Bond Issuance Does Not Reduce Inflation
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- Опубліковано 20 вер 2024
- Professor Bill Mitchell, debunking a commonly held misunderstanding of government "borrowing." Most people believe that a government has 3 choices to "raise funds": it can tax, borrow, or "print money." Further, they believe that "printing money" is more inflationary than borrowing. This could not be more wrong. In fact, a government deficit (spending more than taxing) will be exactly as inflationary regardless of whether it's matched by bond sales (aka. "borrowing") or not (aka. "printing money").
First, the conventional narrative gets the order that things happen in wrong. When the government "borrows," it sells Treasury Bonds. But the private sector can only purchase Treasury Bonds using the government's own currency (paper notes or bank reserves). Where did the private sector get the currency that it uses to purchase the bonds? It can only come from previous government spending: the currency is created by the government only, and the way they get it out there is by spending it (or lending it). So any funds that the government "borrows" are necessarily funds that it has previously spent (or lent).
So it is incorrect to say that government is borrowing and then spending. Logically, this is wrong. First it is creating funds by spending, and then borrowing back funds it has previously spent, effectively destroying them. That is the way the cycle works, every time. The case that people call "borrowing" is in fact the government spending and then selling bonds, and the case that people call "printing money" is in fact the government spending and then not selling bonds. Nothing more.
Next, a lot of people think that choosing "borrowing" over "printing money" is more inflationary because it increases the money supply. This is false. It might (only might) be true that "the money supply" increases, but in fact they are equally inflationary. Remember, the government is only borrowing back funds it has previously spent. After the government spent them initially, they circulated and eventually wound up in somebody's savings, when that person decided not to spend them. Then that person can use their savings to buy a Treasury bond. Thus we see that a Treasury bond is nothing more than an alternate way to hold savings: an interest-bearing asset, rather than a non-interest bearing asset. And when the government "borrows" all it is doing is changing the form of the private sector's savings, from currency to bonds.
Note that the key word here is "savings." The fact that somebody purchased a Treasury bond indicates that they weren't spending their money. If Timmy needed his $100 for groceries, then he wouldn't have been participating in a Treasury Security auction! The total amount of spending in the economy would be the same regardless of whether the government changed the form of Timmy's savings from currency to bonds, because Timmy wasn't spending in either case. And if there's no change in the amount of spending on goods and services, then how can prices change? They can't. The two scenarios ("borrowing" vs "printing money") have exactly the same impact on on prices, output, and employment.
Now, clever readers might say, "aha, but wait! Timmy might not need his $100 at the moment he buys the bond, but what if he needs it later? What if he buys a 30-year bond, but next week he realizes he needs to spend the $100? In the scenario where the government sells him a bond ('borrowing') he can't spend the $100, whereas in the scenario where the government doesn't sell him a bond ('printing money') he still has the $100, and can spend it next week. So 'printing money' is still more inflationary."
This is clever, but incorrect. The reason is because there is an extremely robust secondary market for Treasury bonds. In fact, in the US in particular, the Treasury bond market is the deepest and most liquid market on Earth. This means there is always somebody standing ready to buy your Treasury bond from you, in exchange for currency/deposits (often a dealer bank), to give you the funds you need if you decide to spend, nearly instantaneously.
This means there is no such thing as being in a situation where you are prevented from spending because you're holding a Treasury bond instead of cash. And that means that the same amount of total spending would occur regardless of whether the government sold Treasury bonds or not. And that means that "borrowing" is exactly as inflationary as "printing money."
Watch the whole video here: • Professor William Mitc...
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how is it the same?
bond sales remove money from economy. so convert cash to bonds. so par for par.
but printing money does not remove money from the economy it adds to it.
ceteris paribus you've added money into the economy.
Converting money into treasury securities is different from converting it into different assets. If i buy apple shares, my money belongs now to apple and therefore stays in the economy and i get the shares. If i buy bonds, my money 'disappears'. Am i not right?
If you talking about buying shares from apple vs from the govt then I believe you are right. But obviously on the secondary market you are buying from someone else in both cases.
The word lunacy is more applicable to 1:17 when he says bonds are not used to fund government spending. What is it for then, confetti?
The purpose of bonds is to control interest rates.
