Yes, Government Deficit Spending Creates Private Sector Surpluses

deficit spending: Image of sectoral balances chart for the USA

But, currency issuer government deficit spending only

To be clear, this applies to currency issuing governments ONLY.

In the US, this is true only of the deficit spending of US Federal government.

This is not true of the government of Texas, or California, or New York, or any government entity that is NOT the federal government.

The US is the currency ISSUER.

Currency user governments ARE like households

State, county, city governments, and any government who isn’t the federal government is a currency USER, just like you and me. In order to spend money, they must first obtain it.

Having said that, the reason we currency users have money is because the currency issuing government spent more of it into existence than they tax back out of existence. Seriously.

Currency issuers spend money in, and tax money out

Currency issuer spending literally adds money to the economy, while taxation takes it out. This is not a metaphor. This is literally how this works.

So it’s “spend and tax”, not “tax and spend”?

Yes, it is.

Currency issuer spending must therefore PRECEDE taxation.

If government spending did not precede taxation, there would be no money with which to pay the taxes.

Government spending must therefore PRECEDE the sale of Treasury Bonds.

If government spending did not precede the sale of Treasury Bonds, there would be no money with which to buy the bonds.

The image at the top of this post is a chart of US Government Balances vs Domestic Private Sector Balances and the US Capital Account (money non-Americans are investing in American in excess of what Americans are investing abroad). It runs from 1952 Q1 to 2014 Q4.

As you can see, every surplus has a corresponding deficit and visa versa.

When you stop to think about, it can’t be any other way, as every dollar received by someone of necessity had to be spent by someone else. In economic speak, every surplus has a corresponding deficit, and it can’t be any other way.

This is true for most, if not all, modern currencies

Below is a video of economist Stephanie Kelton talking about how she would create the Keltonian currency (Keltonis) if she was forming the state of Keltonia.

It runs not quite 10 minutes long, and it’s an excellent explanation of what currency is, how currencies work, and how currency issuer spending MUST precede currency issuer taxes.

As weird as this may sound, the fact is that the currency issuing government MUST spend money into the economy before anyone has any is demonstrated by a simple accounting truth.

Why? Because every dollar received by one person was spent by another.

Every financial payment comes from somewhere and it goes somewhere.

Simply put, when the currency issuing government spends more than it takes back in taxes, it leaves money in the hands of the currency users. In the economy.

And THIS is why currency issuing governments MUST run deficits. Because that is where the money we use comes from.

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