If we run deficits now, it means cuts in the future - Page 4 - Politics Forum.org | PoFo

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#15175121
Rugoz wrote::eh:

:eh:

Only if the bonds are purchased from the central bank. Only the central bank can remove reserves from the system.

Taxation and Treaury bond auctions also remove reserves from private sector balances. The central bank is uniquely authorised by govt to mark reserve balances up or down, but doesn't tax or issue Treasury bonds.

Not that it's even relevant to what I was saying about the purpose of govt bond issuance.
#15175122
me wrote:It is purchase of the bonds that removes reserves from the system, and the central bank cannot buy bonds directly from Treasury.

Steve_American wrote:I'm no expert. However, it seems to me that when the Gov. sells bonds to the public, this removes cash, aka reserves, form the banking system.

The above says just that.

It then follows, that when the Fed. buys bonds from the public, this would add cash, aka reserves, to the banking system.

Yup, and most central banks have literature saying so.
#15175505
SueDeNîmes wrote:Taxation and Treaury bond auctions also remove reserves from private sector balances. The central bank is uniquely authorised by govt to mark reserve balances up or down, but doesn't tax or issue Treasury bonds.


At least partially a misunderstanding then. The treasury issuing bonds potentially (i.e. if it doesn't spend the money) removes reserves from private sector balances, simply by shifting them to the treasury account, but only the central bank can remove them from the system altogether.

SueDeNîmes wrote:Not that it's even relevant to what I was saying about the purpose of govt bond issuance.


You said

The govt doesn't really have to issue bonds at all and does so, not in order to obtain its own currency, but to mop up central bank reserves created by net (or "deficit") spending, which would otherwise accumulate in the banking system until the central bank lost control of interest rates


That's generally not why governments issue bonds. They do it to get money to pay for stuff. Of course they can sit on their cash in order to withdraw it from the banking system. The reason you're saying that is probably because the US treasury has been sitting on a lot of cash since 2020 (dark blue line):

Image

I guess the treasury does that to benefit from the low yields. Since banks are not in any way reserve-constrained currently, in fact haven't been for most of the time since the financial crisis, it's not being done to constrain banks however.
#15175616
Rugoz wrote:At least partially a misunderstanding then. The treasury issuing bonds potentially (i.e. if it doesn't spend the money) removes reserves from private sector balances, simply by shifting them to the treasury account, but only the central bank can remove them from the system altogether.
...snip...
You said
...snip...
That's generally not why governments issue bonds. They do it to get money to pay for stuff. Of course they can sit on their cash in order to withdraw it from the banking system. The reason you're saying that is probably because the US treasury has been sitting on a lot of cash since 2020 (dark blue line):

Image
...snip...
I guess the treasury does that to benefit from the low yields. Since banks are not in any way reserve-constrained currently, in fact haven't been for most of the time since the financial crisis, it's not being done to constrain banks however.


Sir, both of those assertions can be disputed.
MMT asserts that the US Gov. can, and often does , deficit spend without 1st having the money in its account at the Fed. And then it sells bonds to "cover" the check that it kited.
This because it is the issurer of the dollar. This is why the Gov. is not at all like a household.

MMT also asserts that taxes remove dollars from the world. [When someone pays taxes with cash, it is cheaper for the Gov. to destroy them than it is to use an armored truck to move them. So, the Gov. shreads or burns the cash.] Because of the above statement (spend before borrowing to cover it) it follows logically, that taxes and bond sales do remove cash, aka reserves, from the (private) banking system.

All of this goes directly to your point that the Gov. sells bonds to get dollars to spend.
MMT disputs this. MMT asserts that the Gov. issues the currency, and therefore, it doesn't need to sell bonds at all. It is required to by law, but the law is a hold over from the gold standard.
Are you aware that Pres. Lincoln spent greenbacks into the economy because bond buyers wanted too much interest? This proves that in reality (which is different from 'legally') the Gov. does not need to borrow (or sell bonds) to get dollars to spend.

