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Letter: Difference between household and government budgets is big

A common misconception (shared by at least one online commenter upon an earlier letter of mine) is that government budgets are just like household budgets, where one can only spend what one takes in (or what one can borrow at market rates). There are two things wrong with this analogy.

A sovereign government (like the United States) creates and spends (and borrows in) its own currency, which is also freely convertible to other currencies (thus, it “floats”). 

Households can do this too — IF they can get someone to accept the “money” they create! But otherwise, households are limited, whereas the government is not (at least not for the same reasons: inflation is not a problem when resources are massively unemployed, as now).

And for households to spend less than they earn (i.e., to reduce debt when they feel over-indebted — as now), government has to spend more than it earns (because businesses — the only other sector in the economy — are ALSO trying to reduce debt). 

Otherwise, where would the money come from?

— Rick Wicks

Anchorage