Yellen uses the word "debt" a lot in that letter, along with "interest" and "borrow". So she is part of the cabal spreading the lies that the government has no debt, and no obligations to our central bank to replay the money it borrowed from it?
Who is not printing money?
- Thread starter ValeryN
- Start date
Yellen uses the word "debt" a lot in that letter, along with "interest" and "borrow". So she is part of the cabal spreading the lies that the government has no debt, and no obligations to our central bank to replay the money it borrowed from it?
I’m not printing money. The secret service would shoot me.
But absolutely, positively nothing you said so far as I can tell goes to whether it is debt or not. The most basic definition of a loan (i.e. debt) is an obligation to repay an amount borrowed, plus interest thereon, at some future date(s). When I buy a Treasury instrument for $1,000, I give the Treasury $1,000 and they have the obligation to pay me back that $1,000, plus interest. That is a debt owed by the Treasury to me. Whether the debt limit is purely political or not, and whether government finances are different than or the same as personal finances, has absolutely no relevance to whether or not it is debt. Sorry.
I see something in your post (see my underlining above) that is going to create a difficulty in your acceptance of newer ideas coming from younger economists that I am often posting. The idea that the Central Bank is somehow a private for profit bank created by Congress but somehow separate from the government was once true, but is no longer; not after the banking laws of the 1930s which restructured the 1913 central bank. The Fed is wisely protected from political influence, to the extent possible, but that doesn't mean it is not a government agency. I would caution about numerous You Tube videos claiming all sorts of nonsense re the Fed -- Zeitgeist would be a prime offender. If you want correct information about the Central Bank, their website is a great resource. The Fed today is thoroughly government, with artifacts and odd remnants from former days. It helps to remember that all Fed net profits flow directly back to the Treasury!; not to private interests.
It is not wrong to use the word "debt" to describe Treasury bonds. We have no better word. Certainly Yellen is not obliged to explain more than necessary in her letter to Kevin McCarthy warning of the consequences of forcing a default for no reason other than politics. The debt ceiling statute has no reason to exist beyond the purely political. Because we speak of Government issued bonds in the same way we speak of private sector bonds, naturally people assume that government finances are just like their personal finances. In reality, government finances are so drastically different from personal finances that the biggest mistake anyone could make is to assume they are even somewhat alike.
For you, I am going to quote, with slight paraphrasing for brevity, excerpts from the first four paragraphs of L. Randall Wray's now classic monograph on Money Theory published in 1992, and now available in paperback at an affordable price (I was shocked to find my hardback version quoted on Amazon @ $200! Should I trade mine for the paperback?) I realize this is long for an ET post, nevertheless I hope you can find time to read through Wray's summary of differences between classical and modern thinking on government spending and deficits. I think this will really help you begin to grasp what the big fuss is about.
I used ellipses where i have made deletions in the interest of brevity. And I used brackets and regular type to insert my own comments or an occasional paraphrase for brevity.
From Chapter 4: Government Spending, Deficits and Money. Pg.74
According to the conventional view, tax revenue provides income to finance the government's spending. A government might spend in excess of revenue, at least temporarily, if it is able to issue debt the public will hold. One method almost universally scorned is for the government to issue non-interest bearing debt --- currency -- to finance deficits. [note that Wray recognizes that money is a government liability, and thus a form of government "debt"] Because government deficits financed this way would expand the money supply, many economists claim this would directly cause inflation. [I think this concern is not unreasonable, and it's one reason we currently issue bonds dollar for dollar to match our deficit spending financed by "printing" rather than bond revenue.]
If instead, the government sold interest paying bonds to finance its deficit, the money supply would increase, according to most economists, only if the central bank accommodated by increasing bank reserves. So long as the C.B. did not accommodate there should be no impact on inflation. According to the common view government borrowing is likely to compete for money with private borrowing, driving up interest rates and displacing interest-sensitive private spending...
While most economists recognize that deficits are desirable under some situations, most would argue that persistent deficits must be avoided. Even Keynesian economists argue that structural deficits must be avoided; that is, although a government should run deficits in recessions , these should be offset by surpluses during expansions. It is believed that permanent deficits must be avoided because no government can operate in such a manner as to generate the expectation that it will never be able to retire its debt. It is not doubted that thresholds for debt to GDP or deficit to GDP ratios exist, beyond which markets lose trust in government. Governments are thus believed to be subject to market forces that determine the quantity of debt governments can issue as well as the interest rate. If the domestic population will not absorb all the debt, the government is forced to sell bonds in international markets. Governments, with questionable finances, might be forced to issue debt denominated in another nations currency. A government might even be forced to impose austerity measures on its population to placate international markets.
We do not intend to explore these positions in more detail. Rather, our analysis will demonstrate that this view completely misunderstands the nature of government spending, taxing, deficits and bond sales. As we claimed in the introduction, permanent consolidated government deficits are the theoretical and practical norm in a modern economy. While it is certainly possible to run a surplus over a short period... this has income and balance sheet effects that unleash strong deflationary forces. Given usual private sector preferences regarding net saving, economic growth requires persistent government deficits. Further, government spending is always financed through creation of fiat money rather than through tax revenues or bond sales.. Taxes are required not to finance spending , but rather to maintain demand for government fiat money. [I believe there are other important reasons for taxing that Wray does not mention here.]
... Finally, bond sales provide a primary tool of the Central Bank rather than to finance deficits. ... We will argue that most of the pressures governments believe arise from international markets are actually self imposed constraints that arise from a misunderstanding of the nature of government deficits.
Our view builds upon the Keynesian approach and is probably most closely related to Abba Lerner's functional finance approach. According to Lerner,
If instead, the government sold interest paying bonds to finance its deficit, the money supply would increase, according to most economists, only if the central bank accommodated by increasing bank reserves. So long as the C.B. did not accommodate there should be no impact on inflation. According to the common view government borrowing is likely to compete for money with private borrowing, driving up interest rates and displacing interest-sensitive private spending...
While most economists recognize that deficits are desirable under some situations, most would argue that persistent deficits must be avoided. Even Keynesian economists argue that structural deficits must be avoided; that is, although a government should run deficits in recessions , these should be offset by surpluses during expansions. It is believed that permanent deficits must be avoided because no government can operate in such a manner as to generate the expectation that it will never be able to retire its debt. It is not doubted that thresholds for debt to GDP or deficit to GDP ratios exist, beyond which markets lose trust in government. Governments are thus believed to be subject to market forces that determine the quantity of debt governments can issue as well as the interest rate. If the domestic population will not absorb all the debt, the government is forced to sell bonds in international markets. Governments, with questionable finances, might be forced to issue debt denominated in another nations currency. A government might even be forced to impose austerity measures on its population to placate international markets.
We do not intend to explore these positions in more detail. Rather, our analysis will demonstrate that this view completely misunderstands the nature of government spending, taxing, deficits and bond sales. As we claimed in the introduction, permanent consolidated government deficits are the theoretical and practical norm in a modern economy. While it is certainly possible to run a surplus over a short period... this has income and balance sheet effects that unleash strong deflationary forces. Given usual private sector preferences regarding net saving, economic growth requires persistent government deficits. Further, government spending is always financed through creation of fiat money rather than through tax revenues or bond sales.. Taxes are required not to finance spending , but rather to maintain demand for government fiat money. [I believe there are other important reasons for taxing that Wray does not mention here.]
... Finally, bond sales provide a primary tool of the Central Bank rather than to finance deficits. ... We will argue that most of the pressures governments believe arise from international markets are actually self imposed constraints that arise from a misunderstanding of the nature of government deficits.
Our view builds upon the Keynesian approach and is probably most closely related to Abba Lerner's functional finance approach. According to Lerner,
"The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money, and its withdrawal of money, shall be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound (Lerner, 1943)"
I am hoping this will get you interested in new economic thought regarding government spending and deficits.
"...While it is certainly possible to run a surplus over a short period... this has income and balance sheet effects that unleash strong deflationary forces. Given usual private sector preferences regarding net saving, economic growth requires persistent government deficits. Further, government spending is always financed through creation of fiat money rather than through tax revenues or bond sales..."
This is the bit I have to chew through. No, I do not like your explanation, Piezoe. Doesn't pass the sniff test.
You needn't be sorry. We are in agreement here. I have posted on the differences between private sector debt and government*, ersatz "debt" elsewhere. I will probably post again on this topic at some point. If you are interested in reading an explanation of why U.S. government bonds don't represent, to the government, the kind of debt that comes from borrowing, there is a good discussion of this in former Senate economist Stephanie Kelton's new book. The exact title escapes me, something like "The Deficit Myth" I think. (To you, as the proud owner of a government security, the security seems no different than private sector debt of course.)
All money issued by government is a government liability when in the private sector. In models that economists use, government bonds are considered as just another form of money, thus in that sense they are also debt. From a government perspective, however, they are not the kind of debt that comes from conventional borrowing. But from your perspective, as an owner of government securities, they are, indeed, the kind of debt that comes from borrowing. You loaned the government $1000 of your money!
__________________
*Only referring specifically to U.S. "debt". Lots of countries have real debt from borrowing, because they were forced to borrow in another nations currency (Russia!). The U.S. always money finances its expenditures, it does not borrow, again from the government prospective. The U.S. does issue Securities, but their purpose is other than borrowing. Only when I write about this do i begin to grasp why these concepts are so difficult for most of us.
:
This stuff isn't easy. I realize that. It took me a years, I am apparently a slow learner. Stuff like: "government spending is always financed through creation of fiat money rather than through tax revenues or bond sales.." seems pretty damn radical. I guess that's one of the reasons I became so fascinated by it when I read Wray's book the first time. Wray is a Minsky protege and Minsky was pretty much on the cutting edge of new economic thought. Then low and behold a few years later people in Congress started to mention MMT economics and it started popping up in main stream media, often in an unfavorable light. But than other economists started jumping on the band wagon. Now two years ago, I believe , the first macro text for undergraduates came out and they had the correct discussion, according to the MMT guys, of the so-called money multiplier in the section on money and banking. Whenever there is a break from conventional thinking in any profession there is always resistance. I can now explain a lot of this stuff, not all of it, if you're interested.
How do you figure? That money was loaned to us by the government in the first place! The money we earned through our hard work did not come out of the company's pocket who we worked for, it came from the government which loaned that company the money to do business in the first place! So it is the government's money to begin with. We have to pay back interest on that money we borrowed from the government!
And you keep banging on about MMT, which is a theory. You should really look up MMM, which is what actually goes on.
Modern Money Mechanics, not 3M the stock, haha.
Ha ha. You never cease to entertain
For Christ's sake. You and your government debt stuff? There's a video for you...
Modern Money Mechanics, man. Read it!