Sue is telling you what MMTers say is how the system works in reality. That the Fed. does buy bonds to remove cash from the banking system to keep the overnight interbank interest rate a little above zero. [And that the Gov. sells bonds to remove cash from the economy to reduce the inflation risk.] [Under the gold standard, the Gov. sold bonds to protect the gold supply, because bond holders didn't have dollars, so they could not demand gold in exchange for the dollars which they didn't have anymore.]

Sue is telling you how reality works, and you seem to be responding with either a theoretical construct or with what is currently legal. You are talking past each other.
It would be helpful if you 2 could agree to talk about either "reality" or "current legality".

.
#15175922
To sumarizse this thread.
The original claim was that deficits now, would require large or huge 'cuts' later, 'huge' because who would care about small cuts in Gov. spending when it is running a large deficit?

The OP was asked to explain why, if the UK had had a national debt in every year for the last 325 years, that somehow, the US would have to have a large surplus to pay down its national debt, anytime soon. He never replied.
I know that this is the MS contention, but it doesn't seem to be supported by real economic history.
The MMRers here explained that this MS econominc theory or conclusion made some semse as long as the US was on the gold standrd. However, now that the US is off the gold standard it no longer makes any sense. Now, the so called US nationl debt is just the total of all the previous deficit spending that the Gov. made that it did not tax back out of the economy. That all these dollars are now assets of some part of the worldwide public. They like having them. It makes no sense for the US to tax those dollars away from the holders, and the US can't tax $20T away from the rest of the American people, because they it don't have the assets or income to pay those taxes. And, very importantly, such a tax plan would destroy the US economy in just a few years, and that would be before $1T of the bonds had been paid-off.

The MMTers here also explained that the US will never again need to sell a bond with an interest rate over 1%** (or over 1/2% after inflation is taken into account), never again. It can do this because just like Pres. Lincoln did by printing greenbacks and spending them into the economy, the US can now just credit the bank accounts of corps. & people with dollars and not sell a bond to match the deficit spending. Yes. this will add to the so called national debt, but this name for it is out of date (see above). The Gov. must not do this too much though or there will be inflation. However, "too much" is a huge alot more than MS economists think it is.


. ** . Note: that people are buying German bonds now with a negative interest rate. At least I've been told this is true.
#15176095
Rugoz wrote:At least partially a misunderstanding then. The treasury issuing bonds potentially (i.e. if it doesn't spend the money) removes reserves from private sector balances, simply by shifting them to the treasury account, but only the central bank can remove them from the system altogether.

To the same effect - "remove" being correct term. Only the central bank deletes reserves altogether and even that is down to govt authorisation.



You said

"The govt doesn't really have to issue bonds at all and does so, not in order to obtain its own currency, but to mop up central bank reserves created by net (or "deficit") spending, which would otherwise accumulate in the banking system until the central bank lost control of interest rates"


I did indeed say that along with the following citation:

Wikidedia wrote:A central government with its own currency can pay for its nominal spending by creating money ex novo,[3] although typical arrangements leave money creation to central banks. In this instance, a government issues securities to the public not to raise funds, but instead to remove excess bank reserves (caused by government spending including debt servicing cost that is higher than tax receipts) and '...create a shortage of reserves in the market so that the system as a whole must come to the [central] Bank for liquidity.' [4]

https://en.wikipedia.org/wiki/Government_debt



That's generally not why governments issue bonds. They do it to get money to pay for stuff. Of course they can sit on their cash in order to withdraw it from the banking system. The reason you're saying that is probably because the US treasury has been sitting on a lot of cash since 2020


Nothing to do with it.

If govt had to issue bonds in order to pay for stuff, there wouldn't be fiscal rules obligating it to match net spending with bond issuance. It's like saying a diet is a means of obtaining food.
#15176109
SueDeNîmes wrote:I did indeed say that along with the following citation:

A central government with its own currency can pay for its nominal spending by creating money ex novo,[3] although typical arrangements leave money creation to central banks. In this instance, a government issues securities to the public not to raise funds, but instead to remove excess bank reserves (caused by government spending including debt servicing cost that is higher than tax receipts) and '...create a shortage of reserves in the market so that the system as a whole must come to the [central] Bank for liquidity.'


