Here is why printing money is little different from selling Gov. Bonds to deficit spend. - Politics Forum.org | PoFo

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#14980037
On another site I asked this question and I got the rely below.

Analogies never prove anything, However let me use this one to illustrate this one.

The question I want to ask is ---
How much difference does it make if the US Gov. sells bonds after the fact to pay for deficit spending compared to just creating dollars and spending them? I'm assuming here that there is no crisis, just the normal every day situation.

I will use a game of Monopoly(c) to illustrate my argument. I will make a few rule changes though.
1] At the start each player gets $1000 in cash and five $100 bonds.
2] Each time you go past GO you get $2 in interest for each bond you hold.
3] The Bank or a separate bank will buy your bonds during your turn for a discount of $1, so you get $99. During your turn it will sell you a bond for $99.

These rules are intended to replace the *fact* that you can sell a US Bond at most any time and there is always going to be a willing buyer for it if there is a small discount. That is, US Gov. Bonds are very liquid. If this is not the case please tell me I'm wrong about this.

Now, I ask you, are these rules going to make any difference in how the game is played?
I assert that they change things very, very little. Players can park their money in Bonds to try to earn a little more money when they go around GO. If they land on a good property to buy or one owned by another player then [still in their turn] sell a bond to get the money they need to buy it or to pay the rent.
. . .The same thing happens every day IRL. People and corps. with Bonds can sell them if they want cash to buy something or to pay a bill. Currently, the world is awash in dollars, there is IIRC about $5T in cash and IIRC about $17T in debt (not owed to the US , like SS Trust Fund). There is also $XT in bank deposits created by loans. Therefore, there is plenty of money around for someone who wants to sell his US Gov. Bond (to do that if he wants to) to be able to do that.

========================

This is the answer that I got.
Question 2:
When the government matches an increase in its deficit spending with debt issued to the non-government sector, the immediate stimulus to aggregate expenditure is less than would be the case if the government didn’t borrow at all.

The answer is False.

Note the use of the term ‘immediate’, which is included so that you ignore any income flows that subsequently flow from any debt issued.

The mainstream macroeconomic textbooks all have a chapter on fiscal policy (and it is often written in the context of the so-called IS-LM model but not always).

The chapters always introduces the so-called Government Budget Constraint that alleges that governments have to “finance” all spending either through taxation; debt-issuance; or money creation. The writer fails to understand that government spending is performed in the same way irrespective of the accompanying monetary operations.

The textbook argument claims that money creation (borrowing from central bank) is inflationary while the latter (private bond sales) is less so. These conclusions are based on their erroneous claim that “money creation” adds more to aggregate demand than bond sales, because the latter forces up interest rates which crowd out some private spending.

All these claims are without foundation in a fiat monetary system and an understanding of the banking operations that occur when governments spend and issue debt helps to show why.

So what would happen if a sovereign, currency-issuing government (with a flexible exchange rate) ran a fiscal deficit without issuing debt?

Like all government spending, the Treasury would credit the reserve accounts held by the commercial bank at the central bank. The commercial bank in question would be where the target of the spending had an account. So the commercial bank’s assets rise and its liabilities also increase because a deposit would be made.

The transactions are clear: The commercial bank’s assets rise and its liabilities also increase because a new deposit has been made.

Further, the target of the fiscal initiative enjoys increased assets (bank deposit) and net worth (a liability/equity entry on their balance sheet).

Taxation does the opposite and so a deficit (spending greater than taxation) means that reserves increase and private net worth increases.

This means that there are likely to be excess reserves in the “cash system” which then raises issues for the central bank about its liquidity management. The aim of the central bank is to “hit” a target interest rate and so it has to ensure that competitive forces in the interbank market do not compromise that target.

When there are excess reserves there is downward pressure on the overnight interest rate (as banks scurry to seek interest-earning opportunities), the central bank then has to sell government bonds to the banks to soak the excess up and maintain liquidity at a level consistent with the target.

Some central banks offer a return on overnight reserves which reduces the need to sell debt as a liquidity management operation.

There is no sense that these debt sales have anything to do with “financing” government net spending. The sales are a monetary operation aimed at interest-rate maintenance.

