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Government borrowing is pointless where a government issues its own currency

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  • Musgrave, Ralph S.

Abstract

The alleged justifications for government borrowing in a country which issues its own currency are examined here. The conclusion is that no justification exists for borrowing money in the normal sense of the phrase “borrow money”: that is, the use by one entity of money loaned by another entity, and so as to fund expenditure by the first entity. In contrast, and where a deflationary stance is required, it is justifiable for government (or as is more usual, the central bank) to borrow in the sense of withdrawing funds from the private sector and purely so as to stop those funds being spent. Moreover, inflation destroys a proportion of the money “borrowed”. Plus government effectively confiscates (via tax) the money needed to pay interest on this “borrowed” money. This is essentially a money shredding operation. This is not the normal meaning of the word borrow. Many of the points made here apply to the central bank of a common currency area. Individual countries within a common currency area are not considered.

Suggested Citation

  • Musgrave, Ralph S., 2010. "Government borrowing is pointless where a government issues its own currency," MPRA Paper 20057, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:20057
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How to dispose of the national debt in two or three years.
      by Ralph Musgrave in Ralphonomics on 2011-04-06 12:44:00
    2. Reducing the national debt does not involve much austerity.
      by Musgrave in Ralphonomics on 2011-02-02 09:04:00

    Citations

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    Cited by:

    1. Musgrave, Ralph S., 2011. "Monetary and fiscal policy should be merged, which in turn changes the role of central banks," MPRA Paper 30521, University Library of Munich, Germany.
    2. Musgrave, Ralph S., 2011. "Consolidation causes little austerity," MPRA Paper 34295, University Library of Munich, Germany.

    More about this item

    Keywords

    Abba Lerner; Modern Monetary Theory; government borrowing;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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