Fri May 25th, 2012 at 04:29:20 AM EST
Reading here on ET has given me a few ideas as to how government finance and the money supply work. I'm curious to see what people think, and to have my thinking corrected by the infinite font of wisdom that is ET.
- Money is created by government spending and bank lending.
- Money is destroyed by taxation.
- The purpose of taxation is not to fund government, but to manage the money supply, and to penalize or support certain activities in the economy.
- There is no special connection between government spending and inflation - government spending is an inflation driver only in the circumstances in which the same spending by private entities would be inflationary.
- Maintaining a connection between government spending and taxation is completely pointless.
If these are reasonably correct, then what exactly are the outer boundaries for a workable system of government finance?
front-paged with minor edits by afew
- What is the purpose of Treasury Bonds? They are certainly not funding the government - so what are the doing? Could they be dispensed with entirely?
- Rather than destroying money via taxation, would it be more sensible to regulate the monetary supply by limiting the ability of private banks to create money? Or banning it altogether, and centralizing monetary creation entirely in a central bank?
- Is modern econometric data sufficient for the management of inflation through targeted destruction of inflationary pressure via taxation to be possible? That is, if taxation is to be used as a tool of monetary destruction, and not of government funding, then can that tool be used with sufficient agility?
Part of the Socratic Economics series