Back: Money is Finite? Nope Top: Getting Money Right

The Government Must Tax or Borrow to Spend? Unh-unh

There's lots of loose talk about your taxpayer dollars paying for this and that. That's bunk when applied to the sovereign. The issuer of the money can buy anything that's for sale in the society. It doesn't need to wait around for taxes to get paid. Indeed, the causality is exactly reversed: the goverment as issuer must spend so that taxes can be paid! Fiat money is created by goverment spending. When the sovereign pays a subject, the subject gets money which can be used for taxes and as claims against goods and services for sale elsewhere in the society. Money is born. The part that doesn't go for taxes can circulate in exchanges of resources among other subjects.

The flip side to fiat money creation by sovereign spending is destruction of fiat money by taxation. Money dies. When taxes are paid, fiat money is destroyed. Now we have the whole money lifecyle: spent into existence by the sovereign, circulated among the subject parts of society, and eventually extinguished with payment by subjects of taxes, fees, fines, etc.

Let me reiterate: taxes do not fund sovereign spending. Indeed, the sovereign must spend so that taxes can be paid!

Most sovereigns, as a policy choice, emulate commodity money by issuing debt to match the difference between sovereign spending and taxation. This sovereign debt is a special asset for subjects. Unlike debt issued by a subject, for which an involuntary default is always a risk, the sovereign issuer of fiat money can never be forced to default. Sovereign default is entirely voluntary and only by policy choice, never by necessity. Because the risk of sovereign default should be nil, sovereign debt is a benchmark asset and fundamental store of financial wealth. Only the most reckless and irresponsible of sovereigns would choose to default on its debt as long as that debt is denominated in its own money.

Although the sovereign may issue debt corresponding to the excess of spending over taxation, or in any other amount, it need not do so. Debt issuance is a policy choice. As a practical matter, debt issuance with payment of interest is a subsidy for the wealthiest segments of society. Without interest-bearing sovereign debt, the only financial asset free of default risk would be the non-interest bearing money itself. The issuance of interest-bearing sovereign debt is a policy choice.