In the absence of bond issuance, then deficit spending by the government (which is necessary to meet the financial savings desires of the private sector) would lead to excess reserves, and drive the interest rate (the overnight inter-bank interest rate) to zero. The government can sell bonds approximately equal to the deficit spending it has just done, in order to drain the excess reserves, to raise the interest rate from zero to its target.
@@deficitowls5296
Billy states here that reserves are just base money, only in your reply above you say that government spending will increase reserves. But how can reserves (base money) be increased if government spending is just digits in a computer? Base is literally printing, no?
And why would it matter so much about the bank rate being zero?
As taxing is far more effective than spending, why not dramatically reduce taxation (that form of spending on at least on £20k to 30k), pull the interest rate to zero and stop bond issuance, which would stop big business sitting on piles of cash. Is the problem not unspent savings that causes unemployment? As i understand it bond issuance is mostly feeding the already wealthy while us regular joes are being taxed into the red. Big business would/could make a return by reducing excess capacity instead.
So, increasing the taxable allowance for the public would hypothetically increase spending, removing the need for so much (if at all) government spending, equal to inflationary expectations?
@@deficitowls5296 (edit: the reply on a separate comment thread explains it so much better) given only a simple understanding of the terminology, that still doesn't make any sense. In the USA, bond referendums are put on ballots specifically when a local government wants to spend more than allowed by existing budget. So you're either using a different definition of bonds or I won't say the other option just yet.
There may be a purpose of using bonds versus printing new dollars to control interest rates but your response again contradicts logic by claiming reserves would increase when the budget allows defecit spending without bonds. I know of 3 ways for a government to fund it's expenses: tax more, borrow more, or manufacturer new money out of thin air (a hidden tax on savings). But maybe reserves is a coded term that refers to an illogical meaning instead of the typical definition of a surplus of cash. My guess based on context is that reserves refers to the entire supply of cash in circulation.
Ok, I have to hand it to the guy that he makes a good point about bonds being similar to dollars as a piece of paper to trade for goods or services (real value in a fiat economy). but it still doesn't address the fact that the interest needed to pay the bonds will still result in increased taxation or increased printing of money. you CANNOT just keep issuing bonds to pay for the interest on matured bonds. THAT is crazy. So I see how it's true to say bonds also cause inflation but it is DELAYED much more than printing all that money and flooding the market with it. Especially since the government doesn't just buy things in one fell swoop but has to buy stuff all year long and use the tax revenue, extra printed money and proceeds of bonds to fund their operations year after year. With inflation their return on money stored in the treasury will be less so if they can delay inflation then they get their return.
What you're saying is based on the "Quantity Theory Of Money," which holds that prices are determined by the amount of money that exists. This is demonstrably false, both in theory and in fact (look at what Japan has been doing for the last 10 years, "printing money" like mad, and yet their economy is still deflationary).
As I said before, currency is just a claim on government (with the actual pieces of paper or electronic entries being merely a record of that claim), and the government must spend first before it can tax or sell bonds. If you think about it that way, it's actually much easier to understand how the Quantity Theory is wrong.
Suppose that the government spends, and does no offsetting tax or bond sale. We presumably agree this is potentially inflationary. I say potentially because of course it depends on the economy: more spending means the economy has to produce more stuff. If the economy can expand to produce that extra stuff, then there won't be inflation. On the other hand, if it can't, like because there are no more available workers or raw materials or something like that, then the extra spending on the limited goods will only drive up prices.
Now consider the case where government spends and taxes. The spending pushes the economy to produce more, but what do the taxes do? By taking money away from private citizens, the goal is to decrease their spending. With private citizens spending less, those businesses that were previously meeting those needs no longer need the real resources (workers and machines and raw materials) that they were using, so those resources get freed up to be re-allocated to whatever the government is spending on. So notice here that the purpose of the tax is not to "get money" for the government, the purpose is to free up real resources, so that the government can spend without causing inflation. So taxes "make room" for government spending, though there's no reason to think that the two have to be exactly equal for this. (And again, as above, this is only necessary if the economy is already producing at full capacity and has no room to expand. If there's excess idle capacity, then the government can just spend, putting that capacity into use, without causing prices to rise.)
