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adameran commented on the blog post The Problem With the Clinton Budget Surpluses
When the Fed creates money, as a legacy of our pre-1971 commodity-backed money system, it also creates an equal amount of debt. Extinguishing debt and money are simultaneous when the Fed retrieves what the government previously spent. Both go away simultaneously. It’s obvious, therefore, that extinguishing debt also removes currency or financial assets from the non-government sector. The accounting identity is this:
Government “debt” = non-government financial assets + current account (i.e. exports – imports)
The current account isn’t going to make much contribution to the equation, since it’s negative.
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