RE: Qustions for Bill and Randy

Trond, yes you have the general idea although i would state things a little
differently. I'll comment very briefly. note that the recent jpke has a
short article by bell and me which goes thru the treasury/central bank
relations in detail. Just one general distinction needs to be added to
what you post: all of the following applies only to a country that issues
its own currency and which does not operate a currency board, gold standard
or fixed exchange rate.

T- There is no need to make a distinction between a government and a central
bank. Removing this distinction implies that the government can create money
as it likes, and spend it into existence. From this also follows that the
concept of the government borrowing from the central bank and being in debt
to it, is meaningless.

R-Right. interactions between the Treas and CB should be of no interest to
anyone external to the govt. all that matters for the "external" (that is
non govt) sector is the consolidated "govt" balance sheet. the govt might
adopt various rules for the "internal" operations. it might require, for
example, that the treas have some $$ in its acct at the CB before it can
spend by crediting a nongovt entity's balance sheet ("spend"). Or, it
might require that alan greenspan stand on his head and twirl like whirling
dervish before the CB can buy Treasuries. the "external" economist observing
uncle alan doing his twirling would not conclude that the twirling is a
necessary part of "financing govt spending". at least, one hopes that
economists would not be so superficial. and, right, a treas debt to the CB
is just an internal acct and of no more interest to an economist than is
the IOUs the husband holds against his wife. we can go further. the concept
of such a govt "being in debt" even to the "external" sector is quite different
from the normal use of the term "debt". the only debt a sovereign nation
has in its own currency is to accept same in payment of taxes. hence, even
the treasury "debt" that is held in the nongovt sector is not a debt such as
the type you and i owe. we are users of the currency, not issuers.

T- Because the gvt. can create new money at will, there is no need for the
government to sell gvt. bonds.

R-right. you can go even further. if the govt had not already "created
the new money at will", it could not sell the bonds w/o draining reqd/
desired bank reserves and thus causing the CB buy the bonds to keep
its overnight interest rate from rising above target. if the CB pays
interest on bank reserves there is no necessity to ever sell govt bonds to
keep overnight interest rates positive. Bond sales are not a "borrowing"
operation at all; they are an interest rate maintenance operation, not
reqd if CB pays interest on reserves.

T- Money collected through taxation may in this model be considered to
be destroyed.

R-right. govt taxes by debiting private bank accts. this necessarily reduces
HPM by the same amt.

T-Have I got you right so far?

R-Yes!
Received on Fri Jan 24 16:27:47 2003