Here is a story in a fairy tale format.
Once upon a time there was a country that discovered some amazing economic secrets. And, it seems, the country guarded those secrets zealously. The first thing it discovered was that it did NOT need to collect taxes when it wanted to spend. How could that be possible? Well, as a newly formed country its government wanted to create its own independent money that, as a modern currency, would float freely on the markets.
At the same time the government decided to levy a 10% tax on the income of all it citizens. It was then that it discovered the FIRST SECRET: no taxes could be collected until it had created the currency and spent it into circulation. None of the citizens could pay taxes until they got their hands on the newly created currency. SO LOGICALLY *government spending (to put money into circulation) had to come before tax collection and did not depend on it!
In fact the government asked itself: why collect taxes at all? Eventually it found a good reason to collect taxes, but that is a different story and the taxes were not needed to finance its spending. The government also came to realize that it didn't need to issue any bonds to borrow money; after all it could create all the money needed electronically. However, the most fabulous discovery that the government made was that it could afford to guarantee an excellent education for everybody, ensure healthcare coverage for everybody in the country, guarantee decent pensions for its senior citizens; finance the building badly needed infrastructure, support private enterprise, and much, much more.
Not all was well, some ministers said! They claimed that all this spending would cause inflation to raise its ugly head and that inflation was more difficult to defeat than the fiercest dragon imaginable. It was then that the country discovered ANOTHER SECRET. The government discovered that provided the companies in the country had the capacity to meet the extra demand created and there were people still unemployed, inflation did not arise and that the fear was groundless.
Now you would probably say that in the real world a fairytale country with a magic currency like that could not possibly exist. And this is the most amazing part of this story. Modern Monetary Theory, a well-researched economic theory, has demonstrated that this magic currency exits. It's called 'fiat' currency and many modern countries have it, for example countries like the US, the UK, Australia,China, India or Japan. Unfortunately that does not apply to countries within the European Monetary Union (EMU) because they have given up their fiat currency for the Euro and only the European Central Bank now has the capacity to create fiat money. You are probably also surprised to learn that the countries that have their own freely floating and independent fiat currency are in the very same position as our fairyland country and could act in the same beneficial manner, but, unfortunately, the political leaders of these countries do not appear to know it. Many governments, ignorant and blind to the possibilities of 'fiat money', are now subjecting their citizens to the harmful and misguided effects of austerity measures - isn't it time they knew the secrets of this story?
* Governments introduce money into the private sector by spending, for example paying unemployment benefit or constructing roads.
For information about 'Modern Monetary Theory' visit: mmtwiki.org/wiki/Main_Page or simply google 'Modern Monetary Theory' (MMT)
From Hanns Jurgen in