>This paper investigates the commonly held belief that government
>spending is normally financed through a combination of taxes and bond
>sales. The argument is a technical one and requires a detailed analysis
>of reserve accounting at the central bank. After carefully considering
>the complexities of reserve accounting, it is argued that the proceeds
>from taxation and bond sales are technically incapable of financing
>government spending and that modern governments actually finance all of
>their spending through the direct creation of high-powered money. The
>analysis carries significant implications for fiscal as well as monetary
>policy.
This seems like high-end crankery to me. Taxes and bond sales represent a diversion of resources (in monetary form) from the private to the public sector. A society facing resource constraints - and what society doesn't? - has to choose between SUVs and childcare, projection TVs and cruise missiles. A government can create money out of thin air, but it can't create real resources, which have to produced using a limited supply of capital and labor. This stuff just seems dreamy.
Doug