Excellent! I'd also point out that the interest paid on bonds goes to the wealthy end of the private sector. In other words, interest rates are the opposite of progressive. Although outside of the scope of an article explaining debt, this would lead on to why Warren Mosler's ZIRP proposal should be adopted.
The statement "the issuance of bonds to match deficit spending is a convention" gives the impression that in normal times additional bonds are issued to match the current year's budget deficit. Is that what the author meant? If that were the case, wouldn't that suck money out of the economy equivalent to the budget deficit, thereby nullifying the monetary effects of the deficit?
Thanks for your comment Wombaticus Anonymous. I did mean that, i.e., 'in normal times additional bonds are issued to match the current year's budget deficit.'
However, bond issuance does not 'suck money out' of the economy: the value of the bonds purchased by commercial banks equals the value of reserves used to purchase them. The bond sale just swaps reserves for bonds, with interest now attached.
Any net addition to the non-government sector comes from deficit spending. Any net deduction comes from collecting taxes.
To expand on Jim's reply; when I get my £1,100 state pension at the end of the month, the government will send the money through my bank and so my bank receives £1,100 in its bank (reserve) account with the BoE and immediately credits my bank account with the £1,100.
This double entry bookkeeping means that the bank's books balance, ie it has an £1,100 asset in its bank account but also has a liability in owing me £1,100.
Although also "money" banks' reserve accounts are completely isolated from the money you & I use.
If I send back £200 in tax to the gov't, the above process is reversed, leaving the gov't with a £900 deficit and the bank and me with a £900 surplus.
What then happens is that the bank returns its £900 surplus in exchange for £900 in new bonds. My £900 is still intact and I'll immediately dash down to Morrisons to spend some of it but I could, if I wished, save some of it by buying some bonds from a bank.
Thanks for your comment lowly snail. :-) In general I aim to educate, rather than provide commentary on contemporary issues or news. There are plenty of people responding to news about the economy - but less providing a framework for understanding it.
The best most accurate description I think we can find is the negative equity of the federal government equals its contribution to M2.
If you go to the fed and sum together all the outstanding treasuries, they don’t sum to the national debt. At best they are around 95% of the national debt.
The other thing to note is that if treasuries are paid for by actual dollars and not reserves, and I think very little actually are, it’s functionally the same as paying federal tax, but with the provision that when the bond matures, the money is returned to the economy. But we all know that bonds serve as an asset slush fund for the commercial banking sector, a UBI for institutions and individuals who don’t need it.
Still obviously the math doesn’t math if you’re orthodox or heterodox MMT. something is wrong with the accounting. The proportion of outstanding treasuries and national debt don’t ever square.
“ Banks make loans when they are presented with a watertight business model presented by solvent individuals or businesses.”
You might want to rewrite that: “when they convince themselves they won’t lose principal or some billionaire promises AGI will make them infinitely rich. They will then sign any check put in front of them.”
A triple AAA rated car parts company just went belly up mere weeks ago; shades of GFC . Also, just about every major corporation happens to be a financial institution.. GM, the airline industry, just about everyone now makes money off of finance more than they make off of products more services. Harvard has long been known as a financial institution with Ivy league attached to it.
The quaint old-fashioned idea that banks are banks and businesses businesses eroded years ago. I don’t think macroeconomic models have been updated to embrace this reality. Finance and business have consolidated at the very largest scales.
👏🏼 Also, "managing the interest rate" is easy, *permanent zero rate* (with a floating exchange rate for the extra degree of freedom instead, to avoid inflation risk). If "we" want to hit an inflation target then easy-peasy, just use a lowest public sector wage re-gauge and a job guarantee as the floor buffer. No need to use the tool of basic income only for people who already have a lot of money. (Same point made by George S Gordon.)
Then "government debt" becomes defined as cash and deposits (or whatever the aggregate is ('M2'? who cares?!)), which is more obviously equivalent to private credit. Then we have the one proper true MMT framing which is that we are talking neither about debt nor credit, but *both*, so the 'government balance sheet' is what we're talking about.
The most important thing about that (the government balance sheet) is not the numbers on it, but what real resources they've claimed, and at what *real rate of 'spending'*, and (more hidden) what pointless parasitic fintec activity they permit, and most importantly what real resources they've horrifically squandered (all idle labour due to choosing an unemployed labour buffer — a crime against humanity).
(Though I guess the latter is not perhaps "more important" since the former feeds on the greed mindset and inflation hysteria leading to the latter. People with lots of government scorepoints prefer the poor to be miserable than pay more nominally — out of their rising real wage — for their plumbers and drivers.)
"the asset belongs to the non-government sector", though not necessarily the non-government sector of the issuing nation. Private bondholding entities are generally international corporations and free to transfer and domicile their assets in whatever country they wish.
