October 2nd, 2010 at 2:26 pm Here's how it works: 1. The Treasury sells one-year obligations to fund the public sector fiscal budget -- this is accomplished in 52 equal tranches over the course of the fiscal year. 2. The Treasury begins to retire the one year obligations at the end of the fiscal year -- this is accomplished in 52 equal tranches over the course of the following fiscal year. 3. The net result is that there is a permanent revolving debt equal to the public sector budget and the monetary base is increased steadily by the amount of interest paid on the debt. 4. The level of Treasury borrowing can be adjusted to exceed or fall short of the public sector budget according to whether economic stimulus or dampening is targeted. The size of the permanent revolving debt in relation to the size of the economy will increase during stimulus periods and decrease during dampening periods. The net result will be that one cycle cancels the other over time. Stipulating that taxes are used to control aggregate demand, is there any evidence that this technique does in fact have the intended controlling effect? Question: If the government doesn't tax because it needs the money to spend, why tax at all? Answer: The federal government taxes to regulate what economists call "aggregate demand" which is a fancy word for "spending power." In short, that means that if the economy is "too hot," then raising taxes will cool it down,