Sovereign Currency

Australia’s Sovereign Currency

The Australian Government uses its own currency, issued by The Reserve Bank of Australia (RBA) USA, Japan, United Kingdom and New Zealand and many others do the same. Most European Countries do not have a common currency and use the Euro.

A Bank of England publication ( Quarterly Bulletin 2014):-

A central bank simply creates new money at the stroke of a computer key, in effect increasing the credit in its own bank account. It can then use this new money to buy whatever assets it likes’. http://www.bankofengland.co.uk/monetarypolicy/Pages/qe/default.aspx> .

Every time the Australian Government spends a dollar, it does so by crediting the reserves of a commercial bank which are held at the RBA (Australia’s central bank) by that dollar, and having the commercial bank credit the bank account of whoever has been the beneficiary of that spending. 

The Australian Government has an unlimited capacity to pay for things, to make contracted future payments and it has an unlimited ability to provide funds to the other sectors. The State and Local Governments cannot issue currency and rely on transfer payments from the Australian Federal Government, State and local taxes, stamp duties, rates, fines and fees, poker machine taxes etc.

A Sovereign Currency country – Doesn’t borrow in foreign currencies or peg its currency to any other: Spends and taxes only in its own currency, which floats against other currencies: and the central bank sets policy interest rate.

A Sovereign Currency country’s government can purchase anything that is available for sale in that currency including all idle labour. Productive resources need never be idle if they are looking to be used.

Growth in the money supply is critical for economic growth, and there are only two ways that the money supply can grow in a fiat currency system – Government spends more than it collects – runs a deficit or by private credit growth.\

Adding money to the economy is not inflationary until full economic capacity is achieved. Government spending is not constrained by inflation. It is constrained by the capacity of the real economy. Once spending (either by the private sector and/or the government sector) exceeds the capacity of the real economy inflation increases. 

The Australian Government does not fund its spending from taxes. Its capacity to spend is independent of taxation revenue. Taxation supports demand for the currency. The non government sector cannot pay taxes without the government first spending.  Sovereign Currency Governments spend first and tax afterwards

Taxpayers do not fund anything. Taxpayers simply lose or gain purchasing power as the national government manipulates the policy parameters in search of public purpose. Tax is all about the social consequences; that is the total impact of each tax on the real economy and on people’s well-being. In a modern economy, spending and taxing are economically separate activities.’

A Sovereign Currency Government can always buy or construct things or fund things if they can be paid for in its own currency. It must carefully consider the effect its spending on the economy, prices, unemployment levels, industrial and other output, foreign trade, etc but there is never a shortage of money unless it is self-imposed.

 

 

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