So M1 (deposits in the non-government sector) rise as a result of the deficit without a corresponding increase in liabilities. It is this result that leads to the conclusion that that deficits increase net financial assets in the non-government sector.

What would happen if there were bond sales? All that happens is that the banks reserves are reduced by the bond sales but this does not reduce the deposits created by the net spending. So net worth is not altered. What is changed is the composition of the asset portfolio held in the non-government sector.

The only difference between the Treasury “borrowing from the central bank” and issuing debt to the private sector is that the central bank has to use different operations to pursue its policy interest rate target. If it debt is not issued to match the deficit then it has to either pay interest on excess reserves (which most central banks are doing now anyway) or let the target rate fall to zero (the Japan solution).

There is no difference to the impact of the deficits on net worth in the non-government sector.

Mainstream economists would say that by draining the reserves, the central bank has reduced the ability of banks to lend which then, via the money multiplier, expands the money supply.

However, the reality is that:
1] Building bank reserves does not increase the ability of the banks to lend.
The money multiplier process so loved by the mainstream does not describe the way in which banks make loans.
2] Inflation is caused by aggregate demand growing faster than real output capacity. The reserve position of the banks is not functionally related with that process.
3] So the banks are able to create as much credit as they can find credit-worthy customers to hold irrespective of the operations that accompany government net spending.

This doesn’t lead to the conclusion that deficits do not carry an inflation risk. All components of aggregate demand carry an inflation risk if they become excessive, which can only be defined in terms of the relation between spending and productive capacity.

It is totally fallacious to think that private placement [does he mean 'creation'?] of debt reduces the inflation risk. It does not.

Link = http://bilbo.economicoutlook.net/blog/?p=40049
#14981984
@Rugoz, yesterday I was watching a youtube vid by Mark Blyth the economist professor, and he said that the crouding out theory goes way back to the John Smith [Wealth of Nations] era. That is under the god standard. And IIRC at that time it did mean more or less immediately. But, that may not be the current 'Mainstream' that you were referring to.

With a fiat currency it can be completely different. Crowing out doesn't happen at all because the bank create dollars from thin air when they make loans. And the economy is given the dollars with or by the deficit spending before the bonds are sold.

So, I think you don't grok the full meaning and effects of MMT.
#14982033
One obvious difference is that, when selling bonds, there are different effects for those who choose to buy the bonds (they get interest, but tie up their money), and those who don't. With printing money, the effect is on all the people holding the currency, in proportion to what they hold, with them having no choice about it.
#14982035
Prosthetic Conscience wrote:One obvious difference is that, when selling bonds, there are different effects for those who choose to buy the bonds (they get interest, but tie up their money), and those who don't. With printing money, the effect is on all the people holding the currency, in proportion to what they hold, with them having no choice about it.


How is that a little difference? That seems like a huge difference to me.
#14982042
Prosthetic Conscience wrote:@Victoribus Spolia , I didn't say 'little', I said 'obvious'. I think it's pretty big too.


I was using the language of the OP, not yours specifically. I think we are in agreement and would share the same criticism of the claim that U.S. currency being printed via government decree is not different from selling government bonds.

The point you make was spot on, as any valuation (whether decreasing or increasing) regarding currency is attained involuntarily on the part of those holding the currency; whereas, any valuation regarding bonds was a voluntarily assumed risk on the part of the buyer.


Likewise, contra the assumptions of the OP; I think MMT is flawed partially in its presumption that the dollar, or any alleged fiat in the globe right now, is a true fiat currency.

I would contend that this is untrue and this mistake is what allows MMT people to make their claims. The Dollar is not fiat, it has a tangible base in oil thanks to Kissinger's agreement with Saudi Arabia as secured by the U.S. armed forces.

It has all of the benefits of the gold standard; without any of the limits on spending. Its the magic sauce for any state seeking global empire.
#14982156
Prosthetic Conscience wrote:One obvious difference is that, when selling bonds, there are different effects for those who choose to buy the bonds (they get interest, but tie up their money), and those who don't. With printing money, the effect is on all the people holding the currency, in proportion to what they hold, with them having no choice about it.

