The Limited Role Of Currency In Government Finance

There is a tendency to associate currency (in North America, dollar bills and coins) with the concept of "money." This is somewhat unfortunate, as currency is of limited importance for most developed countries, at least outside of the underground economy.

Since the underground economy consists of activity that is precisely aimed to avoid interference by government (laws, taxes), it has limited effect on government finance under most circumstances. This article contains an excerpt from my eReport Understanding Government Finance. It explains how currency interacts with the rest of the financial system, based on what I refer to as the Simplified Framework of Government Finance (discussed in an earlier article). The Simplified Framework is based on the Canadian system of government finance, with a few simplifications.

The Simplified Framework Of Government Finance

In order to understand how government finances work, we need to strip out cosmetic details to find the underlying principles. Within this this article, I outline the "Simplified Framework" of government finance, which (roughly) corresponds to modern Canadian practice. Once the implications of this framework are understood, complications (such as bank reserves) can later be added. This is an excerpt from the eReport Understanding Government Finance.

The Role Of A Central Bank In Government Finance

The central bank acts as the key intermediary between the fiscal arm of the government (Treasury or Ministry of Finance) and the "non-central government sector", which includes the private sector, sub-sovereigns, and even the external sector (for example, foreign central banks). How the central bank operates largely determines the nature of the monetary system.

This article is an excerpt from the recently released eReport, Understanding Government Finance.

How Should The Bank Of Canada Operate?

The Bank of Canada has asked for comments on potential changes on its operating procedures. Many of the potential changes appear to only matter to the central bank and its bank counter-parties, however others raise some philosophical issues about how central banks operate. I do not think that the Bank of Canada wishes to get into debates about the philosophy of central banking, but the reality is that when a crisis hits, we need a coherent view of what a central bank is supposed to be doing.

Understanding Government Finance - Released

The BondEconomics.com eReport Understanding Government Finance has been released, and is available at online retail stores in ebook format. The current list of retailers includes Amazon, Kobo, the Apple Store, Nook, Scribd, and the Tolino network. The widget above gives an online preview (from Amazon).

Announcing The eReport: Understanding Government Finance

The first BondEconomics eReport: "Understanding Government Finance" is expected to be released for sale in mid-June has been released; details available at its product page.

It provides an introduction to the operations behind government finance, aimed at a non-specialist audience. It will be initially published in ebook formats (epub and Kindle), followed by pdf and paperback editions.

The Budget Constraint Does Not Mean The Government Will Pay Off Its Debt

Professor Brad DeLong made some assertions about Modern Monetary Theory (MMT) in this article about bond bubbles, which drew responses on the Mike Norman Economics web site (here and here). Professor DeLong's points have a lot of embedded assumptions, and I cannot deal with all of them here. But I do discuss one assumption in my upcoming eReport: Understanding Government Finance. This is the idea government 'has to pay back its debt'.

UPDATE: The eReport has been released.