Nirav's Personal Blog

In the Chapter the author presents general principles that are applicable to any issuer of a domestic currency. What is a sovereign currency? Majority of nations have adopted their own unique money of account. The government spending, as well as the taxes, fees and fines owed to the government, are denominated in the state money of account. When the court system assesses damages in civil cases, they too are denominated in the state money of account. The national currency is often referred to as a “sovereign currency” that is, the currency issued by the sovereign government. Most sovereign governments retain a monopoly over the issuance of currency. If any other person tries to issue domestic currency, unless expressly permitted, they will be considered as counterfeiters and prosecuted. What backs up the currency and why would anyone accept it? Most of the sovereign currencies which are in existence, today are “fiat” currencies which means that they are backed by nothing. In t

  In the Chapter, the author introduces concepts about basic macroeconomic accounting. One person's financial asset is another person's financial liability This is a fundamental principle of accounting. The same transaction can be an asset for one party and liability for another party. Example, when you make a time deposit with a bank, from your perspective it is an asset but from the bank’s perspective, it is a liability. When you buy something from a store, the transaction is an expense for you but it is a revenue for the store. Inside wealth versus outside wealth The author divides the economy into two broad sectors, the public sector and the private sector. The public sector includes all levels of government, federal and state. The private sector includes households and firms. If we aggregate all the privately issued assets and liabilities, then they should net off to zero. So, the net financial wealth will be zero if only private sector IOU’s are considered. This is called