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What is the book The Deficit Myth about?
The Deficit Myth is written by Stephanie Carlton, an economist in modern monetary theory and a former staffer for Democratic politician Bernie Sanders. In this book, she explains the concepts of modern monetary theory in a popularized way and explains why government deficits are not necessarily a problem for countries with monetary sovereignty. For those who are not familiar with modern monetary theory, this is a good popularization book to understand different economic theories.
Since the author is an economist and a staff member of the Democratic Party, this book not only discusses the concept of deficits from an economic perspective, but also touches on some political and policy discussions. After reading the book, I think that the actual policy discussions are a bit subjective and the analysis is not well-presented, however, the theoretical operation is well explained, and the non-executive explanations are worth reading. I would like to share some of my personal understanding and thoughts after reading the book, which may not exactly match with the content of the book.
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Currency Sovereignty
Before we look at deficits, it is important to understand what monetary sovereignty is. Monetary sovereignty is when a country is free to print its own money and thus control how much of its own money circulates in the market. This is known as printing money.
A country with a sovereign currency still needs to borrow money?
Countries that have monetary sovereignty can spend unlimited amounts of money because they can print money. Imagine if I owe someone money today, I can always print money to pay them back. As long as the currency is still accepted in the market, even if you owe money, you can always print money to pay it back. If money can be generated at the push of a button, why do countries still need to borrow money? We can think of two reasons:
- The reason for the economy is the need to control the supply of money. If too much money is provided in the market, it will cause inflation. Simply put, if everyone has a lot of money in their hands, there is a limit to the number of goods that can be sold, so prices will rise. If everything goes up in price indefinitely, then the existence of money is meaningless, and trust will probably be lost, and we will go back to the days of bartering.
- On the other hand, the State does not want the people to think that they can get pocket money at any time without having to work, so it may not be a good idea to provide the people with unlimited funds easily. Many people may worry that if everyone does not have to work, real productivity will be lowered. If people do not work, then the whole country and even the world will be in trouble.
On the other hand, the state can control the amount of money that circulates in the market by using national bonds, taxes, etc. People who have more money (perhaps from other countries) will give it to the state because they can earn interest on it, or because it is required by law, and so on, and so on, so that there is less money actually available in the marketplace. This is why it is always said that interest rates control inflation.
What happens when you print money?
The government can gather or release more money by printing money, collecting taxes, or issuing bonds. When the state prints new money, it increases the money supply and more money enters the private market. Therefore, we can understand that banknotes are resources that are transferred between the private sector and the government (both domestic and foreign).
When the government prints new money, the main question is whether the new money can be used wisely and how to create value. The question then becomes "how to spend the money" rather than simply "whether to print money". On the government's part, through budgetary control and policy tools, it is possible to decide how to utilize the funds that the government has recovered. If the money is released directly to the public, the public will also utilize the money.
Therefore, can the Government print unlimited banknotes?
From the Government's point of view, the impact of the use of funds on the community can be broadly considered in two simplified versions of the possibilities.
- Excessive government spending may lead to inflation, making it more difficult for the poor to survive and causing social instability.
- The extra money can be used to create jobs or even directly subsidize the poor, closing the gap between the rich and the poor, providing jobs, creating more productivity and innovation, and may also be a condition for a more stable and progressive society. By stabilizing consumer incomes, employment security prevents consumers from having to over-adjust their expenditures, which in turn prevents extreme price fluctuations. By fixing the price of labor, employment security can provide greater stability.
In fact, the government does not need to and should not be committed to paying down the debt. Several debt-free situations in U.S. history have resulted in subsequent economic depressions because they drained the public of available funds.
We can see from this that the way in which funds are utilized is actually quite important. Monetary policy may help, but it is fiscal policy (tax and spending adjustments) that takes the wheel. Under different circumstances, for the sake of social stability, the government should probably spend more money rather than eliminating all debt deficits. Balancing the system is more of an art. If it is used in such a way as to create deficits, it can eliminate the gap between the rich and the poor, which has an effect similar to that of tax revenue. The government's upper limit on money printing should be based on the overall consideration of the economy's ability to absorb the additional spending in a reasonable way without accelerating inflation.
The government's budget process is very important and it should take the risk of inflation into account. If there are millions of people looking for paying jobs, and our economy has the ability to produce more goods and services without raising prices, then there is fiscal space to spend those resources on productive employment, and how that fiscal space is utilized is a political question.
The reasoning is similar when we consider the economic relationship between our own government and foreign countries. Trade should not be considered purely in terms of winners and losers, but the most important aspect of policy is the distribution of real resources, social needs and environmental benefits.
For governments with monetary sovereignty, it can be said that getting money is easy; the real challenge is managing the available resources. A government that can print money is not afraid to borrow money; borrowing money is just a matter of system control. The real problem is whether the money, once generated, can achieve the goal of producing equal value and distributing the surplus rationally. If it cannot do so, it will not be able to control inflation, which will cause real economic problems.
The conclusion is that the government cannot print unlimited money and spend it recklessly, but setting a limit is not that simple. Whether or not it is spending money recklessly depends on how the money is used and whether it can effectively drive resources.
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