Re: On Budget Deficits

From: cantueso (cantueso_at_dieznet.com)
Date: 08/14/04 

Date: 14 Aug 2004 00:22:16 -0700

William F Hummel <wfhummel@comcast.net> wrote in message news:<d8rph0pcm7ac9nr3ph0cllbikfn7j6c2r6@4ax.com>...
> On 12 Aug 2004 23:48:09 -0700, cantueso@dieznet.com (cantueso) wrote:
>
> >William F Hummel <wfhummel@comcast.net> wrote
> >>
> >""""Indeed there is no practical limit to what the government can
> >spend
> >under a fiat money system. The only constraint is self-imposed. """
> >
> >if this is so, then why does the government tax at all?
> >or rather why would a government tax individuals instead of using
> >taxes only to encourage some activities and discourage others?
>
> WHAT the government taxes is a function of how it chooses to
> distribute the tax burden. WHY the government taxes is an entirely
> different matter. I'll give you an analogy that should explain why
> taxes are necessary.
>
> Imagine a hydraulic loop representing the flow of fiat money between
> the government and the banking system. We start with a reservoir of
> bank reserves created by government spending that contains both
> required reserves and excess reserves. The excess reserves must be
> continually drained. Otherwise the Fed could not maintain control of
> the Fed funds rate, which is the interbank lending rate on reserves.
>
> The government can drain excess reserves in one of two ways, by taxing
> or borrowing. Borrowing depends on the willingness of the public to
> lend, and is therefore voluntary. However taxes are not voluntary.
> They act as the pump in the hydraulic loop. Take away the pump and
> there is nothing to ensure the excess reserves can be drained. Note
> that the pump only needs to drain what borrowing fails to drain. Thus
> the flow through the pump can be a fraction of the total spending by
> the government.
>
> To the extent that the government borrows, the public will build up a
> separate reservoir of government securities. The financial wealth of
> the public increases as the reservoir of securities increases. There
> is no practical limit as to how large that reservoir can be, which is
> equivalent to saying there is no practical limit to how much the
> government can spend.
> >
> >and could you tell me whether in this regard the US currency is
> >different from other currencies?
>
> I don't know of any example of a major currency in which taxes are not
> an essential part of the system. However there may be some countries
> that can avoid taxes by riding piggy back on the US monetary system,
> i.e. pegging their own currency to the dollar.

it is very hard to see things like that.

not too long ago, in some Swiss towns, the taxes were voted by the
inhabitants, and most of the tax money was to be spent by the town
government. ("do you want a new road? in this case the tax will be 1%
more. should the teacher get a raise? in this case we'd have to
postpone the acquisition of a new church bell." etc)

now I will have to see how what you say fits in. you say there is no
practical limit on how much the government can spend. the government
spending turns into assets that people keep in their drawers.

seen like that, what happened in Germany at the end of the war? people
had tons of money and could not buy anything with it. would you say
that the government had gone beyond the "practical limit"? stated in
 terms of your hydraulic loop analogy, what went wrong?

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