Guest post: From reader McWop who has been a constant for a number of years, aka Matthew McOsker, writes on:
How money enters the economy through deficit spending. A simple model for discussion.
When the government deficit spends here are the mechanics:
a) Government buys goods from some private entity, let’s say $1,000 worth. The government deficit spends to do this. They credit the private entity’s checking account to the tune of $1,000 (increases reserves by $1,000)
b) Government issues a bond for $1,000
c) Private entity’s checking account is debited $1,000 to buy…
On net, a financial asset of $1,000 has been added to the economy – the original reserves are still there!
In this spreadsheet I have created three scenarios, for the sake of discussion. Don’t worry where the initial $1,000 for each person comes from, do not consider one rich or one poor – this is for illustrative purposes only to see the mechanics. There is no foreign trade, nor any private borrowing. That is for another discussion. Treat each year as a a calendar year.
Example 1, the government runs a surplus, and makes zero purchases. Quite simply the surpluses drain the economy and essentially drive the private sector into debt. The government does not save surpluses in any account for a rainy day. Its a drain.
For Example 2, we add in government purchases which slows the drain.
In Example 3, we deficit spend, which adds money to the economy – there is more there to drive aggregate demand.
Deficit spending is our savings, it is NOT like a household budget.
Link to spreadsheet: