@morganist thank you for your thread and thank you @piezoe for the point/counter point.
It is like Economic 2.0 for us average Joe.
It is like Economic 2.0 for us average Joe.
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Name a single government without government bonds! You might want to re-think what you just wrote. cash-currency whats the difference. Is there going to be anything fundamentally different when we all move to a "cashless society"???If this was the case the currencies of countries that have surpluses of cash and no government bonds would not be able to issue currency.
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morganist
Name a single government without government bonds! You might want to re-think what you just wrote. cash-currency whats the difference. Is there going to be anything fundamentally different when we all move to a "cashless society"???
You are saying that the currency is based on the debt the government issue and not as a commodity in its own right. The government debt does not equates to the money in circulation, the money in circulation is a commodity that has a set supply that is different to the quantity of government bonds. You still can't get round the fact that money is currency and traded on an exchange, which is what gives it is value and operational dynamics. The explanations you give are either using debt or taxation income to determine its value or some form of Quantitative Easing.
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morganist
There is a error in your accounting. Although issuing sovereign bonds gives the appearance of borrowing and acquiring debt , for the sovereign, one that uses it's own fiat money!, it isn't what it appears. Your government regularly spends before either issuing corresponding bonds or receiving sufficient revenue to cover the expenditure! You, nor I, can do that. The sovereign doesn't really borrow money. Rather it creates the money it needs and uses bonds for an entirely different purpose than borrowing. But of course the outward appearance is that of borrowing. The net deficit equals to the penny all the additional money created and spent into the economy beyond what has been received back in revenue which is exactly in line with your understanding.
When the sovereign creates and sells a bond money flows back to the sovereign and the bond represents a temporary reduction in reserve balances, a future liability of the treasury and the promise to expand the outside money in the economy by the amount of interest to be paid.* The sovereign can do whatever they like with the money they receive for the bond. They can store it on their books, or figuratively burn it. It doesn't matter, because there is an endless supply of money whenever the sovereign desires to pay an obligation or buy goods, services or assets.** When sovereign bonds are traded within the economy there is no affect on the amount of outside money. The transaction is simply a transfer on money from one reserve account to another.
Because the amount of money needed in an economy grows with the economy, the deficit will also grow with the economy.*** So long as an economy continues to grow the deficit will grow, eventually exceed the GDP and continue to grow still larger. This is a great puzzlement to those who look at a nation's ratio of deficit to GDP ,e.g., Japan, and wonder why the economy doesn't collapse, when in fact they are looking at a perfectly normal state of affairs.
In a world of fiat money, only if a nations productivity fails to keep up with the sum of money created, spent into and left in the economy by the sovereign will it be in financial trouble.
I have used the example of Zimbabwe many times because it is so instructive. When Zimbabwe was Rhodesia it was the bread basket of Africa and its farms were very productive. Agricultural exports produced huge revenue and provided all the foreign currency reserves its central bank needed for international commerce. When Mugabe's revolution succeeded, the farms were nationalized and broken into pieces that were awarded to his freedom fighters for their sacrifices. These freedom fighters knew not the first thing about farming and Zimbabwe's agricultural production plummeted. Government revenues also plummeted and foreign currency reserves were rapidly depleted. The government continued to print money, but as there was little to buy, inflation quickly set in; then hyperinflation.
Deficits in themselves are neither good nor bad. They are simply a part of maintaining the necessary supply of outside money in an economy. Underlying every economy is its productivity. I don't think it is too much of a stretch to say that after 1971 the world transitioned from a gold standard to a "productivity standard." The latter is much, much better.
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*QE is different. There the government sells bonds to the C.B. via the secondary market, primary dealers I would guess, which is the near equivalent of the government selling bonds to itself, and uses the money created in the process to spend into the economy. The money is raised at virtually zero cost just as it would be if the new money were printed without linking it to bonds. (A practice frowned on by crusty old economists, and so new money is linked to bonds, though it does not have to be). The bonds are held on the books of the Central Bank. Interest rates are pushed down by QE.
Later if it is found that their is an excess of outside money in the economy, the C.B. can sell the bonds in its inventory into the private economy temporarily removing, i.e., sidetracking, money from reserve accounts and pushing interest rates up. The C.B. also has the option of holding the bonds to maturity in which case, the Treasury and C.B. being different arms of the same body, the net transaction is virtually the same as if the Treasury had indeed printed the money and spent it into the economy the without linking it to bonds.
**In the U.S. for example, when the Treasury writes a check it will always clear regardless of how much money is in the Treasury's reserve account at the Central Bank. The C.B. will cover any shortfall by crediting the Treasury's account with whatever is needed.
***A little reflection on your part will convince you that it is impossible for the amount of outside money in the economy to increase unless spending exceeds revenue; there must be a deficit!
I will try another position to explain to you why government debt is more than simply a deficit as you call it. When money is traded on an exchange it operates like a commodity that is bought and sold, which it has become. The currency is held to the factors that impact commodity prices and is set to follow the dynamics that a product traded on an exchange is subject to. Currency is a commodity it is not just a number on a balance sheet or a Treasury bond or a piece of paper. When the government has debt it can impact the trading operations of the its currency, which is a traded commodity on an exchange.
It doesn't matter how you view the debt, the fact is when government debt rises it has an impact on currency value and subsequently trade and investment. Simply the fact that due to money being a currency that is subject to market forces, government debt becomes a factor that impacts its price. You cannot see government debt as a deficit or something the sovereign has complete control of when the price of the currency is impacted by the level of government debt. Government debt or the government unnecessary deficit has to be managed to prevent the currency value from moving in an uncontrollable direction.
No.You are saying that the currency is based on the debt the government issue and not as a commodity in its own right.
You are saying that the currency is based on the debt the government issue and not as a commodity in its own right. The government debt does not equates to the money in circulation, the money in circulation is a commodity that has a set supply that is different to the quantity of government bonds. You still can't get round the fact that money is currency and traded on an exchange, which is what gives it is value and operational dynamics. The explanations you give are either using debt or taxation income to determine its value or some form of Quantitative Easing.
Let me quote from Wray as it expresses what I believe is the correct view. (I'm not inclined to get into a discussion of the forex markets. I'm interested in the more fundamental concepts I have been posting on.)
If government spending is 'financed' through creation of fiat money, and if taxes are designed to call forth things for sale to government -- rather than to 'finance' government spending -- then why does the government sell bonds? Of course, governments believe that they must sell bonds to borrow the funds necessary to financing spending. However, this is an illusion, as the spending must come first. As we will argue, bond sales (whether by the treasury or by the central bank) function to drain excess reserves; they cannot finance or fund deficit spending. This view builds upon Lerner's second law of functional finance; 'the government should borrow money only if it is desirable that the public should have less money and more bonds'.* More specifically, bond sale are designed to substitute an interest-earning government liability for non-interest-earning government fiat money, and is properly thought of as a monetary policy operation. [The 'Lerner' referred to is the great Aba Lerner, a famous mid-Twentieth Century economist.]
* I sometimes refer to this as 'sidetracking' as it temporarily removes outside money from the economy.
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morganist
Let me quote from Wray as it expresses what I believe is the correct view. (I'm not inclined to get into a discussion of the forex markets. I'm interested in the more fundamental concepts I have been posting on.)
____________________If government spending is 'financed' through creation of fiat money, and if taxes are designed to call forth things for sale to government -- rather than to 'finance' government spending -- then why does the government sell bonds? Of course, governments believe that they must sell bonds to borrow the funds necessary to financing spending. However, this is an illusion, as the spending must come first. As we will argue, bond sales (whether by the treasury or by the central bank) function to drain excess reserves; they cannot finance or fund deficit spending. This view builds upon Lerner's second law of functional finance; 'the government should borrow money only if it is desirable that the public should have less money and more bonds'.* More specifically, bond sale are designed to substitute an interest-earning government liability for non-interest-earning government fiat money, and is properly thought of as a monetary policy operation. [The 'Lerner' referred to is the great Aba Lerner, a famous mid-Twentieth Century economist.]
* I sometimes refer to this as 'sidetracking' as it temporarily removes outside money from the economy.
You are still explaining your view of what money is as opposed to how money reacts to market forces and the impact that has on an economy to operate. Currency traded on an exchange is subjected to the market forces a traded commodity are subjected to. This means any change in the factors that impact price will impact the currencies ability to trade at the same level.
Traders of the currencies are not going to be interested in whether the government debt is a debt or a necessary or unnecessary deficit, they are interested in the price of the currency. This will determine international trading ability and foreign investment, but having a high government debt no matter which way you see it will impact on the currency value.
Your position of how the money is issued or accounted for has no bearing on the currencies price and how it is impacted by a country having a high government debt. Regardless of how long the country can continue to run up a higher government debt regardless of how the money is raised or created it does not mean that it will not impact the currencies operations.
By having a different view of what the government debt is does not mean that the currency which is traded on an exchange is not subject to the same market forces it was with a different view of what the government debt is. It will still impact the currencies trading value and as a result create problems if the government debt or deficit increases in the future.
If your view is correct, as a currency trader how do I trade currency?You are still explaining your view of what money is as opposed to how money reacts to market forces and the impact that has on an economy to operate. Currency traded on an exchange is subjected to the market forces a traded commodity are subjected to. This means any change in the factors that impact price will impact the currencies ability to trade at the same level.
Traders of the currencies are not going to be interested in whether the government debt is a debt or a necessary or unnecessary deficit, they are interested in the price of the currency. This will determine international trading ability and foreign investment, but having a high government debt no matter which way you see it will impact on the currency value.
Your position of how the money is issued or accounted for has no bearing on the currencies price and how it is impacted by a country having a high government debt. Regardless of how long the country can continue to run up a higher government debt regardless of how the money is raised or created it does not mean that it will not impact the currencies operations.
By having a different view of what the government debt is does not mean that the currency which is traded on an exchange is not subject to the same market forces it was with a different view of what the government debt is. It will still impact the currencies trading value and as a result create problems if the government debt or deficit increases in the future.
Same question, if your view is correct, as a trader how do I trade currency?Let me quote from Wray as it expresses what I believe is the correct view. (I'm not inclined to get into a discussion of the forex markets. I'm interested in the more fundamental concepts I have been posting on.)
____________________If government spending is 'financed' through creation of fiat money, and if taxes are designed to call forth things for sale to government -- rather than to 'finance' government spending -- then why does the government sell bonds? Of course, governments believe that they must sell bonds to borrow the funds necessary to financing spending. However, this is an illusion, as the spending must come first. As we will argue, bond sales (whether by the treasury or by the central bank) function to drain excess reserves; they cannot finance or fund deficit spending. This view builds upon Lerner's second law of functional finance; 'the government should borrow money only if it is desirable that the public should have less money and more bonds'.* More specifically, bond sale are designed to substitute an interest-earning government liability for non-interest-earning government fiat money, and is properly thought of as a monetary policy operation. [The 'Lerner' referred to is the great Aba Lerner, a famous mid-Twentieth Century economist.]
* I sometimes refer to this as 'sidetracking' as it temporarily removes outside money from the economy.
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morganist
If your view is correct, as a currency trader how do I trade currency?
However the money was issued it is traded on an exchange so the value is the price that the market sets. You would therefore trade the currency at the price the market is willing to buy or sell the currency for.
There will be various factors that impact the currency price, for example if a country's government debt increases it is likely a trader will foresee there will be an increase in taxation in the future which will have a dampening effect on the currency's value.
The important aspect is the currency has been issued with a certain set supply and then it is traded on an exchange. The price will alter for various reasons like the example above, it will also alter if the supply of the currency changes.
The currency is now a commodity and behaves like a commodity. Any action taken by the government that alters its trading price will impact the nation's ability to buy and sell goods internationally.
So it is important when a currency is traded on an exchange to balance the economy's debt and hit economic targets. When the targets are not met or large deficits occur the price of the currency will likely fall.
When the currency began to be traded on an exchange the nation's economic output and performance became a factor in the currencies pricing on the Forex exchange. When there are bad results or disequilibrium the currency will be negatively impacted.