[fbonetti]

> My question is: if a government deficit is adding money to the economy, what a government surplus is doing? That's the meaning of "taxes destroy money".

It's rare for the federal government to run a surplus, but it did have one for four years straight in 1998, 1999, 2000, and 2001[1]. During that that time, the monetary base increased 32%[2] and the M2 money supply increase 23%[3].

No matter how you look at it, despite the government running a surplus, the money supply continued to increase. How do you square that with your claim that surpluses remove money from the economy?

[1] https://fred.stlouisfed.org/series/FYFSD

[2] https://fred.stlouisfed.org/series/BOGMBASEW

[3] https://fred.stlouisfed.org/series/BOGMBASE

[laurus]

You're forgetting that the government doesn't _control_ the whole money supply. The government only controls how much it itself creates or deletes on net.

Most money is created by commercial banks. As the demand for credit expands the money supply expands, and as credit is repaid, the money supply decreases. This is going on all the time.

[RobertoG]

My point is that with a government surplus there is less money being spent in the economy, the same way that with a government deficit there is more money spent in the economy. I don't think this is polemic.

Now, in order the government to run a surplus, it has to tax more that it spend. The money that is taxed in excess of the money that is spend, it's the money that it's retired from the economy. Ergo, taxes retire money or "destroy money".

Please, note, that when a government is running a deficit, it's effectively spending new money into existence but, that doesn't mean that all the money comes from the fiscal instance of the government. That's the reason we can see years when the government is in surplus and an increase in the monetary base at the same time.

Where is that money coming from if not from a fiscal deficit? It's coming from the central bank creating reserves. Why the central bank create new reserves if the government is not spending more than it tax? Normally, it would be for only one reason, manage the interest rate.

The credit department of commercial banks doesn't check if they have reserves before given a loan, they check if the loan make business sense (or they should) and then get the reserves in the interbank market. If there are not enough reserves in the system for the demand of credit in the economy, the interest rate will go up (offer and demand dynamics in the interbank market). The central bank has a interest rate target, so, in order to keep it in target, they have to add the reserves necessaries. The central bank don't have control of the monetary base, because if they control the quantity of money, they would loss control of the interest rate.

So, if in years of government surplus, the monetary base grow, that means that central bank had to add reserves to the system. Assuming it was not some crazy QE program, that means that the economy was demanding more credit. Also, we can deduce that in those years, while the public debt was going down, the private debt was going up.

This is related also to the (for me) very interesting concept of sectoral balances (1). If the government is running a surplus, and the GDP is the same or growing, and the external balance of payments is the same, that means that the private debt have to increase.

>>"It's rare for the federal government to run a surplus [..]"

Yes, very rare. It's interesting to think about why is that the case in the context of the sectoral balance model.

(1) -

http://bilbo.economicoutlook.net/blog/?p=21287

http://bilbo.economicoutlook.net/blog/?p=32396