Thursday, February 19, 2009

Deficit Spending...

Nice, concise, operationally focused discussion of what precisely happens when the U.S. engages in deficit spending from the great Warren Mosler. As I have said before, reserve accounting in a floating currency world produces some "strange" (to mainstream economic textbook) consequences. Non-convertible currency deficit spending does not produce a "debtor nation". Inflation, inflation, inflation is the policy concern.

Operationally, this is how $100 billion of deficit spending ‘works’ to ADD to nominal savings of financial assets:

1. The Treasury sells $100 billion of treasury securities.

2. Paying for the new securities reduces member bank balances held at the Fed by $100 billion.

3. And our holdings of treasury securities increase by $100 billion.
Quick recap-

4. The Treasury spends the $100 billion it got from selling us the $100 billion of new treasury securities.

5. This increases member bank balances at the Fed by $100 billion.


Bank balances are back where they started from.

Our holdings of treasury securities, which are financial assets and saving, have increased by $100 billion.

Conclusion and proof:

Government deficit spending of $100 billion necessarily increases savings of financial assets by $100 billion.

No comments: