Why does government funding pull workers out of the private sector?
The Unite States, let's say, has eight million construction workers. The government starts a building project, say infrastructure repair, that needs half a million workers. It will need approximately 24 billion in new taxes to pay for it. The taxpayers, corporate and personal, will reduce their spending by that amount on their private projects to pay the taxes. In effect transferring private construction into public construction. Workers simply move from one sector of the economy to another sector preforming the same jobs. You get fewer private houses and more functioning roads and bridges.
Taxes cancel out government spending. It's a simple accounting identity: Spending - Tax Revenue = Deficit.
I was referring to the mechanics of the creation and annihilation operators. I'll try again.
Government spending is largely funded by the creation of money by the central bank, which the government controls. Tax is just used to cancel out most of the money spent into the economy by the government. Without government spending there would be no money to pay tax. The amount of spending that isn't cancelled out by tax is called the deficit and adds to something called government debt.
The central bank does not fund the government of the United States directly. (Nor do other central banks fund their governments directly either.) The Federal Reserve buys a small amount of government bonds by creating an entry in a computer database declaring it money and pays with that.
Securities Held By The Federal Reserve
2024 United States Federal Budget
As you can see, the holdings of treasury securities bought and held by the Federal Reserve doesn't even equal the budget of the United States for one year, which last year was about seven trillion dollars. Almost the entire budget gets funded by personal and corporate taxation with borrowing from the public and overseas governments making up the rest of the funding.
Economically, the Covid-19 virus distorted the economy in a way that caused the Federal Reserve to print up a massive amount of money buying nearly four trillion dollars of government bonds. The media gave a fake name of "greedflation" to resulting inflation from the unnecessary expansion of the monetary base. The Fed realizing its mistake got rid of two trillion dollars of government bonds and pulled money back out of the economy, thus slowing inflation down a bit.
That aside, there is no law that says governments not borrowing from the private sector automatically leads to inflation.
It depends, if an economy grows, either naturally or through emigration, then issuing a small amount of currency does not lead to inflation or significant inflation. Given the current administration of my country which I worry will want to go off the petrodollar reserve currency and print up a round of world wide inflation similar to what Nixon did in the 1970s, I now look upon the gold standard with fondness.
It is not the opposite of MMT.
I keep forgetting that variants of a theory exist. The copy of Mosler's pamphlet mentions that if governments borrow too much and funds that borrowing with money printing you get horrid inflation. I'm sure other variants of MMT exist that ignore that reality.
You're going to have to explain this more because I have no idea what you're trying to say.
In the economy you have savers, businesses and workers, which set aside a percentage of the money they earn. This money, called liquidity, flows back out into the economy in the form of loans for business inventory purchases, construction of houses, industrial equipment purchases, the hiring of workers, getting a college degree, and hundreds of other reasons.
When government steps in and expands its borrowing, it permanently removes liquidity from the system. New borrowers cannot take on new loans for the money and they cannot engage in new economic activity, and the economy shrinks increasing unemployment. (I should note a very rare occurrence during the 1990s when the United States government stopped borrowing funds and savings increased fueling the Internet Boom.)
An extreme example of this was the Greek Debt Crisis back about fifteen years ago when the government their bailed out the banks and assumed a massive debt. It literally vacuumed up all the credit in the country and the economy collapsed. Why they saved the banks I do not know.
As an extreme example, the Greek banks collapsed around 2010 due to bad loans. Instead of acknowledging the loss, closing the bad banks, and starting over, the Greek government bailed out the banks assuming a massive liability and removing almost all the liquidity in the country. The economy went into a sever depression and they probably haven't fully recovered from the mistake.
How does the government crowd out private sector borrowing by not borrowing from the private sector?
The government expands the monetary base, that extra money goes into the banking system and becomes reserves of the various national banks. With this extra money the banks make more loans than usual which creates additional spending in the economy. Because the price determination mechanism, the increase in money pushes prices up so that each dollar purchases less.
Old loans, the majority of the loans in the form of bonds get paid back with these inflated dollars. In essence the money the savers get back from the old loans now has much less purchasing power. New loans made from the old savings cannot supply enough money to keep the economy going at the old level and you get more unemployment with inflation.
The burst of money causes an economic boost, then an economic decline, then savers eventually rebuild their savings slowly and the economy returns to the old equilibrium. A big problem occurs when the government tries to stop the economic decline by printing more money. It gets another boost followed by a bigger decline which it responds by doing more of the same making things even worse.
In Argentina savers because of inflationary policies, among others, have effectively left the banks and seek any alternative to holding money. Unfortunately, their so-called libertarian doesn't understand this simple idea. So I expect more failures.
I agree. If the USA continuously elects economically incompetent leaders then its economy will collapse.
Well, it's a bit too late in the cycle to avoid that now. Both major parties have degenerated to the point of no return. They literally make Count Bin Face in the Unite Kingdom look like a brilliant campaign strategist.
It is just a number. By itself it is meaningless. It's certainly not the worker's life savings.
Government debt matters greatly.
When it passes 100% of the gross domestic product, economic growth rates slow to 3% per year. When it reaches 200% of the gross domestic product, all economic growth essentially stops. (There are exceptions like Japan where the supersaver culture permits such high levels, but I doubt anyone could convince Americans to save anywhere near those levels.)
