Deficits and institutional theorizing about households and the state.

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Deficits and institutional theorizing about households and the state.

In a pecuniary economy, households' spending is limited by the stock of state money and the flow of income received in the form of state money. Thus, households are subject to liquidity constraint as they incur debts in the established unit of account, and consequently need to obtain the widely accepted medium of exchange (Wray 1998; Bell 2001). Even when households' borrowing is unlimited, there is liquidity constraint to the extent that various interest rates and fees are administered by banks and business enterprises upon different households. Consequently, households are concerned with sound finance--or balancing their budgets at some point (albeit not at all times). The state's spending, on the other hand, is not limited by a stock of money, since the state spends by issuing its own IOU (Knapp 1924). Thus, there is no instrumental reason why a sovereign state should follow "sound finance" (Lerner 1943; 1947; Wray 1998).

The idea that a sovereign government or nation faces financial burden due to federal deficits is based on a state-household budget analogy, according to which, in much the same way a household goes bankrupt if its debt continuously exceeds its income fl...

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