With acknowledgement to J.D. Alt and the New Economic Perspective (NEP)blog.
Far too many people, and this includes most, if not all politicians, think that the Federal Government (FG in the diagram below) are financed entirely from the Private Sector (PS in the diagram)
They also have the belief that the Federal Government operates in the same way as a household, or a business in the Private Sector. For any nation that has the right, the authority, and the ability to create its own supply of money, which we must assume applies to Australia, then that belief is completely false. I am sure every Treasurer of the Federal Government, and every senior Banker in Australia who perpetuates that belief, do so with the total knowledge they are deliberately deceiving the people of Australia.
These people try to portray Government financing as shown in this diagram
It assumes that all the "money" in the nation is owned by the Private Sector, which is exactly what every banker wants people to believe. Thus, they keep telling us there is a limit to how much the Government can extract from the Private Sector, and therefore, a limit on how much the Government can spend.
What is never defined, or discussed, is where this "money" in the Private Sector comes from in the first place.
The truth of the matter for a monetary sovereign nation, such as Australia, is actually the reverse of the above diagram.
The reality is shown in this diagram:
As everybody knows, the Government of Australia is supposed to be the only authority that can legally create/print/punch a keyboard, or by any other means, supply the "money" used in the nation. If you or I try to do that, we are charged with counterfeiting and thrown into gaol.
However, there is a huge anomaly in the financial system, not only in Australia, but around the world. The fact that it has been in existence for centuries, does not, and should not, condone its illegitimacy.
The anomaly is what is known as the Government endorsed and approved, Fractional Reserve banking system. It allows the banks to create "money" out of thin air. This is based on, technically, having access to the small reserve amount, necessary to meet the estimated daily demand for physical cash, which is in the form of notes and coins. Roughly, 97% of the "money" in circulation is digital, and simply a computer record in someone's bank account. While the clearing process between bank transactions is explained as a rather complicated and involved process, in truth, it is nothing more than an accounting procedure. In effect, the banks are allowed to counterfeit the nation's currency by a process that would land any other person, or organisation, in gaol.
So, the question is: "Why does the Government allow this to happen?"
If the Government has the sole authority to legitimise the nation's money supply, why do they let the banks do it, and charge interest on this "fictional money" that is nothing more than some figures in a book, or in a computer?
Isn't it about time we got an answer from our politicians?
Way back in 1863, President Lincoln had the answer and he used the authority of his Government to create the US money supply known as the "greenbacks." His answer to the critics is the answer we should get from our politicians:
“The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers….. The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be satisfied. The taxpayers will be saved immense sums of interest, discounts and exchanges. The financing of all public enterprises, the maintenance of stable government and ordered progress, and the conduct of the Treasury will become matters of practical administration. The people can and will be furnished with a currency as safe as their own government. Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power.”
To return to our diagrams, in the one above, it shows the taxes disappearing as they leave the Public Sector tank. In actual accounting practice, that is exactly what happens to them, they are credited to the account held in the name of the taxpayer, thus leaving a zero balance in the account. Bear in mind that most tax payments are simply book entries, and very few are actual physical cash.
When the Government, supposedly, spends this money, all it does is transfer figures to an account in the Private Sector and deducts that figure from an account kept by the Government.
In practice, every dollar the Government spends eventually finishes up in the Private Sector. A Monetary Sovereign Government cannot run out of "money" - it cannot go bankrupt, and it cannot become insolvent - it can always fund any program to which it is committed.
Every single dollar a government spends directly, or indirectly, increases the savings potential in the Private Sector, whether it's in Australia or overseas.
Hence, every Social Security payment and every dollar paid as interest to bond holders, is ultimately spent in the Private Sector, and this includes payment for Government services such as the Post Office, the Hospitals, unemployment benefits, pensions, and every other public service.
This is why the belief in the first diagram of this article is both ridiculous and destructive.
The real diagram related to Government spending actually looks like this: where the spending of taxes are misleadingly depicted as paying for the support services that form the foundation of the society.
While the Federal Government has monetary sovereignty, the State Governments do not. However, the State Governments have the Constitutional right, and power, to set up their own State Banks and operate these on exactly the same basis as the private banks - that is - the fractional reserve banking system. Thus, the State Governments can have all their revenue paid into their own State Bank and use this as the reserve for creating credit in the same way as the private banks create credit of 10 to 12 times the amount of the reserves they must hold.
Because of the almost total ignorance (feigned or otherwise) most politicians have about Government financing, they all act like lemmings and seem quite content to make the society suffer. By talking about "budget deficits", "balanced budgets" , "austerity", and the most obnoxious of them all, running a "budget surplus," they promote profiteering from their taxpayers. These politicians deliberately set out to debilitate the society they are supposed to be elected to support.
The term "budget deficit" does not, and cannot apply to a monetary sovereign Government. The Government does not have any shortage of funds when it has the authority to create the nation's money supply. In fact, every dollar spent in excess of what revenue the Government takes in, represents a direct investment into the nation's future. Rather than being a "deficit" it serves to increase the savings capacity of the private sector.
Hence, for the Government to talk about a "balanced budget" means they refuse to fund any investment for the nation's future. What is even more harmful is for a Government to try and operate on a "surplus" because, that can only happen by reducing the savings capacity of the Private Sector.
No Government should be created to make a profit out of its people.
While the above diagram is correct in respect to Government funding and spending, a major addition to the Public Sector tank is missing. This addition is the huge amount of interest bearing credit that is created by the private banks, and is responsible for the ever growing mountain of debt placed on the shoulders of the public. This private bank credit far exceeds the amount spent by the Government
In reality, it is this poorly regulated supply of "fictional money" that is responsible for the inflationary, and deliberately derived deflationary pressures that are inflicted on society through continuous boom and bust cycles. The banks have very skilfully foisted the blame on the Government because, the Government tries to manipulate inflation through the futile adjustment of interest rates and the fractional reserve ratio.
The futility of this approach is amply proven by the ongoing boom and bust cycles that have occurred throughout the last century, and continue to occur today.
It should be made very clear to people that it is not the Government that is tying the debt noose around people's necks, but the private banking sector's policy of loading people with easy available credit, particularly through credit cards. The Governments must take some responsibility for condoning the fractional reserve system, and the other unsavoury practices of the banks.
The Australian nation, and every other monetary sovereign nation around the world, are faced with a huge education problem. A quantum leap is required to overcome the centuries of misinformation and brain washing that has been drummed into people.
One of the first lies that must be corrected is the continual comparison of Government spending, and budgets, with household and private business spending. Spending in the Private Sector can only occur through earning an income, using savings, and/or borrowing. This means they must finance their spending prior to the fact. Government spending is exactly the opposite because, a Government, as the issuer of the currency, can simply spend without the necessity of seeking funds in advance. This deliberate fraud is perpetrated on the public to shore up the status quo by maintaining the financial control exerted by the banks.
More detail is contained in the article, "A Primer for Monetary Sovereign Nations."
According to the Ludwig von Mises Institute of Canada, the current status of the US banking industry shows they have $2563.016 billion in reserves, almost 20 times the legally required reserve amount of $122.261 billion. The truly frightening thing about this is that they can legally, under current regulation, increase the $11 trillion of credit "money" they would be able to create in relation to the required reserves, to around $227 trillion, if the banks chose to use the excess reserves they now hold. If that isn’t a sure fire recipe for blowing bubbles via the fractional reserve banking system, I don’t know what is.