But, the people with the cash can buy a CD (Certificate of Deposit) from a lot of banks so they are all FDIC insured. That makes it more like the same thing, right?
And, like I said in the OP, the bond holder can always find someone to buy it.
#14982163
Victoribus Spolia wrote:
I was using the language of the OP, not yours specifically. I think we are in agreement and would share the same criticism of the claim that U.S. currency being printed via government decree is not different from selling government bonds.

The point you make was spot on, as any valuation (whether decreasing or increasing) regarding currency is attained involuntarily on the part of those holding the currency; whereas, any valuation regarding bonds was a voluntarily assumed risk on the part of the buyer.


Likewise, contra the assumptions of the OP; I think MMT is flawed partially in its presumption that the dollar, or any alleged fiat in the globe right now, is a true fiat currency.

I would contend that this is untrue and this mistake is what allows MMT people to make their claims. The Dollar is not fiat, it has a tangible base in oil thanks to Kissinger's agreement with Saudi Arabia as secured by the U.S. armed forces.

It has all of the benefits of the gold standard; without any of the limits on spending. Its the magic sauce for any state seeking global empire.

I do agree that the dollar is less of one , but why do you say that about the Br. Pound or the Norwegian currency?
#14982216
Two scenarios :


(1) The govt deficit spends - effectively electronic "money printing" - no bond issuance, end of story.

(2) The govt deficit spends - effectively electronic "money printing" - then, for every dollar some recipient receives, someone else swaps a dollar for a bond.


As Mitchell says, "there is no difference to the impact of the deficits on net worth in the non-government sector."

But surely (2) would mean marginally lower aggregate propensity to spend or marginally lower velocity of money than in (1), as Steve's analogy suggests (albeit a small effect)..?

Mitchell, however, ostensibly denies any such effect ("False"), but his analysis merely re-establishes that "there is no difference to the impact of the deficits on net worth in the non-government sector" without addressing the effect of the different portfolio mixes (cash vs bonds) on "the immediate stimulus to aggregate expenditure".

So, I'm not sure Mitchell has actually addressed Steve's question.
#14982234
SueDeNîmes wrote:Two scenarios :
(1) The govt deficit spends - effectively electronic "money printing" - no bond issuance, end of story.
(2) The govt deficit spends - effectively electronic "money printing" - then, for every dollar some recipient receives, someone else swaps a dollar for a bond.
As Mitchell says, "there is no difference to the impact of the deficits on net worth in the non-government sector."
But surely (2) would mean marginally lower aggregate propensity to spend or marginally lower velocity of money than in (1), as Steve's analogy suggests (albeit a small effect)..?
Mitchell, however, ostensibly denies any such effect ("False"), but his analysis merely re-establishes that "there is no difference to the impact of the deficits on net worth in the non-government sector" without addressing the effect of the different portfolio mixes (cash vs bonds) on "the immediate stimulus to aggregate expenditure".
So, I'm not sure Mitchell has actually addressed Steve's question.

Sue, I think the key element of my argument is the idea that [as of now] anyone who has a US bond and wants cash instead can sell it very, very easily. They are more liquid than just about any other way to earn money on cash assets.
In the Monopoly game I assumed this with the rule about how you can easily buy and sell bonds during your turn.
I think Dr. Mitchell also assumes this but fails to make it clear by never mentioning it. To him it may be as obvious and not need mentioning as the idea that the sun will come up tomorrow. Maybe. But, he should have included it as it seems like a critical and necessary assumption to me.

I just posted a thread in Political Circus on the FDC/2008. This does shed some light on the question of what would happen if a US Bond holder could not find a buyer at the drop of a hat. OTOH, IIRC the talk points out that as of now there is no other comparable bond in the World. Not German bonds because they have a surplus (are not selling bonds) and intend to keep having a surplus; not Japanese bonds because they are paying just about zero or even negative interest now. And so there is a huge demand for US Bonds.
#14982236
Steve_American wrote:but why do you say that about the Br. Pound or the Norwegian currency?



I say that about any currency that is not a reserve currency for oil like the dollar and still trades in the dollar in order to buy oil. This in essence is no different than the Bretton-Woods agreement, only instead of Gold as the unspoken foundation to the dollar and why other nations needed the dollar, now oil serves in the place of gold.


