Where's the Money Coming From, Part II
So we've established that money really will be forthcoming if we understand how to get it, that is, how it is created. This is a bit more difficult, indeed much too difficult and complex for a blog post. So what follows is a mere beginning or brief summary.
Money is usually defined as a medium of exchange, which we all know about and deal with every day. That's fine. But the main point about money is that it is all about borrowing, about debt. We'll get to that.
Money is a complex phenomenon that has evolved over millennia and continues to evolve. It has come to be described as an institution, that is, an accepted pattern of human behavior. Although at one time money was simply a commodity, such as cattle or, following that, gold or silver, the age of commodity money has given way to the age of paper money and other instruments. So money now is comprised of coins, paper money (usually Federal Reserve notes), demand deposits (checking accounts) and other closely related deposits, depending on how broadly economists choose to define money (M1, M2, etc.), and, more recently, credit cards.
An individual gets money at his/her bank, usually in the form of demand deposits, either from prior deposits from paychecks or from borrowing. A business enterprise gets money the same way. Demand deposits are the largest form of money in the United States. The banks that create demand deposits are part of the Federal Reserve System. The so-called Fed is the central bank of the United States, which, among other things, provides money to banks and others according to the tools at its disposal.
The Federal Reserve also provides money to the Congress and to the various other government agencies that demand it. This involves constitutions and other laws and rules and regulations. Most state governments and other governments such as cities and counties and others such as school districts are required to balance their budgets each year. But when we come to the U.S. Congress, we see that it does not have to balance its annual budget. It passes a budget each year, now in the trillions of dollars, which may be balanced but usually projects a deficit, usually of some hundreds of billions of dollars. Earlier we were talking monetary policy, which mostly involves the rate of interest and strongly affects the level of economic activity, that is Gross Domestic Product (GDP). Now we're talking fiscal policy, which may have an even greater effect on GDP. Here's where we see that nation-states can borrow the huge sums. Here's where we see where the real money is coming from, that is, from borrowing from the taxpayers, from you and me when we pay our federal income taxes.
Not surprisingly, there are arguments about how the process or the system works. I accept the theory of the endogeneity of money, which is that money is created in response to demand for money. In other words, money doesn't appear--that is, it isn't created-- unless someone demands it. The alternative to the endogeneity idea is the idea of the exogeneity of money, meaning that it is created by the issuer, which of course it is, but without mention of demand.
So it looks like we could afford universal health care, seeing we're spending twice as much per capita now as, say, Canada, with less coverage and not-as-good outcomes. But now we're getting into macroeconomics, not to mention political philosophy and a theory of human nature. And what about the skills and education of the labor force, and what about natural resources like water power and minerals? And aren't we reading about consumer confidence? The list goes on about things we have to understand.
Money is usually defined as a medium of exchange, which we all know about and deal with every day. That's fine. But the main point about money is that it is all about borrowing, about debt. We'll get to that.
Money is a complex phenomenon that has evolved over millennia and continues to evolve. It has come to be described as an institution, that is, an accepted pattern of human behavior. Although at one time money was simply a commodity, such as cattle or, following that, gold or silver, the age of commodity money has given way to the age of paper money and other instruments. So money now is comprised of coins, paper money (usually Federal Reserve notes), demand deposits (checking accounts) and other closely related deposits, depending on how broadly economists choose to define money (M1, M2, etc.), and, more recently, credit cards.
An individual gets money at his/her bank, usually in the form of demand deposits, either from prior deposits from paychecks or from borrowing. A business enterprise gets money the same way. Demand deposits are the largest form of money in the United States. The banks that create demand deposits are part of the Federal Reserve System. The so-called Fed is the central bank of the United States, which, among other things, provides money to banks and others according to the tools at its disposal.
The Federal Reserve also provides money to the Congress and to the various other government agencies that demand it. This involves constitutions and other laws and rules and regulations. Most state governments and other governments such as cities and counties and others such as school districts are required to balance their budgets each year. But when we come to the U.S. Congress, we see that it does not have to balance its annual budget. It passes a budget each year, now in the trillions of dollars, which may be balanced but usually projects a deficit, usually of some hundreds of billions of dollars. Earlier we were talking monetary policy, which mostly involves the rate of interest and strongly affects the level of economic activity, that is Gross Domestic Product (GDP). Now we're talking fiscal policy, which may have an even greater effect on GDP. Here's where we see that nation-states can borrow the huge sums. Here's where we see where the real money is coming from, that is, from borrowing from the taxpayers, from you and me when we pay our federal income taxes.
Not surprisingly, there are arguments about how the process or the system works. I accept the theory of the endogeneity of money, which is that money is created in response to demand for money. In other words, money doesn't appear--that is, it isn't created-- unless someone demands it. The alternative to the endogeneity idea is the idea of the exogeneity of money, meaning that it is created by the issuer, which of course it is, but without mention of demand.
So it looks like we could afford universal health care, seeing we're spending twice as much per capita now as, say, Canada, with less coverage and not-as-good outcomes. But now we're getting into macroeconomics, not to mention political philosophy and a theory of human nature. And what about the skills and education of the labor force, and what about natural resources like water power and minerals? And aren't we reading about consumer confidence? The list goes on about things we have to understand.
posted by Gladys at 9:54 AM
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