Warren Mosler, one of the fathers of Modern Monetary Theory, explaining the logical sequence of government spending. To get the currency system going, the government first imposes a tax liability on the population, which can only be paid using the government's IOUs. Now the citizens need the government's IOUs in order to pay the tax. How can they get those government IOUs? They can work for the government. That's why the government is doing this: to transfer real resources (labor and goods and services) to the public purpose.

If the government imposes a tax of, say $10, then it must spend at least $10 (a balanced budget), or else the citizens won't be able to pay the tax, because they won't have enough dollars. That means there will be involuntary unemployment, as people look for paid work but are unable to find it. What i some people want to save dollars? The government will then have to spend more (a deficit); it will have to spend enough for citizens to be able to pay the tax and meet the desire to save, or else there will be involuntary unemployment.

Since the government is the issuer of the dollar, it cannot receive tax payments before it spends, because spending is how it gets the dollars out there. So the cycle goes like this: the government spends first, and then later receives those dollars back in taxes or "borrowing."

That means the money the government "borrows," (aka the national debt) is only money that it has previously spent, that it is borrowing back! Why is it doing that? The reason is purely historical: under the gold standard, if the government "borrowed" money from you, by selling you a Treasury Bond, then you wouldn't be allowed to convert that Treasury Bond into gold, whereas you would be allowed to if you held currency. So if the government was scared that it was running out of gold, it could start borrowing more from the citizens, to prevent them from converting to gold. But today, it serves little purpose, other than to provide savers a way to earn risk-free interest on their savings.

See the whole video here:    • Warren Mosler's Soft Currency Economi...  

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