This is why the dollar can be printed almost ad-infinitum and not create hyper-inflation; because the "demand" for the dollar internationally will give a home to those printed dollars and therefore justify the printing of them. All other currencies that have to be converted to the dollar in order to buy oil likewise receive similar printablity without major risk of hyper-inflation (because you still need exchange).

Oil is incredible in this way as compared to Gold; gold is finite in a real-world sense as its supply is very low and almost non-existent; and though its value is high, its finite character limits size of any government that ties its currency to it.

Oil, by contrast has high supply, high demand, and is consumed (whereas Gold is usually a permanent store of value). Thus, by tying the dollar to oil as a reserve currency, the demand for the dollar will always increase with the increasing demand for oil, and will not stall out as the nations buying oil aren't just storing it and not using it, but consuming it. Thus, the dependency on dollar-demand remains both constant and increasing over time.

The size and scope of the current welfare state in the U.S. and ALL of the social democracies worldwide would not be possible had the dollar been still tied to a finite amount of Gold. Oil, unlike Gold, is only theoretically finite, as we have not seen peak production yet of it (atleast not publicly); and the demand has only increased. If the demand for oil ever stopped, but the supply remained high; the dollar's value would collapse and runaway inflation would likely occur. The same thing would happen if the dollar's reserve status were eliminated suddenly. That the U.S. is increasingly turning to fossil fuel net-export status is a sign that the government is well aware of this and is taking steps to mitigate a total collapse.

The point is, as more counties become increasingly developed and demand more oil for their economic and developmental needs; the value of the dollar (its demand) will increase in proportion to the demand for oil; thus, the dollar may be printed by the U.S. government to match or exceed this demand to fund its own desires (whether regarding welfare, the military, etc) because those dollars will never flood the domestic market as they will always be in demand by foreign markets in order to purchase oil. Likewise, the printing of domestic currencies in other countries may likewise fluctuate in proportion to their own country's demand for oil (and therefore the dollar).


MMT is predicated on the false assumption that fiat currencies and deficit spending are viable, economically; however, this theory's predication was developed on assumptions about our current monetary system which are not true; namely that the currency is fiat; when its not. The currencies of the world are backed in oil because they are tied to the dollar as the reserve currency for oil and oil is arguably the most essential substance on the earth for maintaining a modern economic order based on technological advancement, automotive transportation, air travel, plastics, etc, etc.

Chartalism received sufficient criticism in its own day and MMT would be a more believable variety had it not predicated its theories on a plainly incorrect interpretation of how modern states function in relation to the valuation of their currency.
#14982295
Steve_American wrote:But, the people with the cash can buy a CD (Certificate of Deposit) from a lot of banks so they are all FDIC insured. That makes it more like the same thing, right?
And, like I said in the OP, the bond holder can always find someone to buy it.