Check the source of that quote. It says:

the Bank of England creates a shortage of reserves in the market so that the system as a whole must come to the Bank for liquidity

https://www.bostonfed.org/-/media/Docum ... er202m.pdf

Never trust Wiki with such details.

SueDeNîmes wrote:If govt had to issue bonds in order to pay for stuff, there wouldn't be fiscal rules obligating it to match net spending with bond issuance. It's like saying a diet is a means of obtaining food.


Why? If "net spending" is expenses minus revenue, presumably, the government has to issue bonds to get money to pay for the shortfall.
#15176117
Rugoz wrote:Check the source of that quote. It says:


https://www.bostonfed.org/-/media/Docum ... er202m.pdf

Never trust Wiki with such details.



Why? If "net spending" is expenses minus revenue, presumably, the government has to issue bonds to get money to pay for the shortfall.


Sir, thiat last sentence shows that you still don't grok the main point behind MMT.
MMT's main point is that the US is *not* on the gold standard.
Back in the day, govs. *did* have to get gold from somewhere before they could spend it.
The US left the gold standard 50 years ago. Fifty years is, IMHO, long enough for us to *know* that the dollar does not need to be backed by gold to have or even retain its value.
When Pres. Lincoln printed greenbcks and spent them into the economy to pay for the war, he didn't have too (and didn't) sell bonds to do it. The US today has even less need to sell bonds.

You said "presumably",. Well, you were right to be unsure.

One way to maybe undrestand the concept is to assume that counterfitters could print $100 bills that could not be told from real $100 bills by any possible test. If you can grant that assumption for a moment, then if follows that the counterfitters would not need to borrow money to spend. They can just print money.
. . . The US Gov. is very like those coubterfitters. It doesn't need to sell bonds to borrpw dollars from anyone. Yes, there is some risk of inflation. However, Japan and the BoJ have doing a thing that is very like printing money. The BoJ now holds about 40% of Japan's net debt, this debt is now over 234.86% of its GDP**. Thus, it is not 40% of some small debt. Yet, Japan has one of the strongest currencies in the world, there is less than 1% inflation (ignore recent covid situations), sells all its bonds every time, and the interest on those bonds is less than 1%. Now of course, Japan is a net exporter, and this matters.

OTOH, the dollar is the world's reserve currency. The euro can't replace it because Europe normally doesn't offer many new bonds and right now its bonds are paying about 0% interest. Japan is too small to replace the dollar. China might, but right now covid has smeared mud all over its reputation, and who in their right mind would trust the CCP to keep its agreements. Right now, it is very hard to pull your dollars out of China, the gov. doesn't allow that. IIRC.



. ** .
[quote the internet] In 2019, the national debt of Japan amounted to about 234.86 percent of the gross domestic product. Japan's national debt ranks first among countries with the highest debt levels in the world, far surpassing the debt levels of Greece - which ranks number two - whose financial crisis has been in the spotlight recently.
#15176159
Rugoz wrote:Check the source of that quote. It says:


https://www.bostonfed.org/-/media/Docum ... er202m.pdf

Never trust Wiki with such details.

Which it does by selling (mostly) Treasury bonds, hence need for Treasury to issue them.


Why? If "net spending" is expenses minus revenue, presumably, the government has to issue bonds to get money to pay for the shortfall.

Why? There's no reason to think so in a fiat currency system, and the earlier citation explicitly states not. The fiscal rule re bond issuance is self-imposed. It's the difference between a diet and a famine.
#15176243
SueDeNîmes wrote:Which it does by selling (mostly) Treasury bonds, hence need for Treasury to issue them.


Bond markets are very liquid, hence the preference to buy/sell bonds in OMOs. I think about two thirds of the Fed's assets are treasuries right now. In any case, the Fed holds maybe 1/4 of total US debt, which is a record high. I don't think there has ever been a situation where the treasury had to issue bonds such that the Fed could perform OMOs. Feel free to provide evidence of such a situation.

Also note that when the treasury issues bonds and the Fed buys them, that actually increases the money supply.

SueDeNîmes wrote:Why? There's no reason to think so in a fiat currency system, and the earlier citation explicitly states not. The fiscal rule re bond issuance is self-imposed. It's the difference between a diet and a famine.


