Once you understand that the government doesn't need tax revenues to spend, a lot of the way the world works makes more sense.
For instance, look at this chart put together by Joe Weisenthal at Business Insider.
"This chart shows the ratio of the government's tax revenue vs. expenditures. When it's up, tax collections are higher as a percentage of expenses. When it's down, it's the opposite. As you can see, the blue line (the tax ratio) leads the red line (the trade-weighted dollar)," Weisenthal writes.
This correlation is a bit of a mystery. Why should paying for an increased portion of our revenues with taxes rather than debt be bullish for the dollar?
The principal reason is that taxes literally destroy dollars, taking them out of circulation. When you increase taxes and cut spending, the likely outcome of that big budget Supercommittee, you reduce the amount of dollars held or circulated by the American people. It is contractionary in the strictest sense of the word: you are shrinking the money supply.
This reduction of the supply of dollars makes the remaining dollars more valuable.
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