So what about bond sales? Although taxes can decrease private spending, making room for government spending, bond sales cannot. Why? Because bond sales are voluntary. First the government spends, pushing on the economy to produce more. Next the government sells a bond. Can this stop anybody from spending? No. If somebody had wanted to spend, they simply wouldn't buy the bond. Bonds only get purchased by people who have already decided not to spend their money, aka savers. All bond sales do is change the form of people's savings, from "money" to bonds. The government can do this if it wants to offer people an alternate vehicle to hold their savings in, which pays a higher rate of interest than money, but bond sales do not "make room" for government spending in the same way that taxes do.
@@deficitowls5296 Do either of these, bonds and taxation, contribute to perception of value for currency? Meaning without the proper degree of both, the currency would lose value? And so some "limit on spending" would be the ability to create base money, and ability to service debts based on perception of economic growth such that people would value the currency...which could decline and affect imports if world considers quantity of money to increase or ability to produce of economy to decrease (relative to some current price/currency value) in future.
ua-cam.com/video/iiKr-i022mY/v-deo.html The Progressive Growth of the Money Supply Principle (year 2013) tells us the exact quantity of new money the economy needs to works correctly, driving us to the Wicksell interest rate or natural interest. This principle will force central banks to change monetary policy.
Ah Macri
This vid is one month old? Is there not an older version with comments exposing the lunacy of what this guy is saying? at 1:30 he argues that a government is not dependent on credit markets to remain operational. of course not as long as they don't spend more than tax revenue. but when they want to spend more than they have they have the 3 options. print money, borrow back money from the populace or raise taxes. Any one want to play 3 card monty? That's what this is.
MMT uses an ontology of money generally different than what most people are used to. We recognize that currency is an IOU of the government, and that therefore when the government does any spending, it is issuing IOUs. Furthermore, because the government is the issuer of the currency, government spending logically preceeds government revenue: the government wouldn't be able to collect any tax or borrow any dollars if it hadn't provided the private sector some dollars first, which it does by spending (or lending) them.
On those points then, thinking about how the government "pays for" its spending makes no sense. It spends by writing IOUs, created from thin air. When it receives payments back, like in taxes, it is redeeming those IOUs, which are destroyed.
Conventional economists use something called the "government budget constraint," which is what you said above but in equation form: government spending = revenue from taxes + borrowing + "printing money." We would say that attempting to identify the "sources" of government money is out of paradigm; it's treating the government like a currency user (like a household or business), when it isn't one. In truth, the equation is just an accounting identity: of the total amount spent by government in some period, some of it will be returned in taxes, some of it will be returned by bond sales, and any difference between the two will get counted as "money printed."
As an easy analogy, we all know you can ask where players in a game got the points that they have, but what does it mean to ask the scorekeeper where it got the points from? The scorekeeper doesn't "get" points from anywhere, it just creates them from thin air when he awards them, and they are destroyed when he deducts them. (And since the vast majority of the money system only exists in spreadsheet form, basically an electronic scoreboard, this is a strikingly prescient analogy.)
@@deficitowls5296 but the economy exists in real goods and real purchasing power of the currency, and some combination of trade surpluses or deficits, and all of this together contributes to "real" standard of living.
These IOU's you describe will have real quantifiable value, and foreigners willingness to exchange them for real goods they produce, hold them (or bonds), or invest in capital markets based on expectation of future real growth of economy aren't virtual points on a scoreboard and cannot be created on whim of govt without messing with these perceptions tied to the currency, affecting its real purchasing power of imports no?
And the fact that not every nation has same composition of imports, exports, or government spending as percent of GDP means there are real considerations about the effects of these measures on future productive capacity of an economy, and therefore its currency.
@@pkop4 you have successfully identified the real constraint, which is not money but production. if the government spends more money than can be used productively we will have inflation.
Yes... production is the real constraint..but it's more like a seasaw..too much production... lower prices. Too little higher prices..too much money with low production.. higher prices and higher production... with less money... lower prices.. we can print money,but it's value is tied to tax obligation and production I guess. Just like a monopoly game..the money comes from thin air at the start of the game, but it's 'value' comes from the game play... i.e. buying and selling houses, fees, fines from going to jail, borrowing, if the money is needed it can be printed..but the game play determines the value..I guess