[F]or the US domestic private sector to carry a positive balance, the government must in effect carry a negative balance.
This makes a lot of sense if you think of the United States as representing a completely self-contained credit system, where only one official government controlled currency is allowed (and no foreigners can buy US debt). If the economy is to be kept well lubricated and functioning, the government must be willing to take on more debt on behalf of its citizens when the situation calls for it. Think of it as the private sector positve balances (or savings) representing claims on goods and services which haven’t as yet been redeemed. If not for the government’s negative balance, these claims would be represented by billions of private negative balances instead — representations of debts/credits between individuals. Money earned, and taxed, but not yet redeemed. Everything from your right to redeem a dozen baked rolls from your baker one day in the future, to your right to claim 10 days worth of medical services from your local doctor.
Allowing the government to take on those debts/credits (and really we’re talking more about credits) in place of your counterparties allows for claim standardisation. This not only ensures claims can be redeemed more quickly, having a greater wealth effect on the economy, they can also penetrate the system more completely. Furthermore, they are given a state guarantee in place of a private guarantee.
No more is there a risk that the doctor’s services you earned (by fixing the boiler at the medical centre) are lost because the doctor in question has passed away. You will still be able to redeem the services due to the intermediary role played by the government. Your claim is now against the government, not the doctor. You can thus redeem it with anyone who feels inclined to settle transactions with government paper instead of private paper. And why wouldn’t they? Everyone, after all, has a use for official government currency since it’s the only payment unit which will be accepted for the settlement of tax bills — a.k.a the government’s redemption of the claims it has against you.
« Older The beginning of the end of "he said, she said" jo... | Just three minutes a week of e... Newer »
This thread has been archived and is closed to new comments