Perhaps the following thought experiment helps to understand how this is possible.If you imagine two drawers, each representing an account. The first drawer contains 100 gold coins and the second is empty. Also imagine that there are no other gold coins available at this time. Let's call the first drawer account A and the second account B. Now if you want to transfer 30 gold coins from account A to account B, you would actually first have to take the coins out of drawer A and then place them into drawer B. Account A will then necessarily have 30 coins less in it. Now imagine accounts A and B are held in a computer as electronic money. Instead of 100 gold coins, account A only contains the computer generated number '100' and account B shows '0'. To get account B to show a balance of '30', it would now simple be necessary to change the '0' to '30' on the computer. The need to raid account A and to take '30' from the number '100' before you could credit account B does not exist. Money is created as it is entered in B's account irrespective of whether A's account is debited before or after this process or not at
Austerity vs Prosperity v0
MMT Fiscal position
The essence of MMT
A Simple National Income Macroeconomic Model Continuous Time
Macroeconomics Textbook Overview
Full Employment Policy
Irrational rejection of ''Modern Monetary Theory''.
Government Spending (Current Practice)
Government Spending at a certain point leads to spending in excess of tax receipts. This will automatically lead to the issue of treasuries in the belief that the excess spending must be financed by borrowing (although the government has the capacity to create money). This in turn will increase the national debt.
Consequences that follow from this practice:
1) That national debt increases whenever the government spends in excess of tax receipts.
2) That the government must pay interest on the debt issued, which in turn increases and reinforces the need for government spending.
3) That the interest paid on treasuries will increase private sector income.
There is an alternative view, supported by Modern Monetary Theory, of how government spending can proceed. Please see this Insight:
History of Economic Thought
A Simple National Income Macroeconomic Model
Unemployment and Inflation Theory and Policy
Clone of Austerity vs Prosperity
This model shows the basic functioning and dynamics of a 'modern monetary system'.
The non-government sectors, consisting of the private and foreign sectors initial y starts with zero currency units. It is important to realize that after creating a new currency the government must first spend currency units into the economy before they can be used: without currency units the private sector could not even pay taxes! A government that has its own freely floating currency can create a much money as it wants. It does not need tax receipts to finance its spending, and any money it spends into the economy above that collected in taxes represents income for the private sector. The model show that the government initially created 9 trillion money units, but spent only six trillion into the economy. The six trillion showed up as a government deficit, but also as wealth in the non-government sector.
Since the government can create as many money units as it wishes and transfer them to the private sector to ensure an adequate level of demand in the in the economy, austerity is unnecessary: money is available, though real resource may be scarce. This also shows that the government can contribute actively towards the creation of prosperity.
Please note that this model was originally created by Gene Bellinger, IM 3206, from which this version was cloned.