Back to square one? Again, this is about the role of institutions in the present institutional arrangement. The government must issue bonds to get money to pay for stuff.
#15176296
Rugoz wrote:Bond markets are very liquid, hence the preference to buy/sell bonds in OMOs. I think about two thirds of the Fed's assets are treasuries right now. In any case, the Fed holds maybe 1/4 of total US debt, which is a record high. I don't think there has ever been a situation where the treasury had to issue bonds such that the Fed could perform OMOs. Feel free to provide evidence of such a situation.

Also note that when the treasury issues bonds and the Fed buys them, that actually increases the money supply.

Back to square one? Again, this is about the role of institutions in the present institutional arrangement. The government must issue bonds to get money to pay for stuff.


Sir, then why not say it as, "Given the present institutional arrangement, the government must issue bonds to get money to pay for stuff."

At a time like this when institutional arrangements are in a massive state of fluz (think of all the laws being passed "to protect" the vote or maybe "to restrict" the vote so Repuds can win again) isn't it kind of silly to just assume that everyone will know that you are excluding the possibility of any changes?

In fact, why are you excluding the possibility of any changes? Isn't the whole point of an internet forum, to talk about possible changes to make things better?
.
#15176344
Rugoz wrote:Bond markets are very liquid, hence the preference to buy/sell bonds in OMOs. I think about two thirds of the Fed's assets are treasuries right now. In any case, the Fed holds maybe 1/4 of total US debt, which is a record high. I don't think there has ever been a situation where the treasury had to issue bonds such that the Fed could perform OMOs. Feel free to provide evidence of such a situation.


The Fed wrote:
Statement Regarding Supplementary Financing Program
September 17, 2008

Today, the Treasury Department announced the initiation of a temporary Supplementary Financing Program. The program will consist of a series of Treasury bill auctions, separate from Treasury's current borrowing program, with the proceeds from these auctions to be maintained in an account at the Federal Reserve Bank of New York. Funds in this account serve to drain reserves from the banking system, and will therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives.

https://www.newyorkfed.org/markets/stat ... 91708.html



Treasury wrote:
The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program, which will provide cash for use in the Federal Reserve initiatives.

https://www.treasury.gov/press-center/p ... p1144.aspx


Same with the UK's Asset Purchase Facility underwritten by Treasury.



Regardless of "such a situation", the point was that OMOs using Treasury bonds logically require Treasury to have issued bonds in the first place.


Also note that when the treasury issues bonds and the Fed buys them, that actually increases the money supply.

Which also requires Tresury to have issued bonds in the first place.



Again, this is about the role of institutions in the present institutional arrangement.

Again, the current institutional arrangement is that

"A central government with its own currency can pay for its nominal spending by creating money ex novo,[3] although typical arrangements leave money creation to central banks. In this instance, a government issues securities to the public not to raise funds, but instead to remove excess bank reserves (caused by government spending including debt servicing cost that is higher than tax receipts) and '...create a shortage of reserves in the market so that the system as a whole must come to the [central] Bank for liquidity."
https://en.wikipedia.org/wiki/Government_debt

The government must issue bonds to get money to pay for stuff.

Apparently not.
#15176507
Steve_American wrote:@SueDeNîmes,
AFAIK, he is right. In the US, there is currently a law that requires bond sales to match deficit spending.


There's no question about that. The question is whether the purpose is for govt to obtain its own currency or to maintain the value of its currency. If it were simply impossible for the govt to net spend without issuing bonds, there wouldn't be any such rule. We're compelled to drive on a certain side of the road because it's possible not to, but there'd be no point in a law prohibiting us from driving on water.

In fact most monetary sovereign govts didn't rigidly adhere to that rule before the 1980s, and most reserve the right to bypass it.
#15176522
SueDeNîmes wrote:Statement Regarding Supplementary Financing Program


That's an interesting case.

Here's more background:

WSJ wrote:Another Fed Maneuver to Digest

The Treasury announced this afternoon that it is going to revive a program in which it borrows $200 billion by issuing short-term bills and leaves the cash on deposit with the Federal Reserve. Why? And why now?

