Tuesday, May 19, 2009
Another misleading and misinformed article by some widely followed blogger
Some blog site named, "Zero Hedge" (should be named, Zero Brains) had a piece about rising deficits and how the government was going to have to "monetize the debt." (Buy its own bonds.)
This doesn't happen in a floating FX, non-convertible currency world simply because the gov't spends by crediting bank accounts, meaning the "money" is always there to buy the bonds and the sale of bonds is merely to manage reserves and support an interest rate.
Here's the article if you care to read it. Tax Revenues Tanking.
I posted the following comment on Zero Brains' blogsite:
The Federal Gov't spends by crediting bank accounts and that spending adds to the level of reserves in the banking system. Those reserves are then swapped for an interest bearing account known as a Treasury. There is no "monetizing of the deficit." Deficits add to the level of savings of the non-governmental sector as indicated in this basic accounting identity from macroeconomics:
Spvt = (Y + NFI - T + TI + TR) - C
NFI=Net foreign income
TI=Interest paid on the debt
TR=Transfer payments made by gov't
As you can see from the above equation, the greater the deficit becomes (as a result of higher transfer payments, falling tax revenues and interest paid), the higher the level of private savings.
This is why private savings are currently at or near record levels! Gov't spending is the cause.
Your conclusions are completely misinformed.