at least the creation of the Federal Reserve back in 1913.

In the modern world, when the Treasury writes you a check, your bank credits your account. That's how money creation works. The Treasury then issues bonds to absorb that money. Banks like this because bonds pay more interest than reserves. But there is nothing economically necessary about the bonds. This is obvious since the Federal Reserve buys back many of them, leaving the public with the cash it would have had in the first place.
Read rest here.

1 comment:

  1. Levels of ignorance amongst so called professional economists in this area are of staggering proportions. Jamie Goldsmith is of course right to say that government can simple create new money and spend it – without borrowing. Keynes amongst many others made that point.

    But what’s truly hilarious is that numerous so called professional economists don’t seem to realize the above. I.e. they don’t understand the basics of how central banks work or the relationship between central banks, governments, national debts, the monetary base, etc etc. See:


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