Using bond issuance to 'soak up' the full amount of government fiat creation is a norm mandated by a series of laws and regulations. Occasionally (war, pandemic, GFC) this is allowed to run out of balance, but then government strives to return to balanced books, creating recession in the process. The result is that money in circulation (as opposed to savings) is largely bank credit. Isn't this just a government sop to private banking- to give them a profitable role within the economy that need not- indeed centuries ago did not- exist? Doesn't this stink of institutionalised corruption to you- albeit a stink that we don't notice since it is the water in which our 'frog' is being 'boiled?
I'll take this moment to note (off topic I know) that MMT's pet notion that the private banking sector acts as 'agents of the government' in issuing credit money is risible nonsense. Not only is the 'tail wagging the dog' at the moment, it has its hands tight round the throat of the sovereign governments of the Western world. It is not for no good reason that the countries of the world that have 'authoritarian' governments' now have the upper hand geopolitically. It is in precisely this financial authoritarianism that so-called 'libertarians' find cause for war, nothing whatsoever to do with personal liberties or territorial ambitions, though they would have us believe otherwise.
Thanks Kevin. Your comments are welcome - whether or not they are contrary to my own views. You are right of course when you say that those who gain most from the financial welfare offerred via government bonds - are those who are already wealthy.
And banks do indeed control the money supply, however the ups and downs of investment and growth are not driven by banks - they tend to respond to the business cycle and government policies - whether austerity or government spending.
When I say 'the asset belongs to the non-government sector' - I'm talking about the asset side of government spending: 97/98% of which goes into the private sector.
Commercial banks that are able to issue loans from 'thin air'.can only do this because they operate under the umbrella/regulations of the central bank. Their deposits are backed by deposit insurance schemes (like FDIC in the US or FSCS in the UK), they have direct access to the central bank, If they run short of reserves, they can borrow from the central bank. Their lending activities are ultimately underpinned by the state.
The financial system itself is ultimately dependent on the government/central bank: without the government issuing bonds - there is no primary market and eventually no secondary market. And of course - pension funds - are depend on the governments providing risk free money.
Currency issuing governments can decide to stop providing bonds (as happenned under Clinton). If the reaons not to do that is related to funding of pension funds etc - can be taken over or funded dirctly by the govenment: the ability to issue their own currency is not limit. I don't think that's a good idea, I'm just saying that it's possible. The Government/central bank is ultimately in control.
Non-bank financial institutions (NBFIs) such as Credit unions, Peer-to-peer lenders, hedge funds etc - have to find the money the use to make loans. Their loans are not guaranteed by the central bank.
Excellent! I'd also point out that the interest paid on bonds goes to the wealthy end of the private sector. In other words, interest rates are the opposite of progressive. Although outside of the scope of an article explaining debt, this would lead on to why Warren Mosler's ZIRP proposal should be adopted.
You are right George. Thanks for your comment.
The statement "the issuance of bonds to match deficit spending is a convention" gives the impression that in normal times additional bonds are issued to match the current year's budget deficit. Is that what the author meant? If that were the case, wouldn't that suck money out of the economy equivalent to the budget deficit, thereby nullifying the monetary effects of the deficit?
Thanks for your comment Wombaticus Anonymous. I did mean that, i.e., 'in normal times additional bonds are issued to match the current year's budget deficit.'
However, bond issuance does not 'suck money out' of the economy: the value of the bonds purchased by commercial banks equals the value of reserves used to purchase them. The bond sale just swaps reserves for bonds, with interest now attached.
Any net addition to the non-government sector comes from deficit spending. Any net deduction comes from collecting taxes.
To expand on Jim's reply; when I get my £1,100 state pension at the end of the month, the government will send the money through my bank and so my bank receives £1,100 in its bank (reserve) account with the BoE and immediately credits my bank account with the £1,100.
This double entry bookkeeping means that the bank's books balance, ie it has an £1,100 asset in its bank account but also has a liability in owing me £1,100.
Although also "money" banks' reserve accounts are completely isolated from the money you & I use.
If I send back £200 in tax to the gov't, the above process is reversed, leaving the gov't with a £900 deficit and the bank and me with a £900 surplus.
What then happens is that the bank returns its £900 surplus in exchange for £900 in new bonds. My £900 is still intact and I'll immediately dash down to Morrisons to spend some of it but I could, if I wished, save some of it by buying some bonds from a bank.
Does that help?
Nice outline. Must say that the sense of collapse is generally missing from MMT articles and I wonder why.....https://thehonestsorcerer.medium.com/the-debt-surge-ahead-3cbaaf4527ba
Thanks for your comment lowly snail. :-) In general I aim to educate, rather than provide commentary on contemporary issues or news. There are plenty of people responding to news about the economy - but less providing a framework for understanding it.
The best most accurate description I think we can find is the negative equity of the federal government equals its contribution to M2.
If you go to the fed and sum together all the outstanding treasuries, they don’t sum to the national debt. At best they are around 95% of the national debt.
The other thing to note is that if treasuries are paid for by actual dollars and not reserves, and I think very little actually are, it’s functionally the same as paying federal tax, but with the provision that when the bond matures, the money is returned to the economy. But we all know that bonds serve as an asset slush fund for the commercial banking sector, a UBI for institutions and individuals who don’t need it.