No, not really. You appear to be approaching this from the point of view of a private American citizen wondering what to do with a bit of spare cash. If you want to talk about economics, you should be thinking of global meanings applicable everywhere, and not just under the laws that apply to individuals in one country. You'd also need to consider what happens when entities (pension funds, insurance firms, banks, sovereign wealth funds etc.) decide to move money between countries rather than put it into bonds in the country the money starts in. It's not just about whether the bond is freely tradeable; it's also about the relative risk and return from investing it in commerce or real estate. Money isn't just there to pay bills.
#14982403
Victoribus Spolia wrote:I say that about any currency that is not a reserve currency for oil like the dollar and still trades in the dollar in order to buy oil. This in essence is no different than the Bretton-Woods agreement, only instead of Gold as the unspoken foundation to the dollar and why other nations needed the dollar, now oil serves in the place of gold.
This is why the dollar can be printed almost ad-infinitum and not create hyper-inflation; because the "demand" for the dollar internationally will give a home to those printed dollars and therefore justify the printing of them. All other currencies that have to be converted to the dollar in order to buy oil likewise receive similar printablity without major risk of hyper-inflation (because you still need exchange).
Oil is incredible in this way as compared to Gold; gold is finite in a real-world sense as its supply is very low and almost non-existent; and though its value is high, its finite character limits size of any government that ties its currency to it.
Oil, by contrast has high supply, high demand, and is consumed (whereas Gold is usually a permanent store of value). Thus, by tying the dollar to oil as a reserve currency, the demand for the dollar will always increase with the increasing demand for oil, and will not stall out as the nations buying oil aren't just storing it and not using it, but consuming it. Thus, the dependency on dollar-demand remains both constant and increasing over time.
The size and scope of the current welfare state in the U.S. and ALL of the social democracies worldwide would not be possible had the dollar been still tied to a finite amount of Gold. Oil, unlike Gold, is only theoretically finite, as we have not seen peak production yet of it (atleast not publicly); and the demand has only increased. If the demand for oil ever stopped, but the supply remained high; the dollar's value would collapse and runaway inflation would likely occur. The same thing would happen if the dollar's reserve status were eliminated suddenly. That the U.S. is increasingly turning to fossil fuel net-export status is a sign that the government is well aware of this and is taking steps to mitigate a total collapse.
The point is, as more counties become increasingly developed and demand more oil for their economic and developmental needs; the value of the dollar (its demand) will increase in proportion to the demand for oil; thus, the dollar may be printed by the U.S. government to match or exceed this demand to fund its own desires (whether regarding welfare, the military, etc) because those dollars will never flood the domestic market as they will always be in demand by foreign markets in order to purchase oil. Likewise, the printing of domestic currencies in other countries may likewise fluctuate in proportion to their own country's demand for oil (and therefore the dollar).
MMT is predicated on the false assumption that fiat currencies and deficit spending are viable, economically; however, this theory's predication was developed on assumptions about our current monetary system which are not true; namely that the currency is fiat; when its not. The currencies of the world are backed in oil because they are tied to the dollar as the reserve currency for oil and oil is arguably the most essential substance on the earth for maintaining a modern economic order based on technological advancement, automotive transportation, air travel, plastics, etc, etc.
Chartalism received sufficient criticism in its own day and MMT would be a more believable variety had it not predicated its theories on a plainly incorrect interpretation of how modern states function in relation to the valuation of their currency.

1st of all --- I made a mistake. In so far as the Br. pound and Norway's whatever-its-called are subject to EU rules they are not true fiat currencies. OTOH, China's, Australia's, NZ's, Canada's, etc. are true fiat currencies. At least by MMT standards.

Now my reply. You make a lot of good points. I am not a good enough lay-economist to make a judgment. However ---
1] Elsewhere it was pointed out that the world is in another mutual assured destruction situation. In the GFC/2008 the Fed. Res. stepped in and provided many trillions of $$ to the banks of all the world to prop them up. All the world is interwoven and if the US$$ is attacked and hyperinflation starts in the US it is likely that this will crash the world economy. This will soon have 3 effects, the 1st one will start it and the other are 2 caused by and following the preceding one. 1st, all the economies will cease to function, then people in the cities will start to starve and riot, and finally the assets of the rich will be destroyed or taken from them. So, why would the rich who hold the overseas $$ want to do that? See the video in my thread in Political Circus.
2] So, it is unlikely that the rich will force hyperinflation on the US if they can avoid it.
3] Back in the day when there were fixed exchange rates, i.e. under Bretten Woods and before that too; nations could devalue their currency and they could impose capital controls. It is possible that the US Gov. would do that if the world attacked it to cause hyperinflation. It could use eminent domain to buy for pennies on the dollar all or selected foreign owned real estate, it could freeze the bank accounts of selected foreigners and nations (like it did to Japan in 1941), it could take other constitutional steps also.
4] What is the upside for the foreigners who economists say will want to force hyperinflation onto America and thereby destroy the world's economy? Note that: I'm using the history of the GFC/2008 to show how the whole world is dependent on the US$$ as the reserve currency. A crisis in the US banking system immediately spilled over to threaten to crash the big European and other banks worldwide. Only the actions of the Fed. Res. bank saved the world.

