Caesar Giveth and Caesar Taketh Away

 "I'm a little confused by Beagles' proposal.  Is he saying that instead of taxing people the government should just print more paper whenever it wants to fund something?" - Uncle Ken

Well, it's not exactly a proposal, it's just an expression of my own confusion about how our economic system works.  The federal government is the only legal source of all money.  They literally create money out of nothing.  They say, "Let there be money", and lo there is money.  Between 10 and 20 percent of it is actual currency, the rest of it is not paper money, it's money on paper.  The Federal Reserve is charged with controlling both inflation and unemployment.  When they determine that inflation is too high, they reduce the supply of money in circulation and, when they determine that unemployment is too high, they increase the supply of money in circulation.  They also do something with interest rates but I think the only rate they directly control is the Fed Funds Rate, which is the rate that banks charge when they borrow money from each other.  All the other interest rates tend to follow suit, but I think that's just a function of the market place.  The market place generally responds faster to economic changes than any action taken by the Federal Reserve, which is why said action doesn't always have the desired effect, but it seems to work most of the time.  I say "seems to work" because we don't know for sure what would have happened if the Fed had taken a different action, or no action at all.

What I don't understand is the role that taxation plays in all this.  If the Fed had the power to levy taxes, then they could use that as a way to take money out of circulation when they wanted to, but only Congress has the power to levy taxes.  Taxes are raised and lowered mostly for socio-political reasons, and the Federal Reserve is supposed to be above all that.  Government activity vastly exceeds the amount of money brought in by taxes, and the difference is made up by borrowing.  When the Fed wants to increase the money supply, they buy government debt from private brokers with money that they create by decree.  When they want to reduce the money supply, they sell government debt back to private brokers. I don't know what would happen if the Fed kept any of that debt to maturity.  It seems like that would cancel out said debt because the government wouldn't have to repay itself, but I don't know that for sure.  I doubt that the government could fund itself solely by creating new money.  That has been tried in other countries and has led to hyper inflation and political upheaval.  I think that's what's currently going on in Venezuela. 

I think the reason Europeans colonized other countries is that Europe advanced beyond the feudal stage earlier than those other countries.  The Europeans were able to exploit local conflicts to their own advantage, but those conflicts were going on before the Europeans arrived on the scene, and they're still going on even unto this day.  At some point, the Europeans decided that keeping colonies was more trouble than it was worth but, for some reason, they still seem reluctant to make a clean break and let the chips fall where they may.