Still obviously the math doesn’t math if you’re orthodox or heterodox MMT. something is wrong with the accounting. The proportion of outstanding treasuries and national debt don’t ever square.
“ Banks make loans when they are presented with a watertight business model presented by solvent individuals or businesses.”
You might want to rewrite that: “when they convince themselves they won’t lose principal or some billionaire promises AGI will make them infinitely rich. They will then sign any check put in front of them.”
A triple AAA rated car parts company just went belly up mere weeks ago; shades of GFC . Also, just about every major corporation happens to be a financial institution.. GM, the airline industry, just about everyone now makes money off of finance more than they make off of products more services. Harvard has long been known as a financial institution with Ivy league attached to it.
The quaint old-fashioned idea that banks are banks and businesses businesses eroded years ago. I don’t think macroeconomic models have been updated to embrace this reality. Finance and business have consolidated at the very largest scales.
👏🏼 Also, "managing the interest rate" is easy, *permanent zero rate* (with a floating exchange rate for the extra degree of freedom instead, to avoid inflation risk). If "we" want to hit an inflation target then easy-peasy, just use a lowest public sector wage re-gauge and a job guarantee as the floor buffer. No need to use the tool of basic income only for people who already have a lot of money. (Same point made by George S Gordon.)
Then "government debt" becomes defined as cash and deposits (or whatever the aggregate is ('M2'? who cares?!)), which is more obviously equivalent to private credit. Then we have the one proper true MMT framing which is that we are talking neither about debt nor credit, but *both*, so the 'government balance sheet' is what we're talking about.
The most important thing about that (the government balance sheet) is not the numbers on it, but what real resources they've claimed, and at what *real rate of 'spending'*, and (more hidden) what pointless parasitic fintec activity they permit, and most importantly what real resources they've horrifically squandered (all idle labour due to choosing an unemployed labour buffer — a crime against humanity).
(Though I guess the latter is not perhaps "more important" since the former feeds on the greed mindset and inflation hysteria leading to the latter. People with lots of government scorepoints prefer the poor to be miserable than pay more nominally — out of their rising real wage — for their plumbers and drivers.)
"the asset belongs to the non-government sector", though not necessarily the non-government sector of the issuing nation. Private bondholding entities are generally international corporations and free to transfer and domicile their assets in whatever country they wish.
Using bond issuance to 'soak up' the full amount of government fiat creation is a norm mandated by a series of laws and regulations. Occasionally (war, pandemic, GFC) this is allowed to run out of balance, but then government strives to return to balanced books, creating recession in the process. The result is that money in circulation (as opposed to savings) is largely bank credit. Isn't this just a government sop to private banking- to give them a profitable role within the economy that need not- indeed centuries ago did not- exist? Doesn't this stink of institutionalised corruption to you- albeit a stink that we don't notice since it is the water in which our 'frog' is being 'boiled?
I'll take this moment to note (off topic I know) that MMT's pet notion that the private banking sector acts as 'agents of the government' in issuing credit money is risible nonsense. Not only is the 'tail wagging the dog' at the moment, it has its hands tight round the throat of the sovereign governments of the Western world. It is not for no good reason that the countries of the world that have 'authoritarian' governments' now have the upper hand geopolitically. It is in precisely this financial authoritarianism that so-called 'libertarians' find cause for war, nothing whatsoever to do with personal liberties or territorial ambitions, though they would have us believe otherwise.
Thanks Kevin. Your comments are welcome - whether or not they are contrary to my own views. You are right of course when you say that those who gain most from the financial welfare offerred via government bonds - are those who are already wealthy.
And banks do indeed control the money supply, however the ups and downs of investment and growth are not driven by banks - they tend to respond to the business cycle and government policies - whether austerity or government spending.
When I say 'the asset belongs to the non-government sector' - I'm talking about the asset side of government spending: 97/98% of which goes into the private sector.
Commercial banks that are able to issue loans from 'thin air'.can only do this because they operate under the umbrella/regulations of the central bank. Their deposits are backed by deposit insurance schemes (like FDIC in the US or FSCS in the UK), they have direct access to the central bank, If they run short of reserves, they can borrow from the central bank. Their lending activities are ultimately underpinned by the state.
The financial system itself is ultimately dependent on the government/central bank: without the government issuing bonds - there is no primary market and eventually no secondary market. And of course - pension funds - are depend on the governments providing risk free money.
Currency issuing governments can decide to stop providing bonds (as happenned under Clinton). If the reaons not to do that is related to funding of pension funds etc - can be taken over or funded dirctly by the govenment: the ability to issue their own currency is not limit. I don't think that's a good idea, I'm just saying that it's possible. The Government/central bank is ultimately in control.
Non-bank financial institutions (NBFIs) such as Credit unions, Peer-to-peer lenders, hedge funds etc - have to find the money the use to make loans. Their loans are not guaranteed by the central bank.