The Treasury initiated this program -- called the Supplemental Finance Program -- at the peak of the financial crisis. It was a way to get the Fed cash it needed to fund a myriad of new programs to get credit into the financial system. The Treasury reduced the program last year as its borrowing authority approached legal limits. But since Congress earlier this month approved an increase in the debt limit, it is able to revive it.

"The intention always was to resume SFP issuance when the debt ceiling was increased on a permanent basis, which finally happened earlier this month," said Lou Crandall, a money market analyst at Wrightson ICAP LLC. "The Treasury kept $5 billion of SFP bills outstanding throughout all the debt limit negotiations as a placeholder to indicate that it wanted to go back to the status quo ante."

The practical effect of this move is that the Fed will be able to finish $1.25 trillion of purchases of mortgage backed securities by the end of March without printing more money. Instead, it will have the cash on hand from the Treasury deposits to fund the purchases. As of February 17, the Fed's portfolio of mortgage backed securities had reached $1.025 trillion, roughly $200 billion short of the objective.

The supplemental finance program move is part of a complex dance that the Fed has to undertake to manage its large and growing balance sheet. Cash deposits from the Treasury were used to fund some of the Fed's early interventions into the financial system in 2008. But as the interventions grew, and the economic outlook worsened, the Fed took another approach. It began printing the money itself, in effect crediting the accounts of banks with cash when it made loans or bought securities.

Printing money made sense to rescue a wobbling financial system, but it could cause problems down the road. At some point, the Fed will need to drain this money -- known in central banking parlance as "excess reserves" -- to prevent an onset of inflation. It has been experimenting with and debating different ways of doing that. The Fed could sell some mortgage backed securities, taking cash from the buyers which reduces the supply of money in the system. It would soak up money itself by taking longer-term deposits from banks or doing trades with financial institutions that pull money away from them.

Excess reserves were $1.1 trillion on Feb. 10. Having the Treasury renew its supplemental finance program makes it easier for the Fed to contain the growth of this number and officials see it as a helpful supplement to its tools. But taking Treasury deposits aren't seen inside the Fed as a step toward tightening credit broadly in the economy.

When that time comes, and it will, the Fed is likely to increase the interest rate it pays banks on these reserves so they put money at the Fed instead of lending it out. That step is still likely at least several months away, something Fed Chairman Ben Bernanke is likely to reiterate in testimony to Congress Wednesday on the outlook for the economy and monetary policy.

https://www.wsj.com/articles/BL-REB-9131

Basically, the FED wanted to buy those mortgage-based securities from the banks without printing money, i.e. without being forced to sell them again should inflationary pressure arise. It's a curious move to be honest, because there was no danger of inflation at the time or in the future. Though that's with the benefit of hindsight. It's also worth noting that this wasn't an attempt to tighten credit broadly.

I don't see this as part of a central bank's standard monetary policy. It's more about a particular kind of asset and its effect on financial market stability.

Edit: Here's another take
https://econbrowser.com/archives/2010/0 ... ury_supple

Now that I'm thinking about it, those MBS were probably worthless, or expected to be. Of course that's a problem for the FED, because it couldn't reduce the money supply by selling worthless assets, because it would get no money for it, or far less than it spent. I think that's the reason for this move.

Regardless of "such a situation", the point was that OMOs using Treasury bonds logically require Treasury to have issued bonds in the first place.

Which also requires Tresury to have issued bonds in the first place.


The FED needs assets to work with. However, they don't have to be treasuries per se, they can also be corporate bonds for example, and, despite the FED buying and selling them, that doesn't mean they have been issued for that purpose. Those are two different things.
#15176615
Rugoz wrote:That's an interesting case.

Here's more background:

https://www.wsj.com/articles/BL-REB-9131


That isn't "background", but a different instance five years later. In the cited instance, Fed and Treasury unequivocally state that issuance was "at the request of the Federal Reserve" and in order "to drain reserves from the banking system" (your opinion notwithstanding). It isn't routine precisely because the govt issues bonds whenever it deficit spends. This is tangential to the question of whether deficit spending is contingent on bond issuance.
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