So, I think it is possible that MMT can be used by the advanced nations to keep their economies moving. If people agree that AGW is a crisis, then MMT provides a way to pay for what it takes to avert the worst of its effects. Just like massive deficit spending and even selling war bonds directly to the Fed. Res. allowed the massive US spending in the crisis of WWII. [When the Fed. buys bonds from the US Treasury it is seen as a form of "printing dollars" today.]
#14982652
Steve_American wrote:Sue, I think the key element of my argument is the idea that [as of now] anyone who has a US bond and wants cash instead can sell it very, very easily. They are more liquid than just about any other way to earn money on cash assets.
In the Monopoly game I assumed this with the rule about how you can easily buy and sell bonds during your turn.
I think Dr. Mitchell also assumes this but fails to make it clear by never mentioning it. To him it may be as obvious and not need mentioning as the idea that the sun will come up tomorrow. Maybe. But, he should have included it as it seems like a critical and necessary assumption to me.

I just posted a thread in Political Circus on the FDC/2008. This does shed some light on the question of what would happen if a US Bond holder could not find a buyer at the drop of a hat. OTOH, IIRC the talk points out that as of now there is no other comparable bond in the World. Not German bonds because they have a surplus (are not selling bonds) and intend to keep having a surplus; not Japanese bonds because they are paying just about zero or even negative interest now. And so there is a huge demand for US Bonds.


Yep, agreed re liquidity, but surely the interest on the bonds would incentivise saving - or disincentivise spending at the margins - compared to cash dollars.
#14983325
SueDeNîmes wrote:
Yep, agreed re liquidity, but surely the interest on the bonds would incentivise saving - or disincentivise spending at the margins - compared to cash dollars.

Yes, which is why I didn't claim there is NO difference.
To me the difference expressed as a percentage is about 1%.
Which to me is not enough to worry about.

However, I assumed that there is no crisis. I showed that just spending $$ and not selling bonds makes very little difference and I state my firm belief that, therefore, it will not cause a crisis.
OTOH, what if a crisis is triggered by some other thing, like the GFC/2008 was?
Here, I can see a difference. In a crisis people with cash can do stuff with it. People with bonds are somewhat more limited.
In the GFC/2008 people flocked to US bonds because they were better than any other bond in the world. And in the long run as good as cash dollars will be. If dollars are valueless then the bonds will also be valueless.

I still don't see the reason the bond holders will ever decide that they need to crash the value of their bonds. How is this in their interest? Except China might use it as a short of war method of attacking the US. Maybe.
Last edited by Steve_American on 28 Jan 2019 01:27, edited 1 time in total.
#14983456
I see what I think is potentially a big accounting problem with this comparison.

In accounting, and also economics, there is the concept of double-entry bookkeeping.

A credit is always matched by a debit. Assets are matched by debts. It balances to zero (under proper circumstances).

Thus, the balance of payments (trade deficit/surplus) is matched by the balance of accounts (deficit/surplus of financial flows).

The government originating bonds adheres to this. The immediate cash revenue is a credit, while the bond itself is a countervailing liability.

Dollars off the press, used to fund government spending, are something out of thin air.

It can be done because if done moderately it's like pissing in a pond.

I genuinely don't think it can be done on a magnitude which you advocate, without real negative consequences.
#14983617
@Crantag,
I respect your opinion and will not argue against it. But, it is just an opinion.
Also, you gave no reason or evidence to back it up so I can't argue against your reasons.

Would it solve your bookkeeping problem if the Fed. bought some bonds and never redeemed them or just rolled them over forever? It seems like it might.

I'm not sure you know how much of this I'm advocating. I'm not even sure I know how much I'm advocating. As much as necessary, I guess.

BTW, I have seen reports that during WWII the Fed. bought about half of the war bonds that were sold. This is an example of massive "dollar printing" and it didn't seem to cause any problems during or after the war. But, we must remember that during the war there was rationing in place for food, fuel, and tires, etc.

PS --- Did you mean 'real world negative consequences' or "real big negative consequences"? I assumed real world.
#14983688
In reply to no one:
It seems to me [IStM] that if the Gov. spends dollars and doesn't sell a bond then, obviously, that money is spent and re-spent until someone parks it in some sort of a savings place. Like a CD or something.

Buying real estate or corp. stock just moves the cash to a different person's account, right?
Buying machines or tools for a factory is the same thing. So, investing (here) is not the same as saving.

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