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Comment by siavosh | Hacker News Reader

I'm reading a book, Money from Nothing, and I'm curious if anyone can point out if this is a flaw in my understanding:

Taxes are not really a means of a federal government raising funds to pay for things, since they can after all print whatever they need, but instead a way to take money out of circulation to help control inflation.

So a thing like war bonds is never for actually financing a war effort, but help control inflation for all the printing that probably is going on.

So tax compliance and tax code is a monetary tool to control inflation/deflation, not a financing/fiscal tool to pay for stuff. To be clear, local/state government can't print their own money obviously, so taxes actually are raised to pay for things.

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I think that almost everything you said is wrong.

The US government cannot (legally) print whatever they need. The Federal Reserve can, but the government cannot. And the government legally has limits on how much it can borrow, too, though the limit gets extended every time they bump into it (sometimes after some political drama).

Now, you could argue that we should change the rules so that the government can print. But, historically, that has worked out really badly. To see why, don't think in terms of money. Think in terms of stuff. Who gets the stuff? Well, the government prints money so that it gets more stuff than it can pay for just by taxes (without causing a political revolt.) That means that there's less stuff for the people. (Printing money doesn't cause more stuff to appear.) So there's more money circulating, and less stuff for the people to buy with it, so there's inflation. But that means the government's printed money is able to buy less than they planned, so they print some more. So they get more inflation, and still can't buy as much as they wanted, so they print some more. This gets you to runaway inflation.

Now, you might be able to get out of this by taxes. But the reason you got into this was that the people weren't willing for you to charge them the needed taxes...

Regarding inflation, I think what you're saying might be completely right if we're living in a 100% capacity/productive/efficient economy. But often times there is un-employment or under-employment, so printing money in all those scenarios may not actually take 'stuff' away from consumers, but actually help coordinate production to create more stuff where there was none.

So let's say the economy is actually doing well but a war breaks out and the government needs to pay for it. In that case lets say for whatever reason, taxes can't cover it, so the government prints money, but to keep prices under control it needs to suck out a certain amount of cash out of the economy, so it can either increase taxes or issue an emotional appeal for consumers to purchase war bonds. But to your point, in war time economy there can definitely be shortages of consumer goods and an upward pressure on prices.

Again I'm a total novice so I'm curious what I might be missing.

> The US government cannot (legally) print whatever they need

Yes, it can.

> The Federal Reserve can, but the government cannot

The decision-making part of the federal reserve (the Board of Governors) is:

1. An executive branch agency, independent within the government, the same as (e.g.) the FCC, and

2. Has all of its authority delegated from Congress from Congress’ Constitutional powers via statute.

Anything it can legally do is a subset of what the government can legally do, which can be recalled and reassigned to other parts of the Government, or exercised directly, by Congress at will.

> The Federal Reserve can, but the government cannot.

however every crisis for which the government feels it needs to print money it asks the federal reserve which appears to usually oblige them

their seperation to me seems just like some kind of circuit breaking control, but generally they will align to print money when they want, unless im missing something?

I looked quickly at your book, and it seems that it favors modern monetary theory (or MMT). MMT suggests that we can print money, but to keep inflation from spiraling out of control, we tax very strongly. This is simply one of many viewpoints.

Taxes and tax credits are also a useful policy lever to get people and companies to do things without having to imprison or beat them.

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