We shone light on...

Letter by David Brown, by email

Congratulations on the excellent article on the alleged ‘fiscal black hole’ (‘Austerity 2.0 is a choice not a necessity’, PN 2663).

It may also be worth noting that the notion of a fiscal black hole is one of a cluster of myths that grow out of a misunderstanding of the way money works in a financially sovereign state.

A related myth is that taxation and borrowing ‘pay for’ government spending, so that the government is limited in what it can spend by the the amount financial institutions are willing to lend it and the amount of tax the electorate is prepared to bear.

The basis of these misconceptions is the belief that, when it comes to finances, a government is subject to the same constraints as is a household.

This is simply not true for a sovereign government – that is, one that creates its own currency and is not committed to maintaining fixed foreign exchange rates. (It does hold for local authorities, for federated states – such as the individual states in the US – and for members of the Eurozone, since none of these creates the currency in which its citizens are taxed.)

An economic analysis that explores these issues as well as their implications for a greatly expanded ‘policy space’ is ‘Modern Money Theory’.

For further reading on the topic, I would recommend Stephanie Kelton’s The Deficit Myth or L Randal Wray’s Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems.

The latter is a perhaps a bit technical for many readers and, for a layperson’s introduction, I would like to recommend my book, The Magic Money Tree: How Money Really Works.