[RobertoG]

I'm a little late, but I want to answer for the sake of completeness.

>>"Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything."

You say "Inflation is caused by additional dollars chasing the same number of goods". We agree with that (it could be a supply problem too, but that's another subject).

Now, it seems to me that we agree also that a government deficit can be inflationary. So, by definition, a government deficit is adding money to the economy.

My question is: if a government deficit is adding money to the economy, what a government surplus is doing? That's the meaning of "taxes destroy money".

>>" The question you need to ask yourself is, where did those reserves come from? Another question you need to ask is, when Fed engages in QE, why does the monetary base increase? "

Monetary base increase because that is how it's defined.

I think that the problem here is that you subscribe to the fractional reserve banking theory that, I'm afraid, is false. I suggest reading this report from the Bank of England (1) about how money creation works. A private bank lending is not limited for the quantity of reserves available in the system, because central banks have to keep the system of payments working and are targeting an interest rate. So, central banks have to answer any request for additional reserves.

The corollary to all this, is that it doesn't matter if the asset of the private bank is a treasury or reserves in the banking system, banks can lend anyway. The central banks sell treasury to the banks for controlling the interest rate, not the quantity of money.

1. - https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

[fbonetti]

You also seem to be arguing that centrals banks don't create new money, which is an odd assertion, especially for a proponent of MMT. From the article you posted:

> "QE involves a shift in the focus of monetary policy to the quantity of money: the central bank purchases a quantity of assets, financed by the creation of broad money and a corresponding increase in the amount of central bank reserves. The sellers of the assets will be left holding the newly created deposits in place of government bonds."

> "QE has a direct effect on the quantities of both base and broad money because of the way in which the Bank carries out its asset purchases. The policy aims to buy assets, government bonds, mainly from non-bank financial companies, such as pension funds or insurance companies. Consider, for example, the purchase of £1 billion of government bonds from a pension fund. One way in which the Bank could carry out the purchase would be to print £1 billion of banknotes and swap these directly with the pension fund. But transacting in such large quantities of banknotes is impractical. These sorts of transactions are therefore carried out using electronic forms of money."

[RobertoG]

>>"You also seem to be arguing that centrals banks don't create new money"

Not exactly. My undernstanding is that all money comes from the government. That is clear with banknotes for instance, it comes only from one place, but the same is true for bank reserves. Reserves originates in the Central Bank that is part of the government.

Now, if the government want to spend into something, let's say to pay a service to a private company, it tells the central bank to credit the appropriate account of the private company bank with the appropriate quantity. Money was effectively spent into existence, and, this will have inflationary effects.

On the other hand, if, for instance, in order to finance a crazy QE program, new reserves are created in the banking system, that money is available for banks to make loans, but that doesn't mean that a loan will be made. It's not until that loan is fulfilled that the new reserves will have an inflationary effect.

That's the reason why the QE programs were not inflationary. They affected the interest rate, but that was not enough because there were not appetite for loans in the economy. I think this has been calling "pushing a string". The MMT perspective would say "those QE programs are not going to be inflationary but they are not the proper tool. If you want to create demand (and some inflation) you need the government to spend, because the private sector obviously doesn't want to".

[fbonetti]

> My question is: if a government deficit is adding money to the economy, what a government surplus is doing? That's the meaning of "taxes destroy money".

It's rare for the federal government to run a surplus, but it did have one for four years straight in 1998, 1999, 2000, and 2001[1]. During that that time, the monetary base increased 32%[2] and the M2 money supply increase 23%[3].

No matter how you look at it, despite the government running a surplus, the money supply continued to increase. How do you square that with your claim that surpluses remove money from the economy?

[1] https://fred.stlouisfed.org/series/FYFSD

[2] https://fred.stlouisfed.org/series/BOGMBASEW

[3] https://fred.stlouisfed.org/series/BOGMBASE

[laurus]

You're forgetting that the government doesn't _control_ the whole money supply. The government only controls how much it itself creates or deletes on net.

Most money is created by commercial banks. As the demand for credit expands the money supply expands, and as credit is repaid, the money supply decreases. This is going on all the time.

[RobertoG]

My point is that with a government surplus there is less money being spent in the economy, the same way that with a government deficit there is more money spent in the economy. I don't think this is polemic.

Now, in order the government to run a surplus, it has to tax more that it spend. The money that is taxed in excess of the money that is spend, it's the money that it's retired from the economy. Ergo, taxes retire money or "destroy money".

Please, note, that when a government is running a deficit, it's effectively spending new money into existence but, that doesn't mean that all the money comes from the fiscal instance of the government. That's the reason we can see years when the government is in surplus and an increase in the monetary base at the same time.

Where is that money coming from if not from a fiscal deficit? It's coming from the central bank creating reserves. Why the central bank create new reserves if the government is not spending more than it tax? Normally, it would be for only one reason, manage the interest rate.

The credit department of commercial banks doesn't check if they have reserves before given a loan, they check if the loan make business sense (or they should) and then get the reserves in the interbank market. If there are not enough reserves in the system for the demand of credit in the economy, the interest rate will go up (offer and demand dynamics in the interbank market). The central bank has a interest rate target, so, in order to keep it in target, they have to add the reserves necessaries. The central bank don't have control of the monetary base, because if they control the quantity of money, they would loss control of the interest rate.

So, if in years of government surplus, the monetary base grow, that means that central bank had to add reserves to the system. Assuming it was not some crazy QE program, that means that the economy was demanding more credit. Also, we can deduce that in those years, while the public debt was going down, the private debt was going up.

This is related also to the (for me) very interesting concept of sectoral balances (1). If the government is running a surplus, and the GDP is the same or growing, and the external balance of payments is the same, that means that the private debt have to increase.

>>"It's rare for the federal government to run a surplus [..]"

Yes, very rare. It's interesting to think about why is that the case in the context of the sectoral balance model.

(1) -

http://bilbo.economicoutlook.net/blog/?p=21287

http://bilbo.economicoutlook.net/blog/?p=32396