Re: deficit spending adds to savings

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(email exchange)

Think of it this way.

  1. Treasury spends $1 trillion by making deposits to bank accounts at the Fed. The spending adds $1 trillion of income and $1 trillion of new balances (not new balance shoes) that in the first instance are excess reserves at the fed.
  2. Treasury offers treasury securities for sale at auction. The purchase of those securities reduces the new, excess balances at the Fed, and replaces them with treasury securities, which are in fact nothing more than different accounts at the Fed. So operationally the Fed debits bank accounts on its books and credits securities accounts on its books.
  3. Again, the result is $1 trillion of new income and $1 trillion of new treasury securities held by the non government sectors.

Deficit spending adds exactly that much to our savings. The idea that ‘it has to come from somewhere’ and ‘borrowing removes savings’ are inapplicable with non convertibility currency/ floating FX policy.

If you count the new treasury securities as ‘money supply’ then it adds to money supply. If you don’t it doesn’t. Government spending is counted as GDP.

>   On Feb 6, wrote:
>   Question- Treasury needs to raise a trillion dollars to fund shortfall- so they
>   sell a trillion dollars of treasuries which Fed reserve bank buys and puts on its
>   balance sheet- what is the effect on economy? Money supply?