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Notes to myself, possibly of interest to others.
-- Bill Northlich

Monday, March 18, 2013

DeLong: Clear thinking (and writing) about government debt, deficits, and the resultant impending doom.

DeLong: Briefly: (a) federal government spending creates fiat money--liquid debt of the federal government. This money can then be uncreated by (b) levying taxes or by (c ) open-market operations that transform non-interest paying reserve deposits into interest-paying federal debt. Whether you do (b) or (c ), and how much you do of (b) or (c ), are technical financing decisions, but there is no such thing as "undermin[ing] the financial integrity of the nation". Federal spending is always funded by money creation, and the government then adjusts the money supply by levying taxes and conducting open-market operations...

When will our deficits and debt accumulation start the process of beginning to create real financial risk we need to guard against? We don't know. But we do know that the bond market will be very happy to tell us when the process starts.

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