RE: Qu(e)stions for Bill and Randy

Dear Trond

I have the following things to add to Randy who has said most of it.

> >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.

This is crucial. we still a macro theory that ignores the power that a
flexible exchange
rate provides to a government who issues its own currency.

>TROND: 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.
>RANDY-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.

BILL:
The consolidated balance sheet of the Treasury and the Central Bank is what
is important.
There would only be an issue if the central bank was able to bounce the
cheques issued
by the government. That is, was separate to, not appointed by, and could
not be overruled by
acts of the legislature.

But generally the accounting relations that the central bank and the
treasury keep is
only of interest to accountants.

This is not to say that the Treasury, dominated by economists who believe
that their
spending has to be financed (which would include several economists on this
list, unfortunately)
behave with "self-imposed" constraints as if the world is like the
second-year textbook model.

On progressives who mistakenly "believe" government spending needs to be
financed (along the
lines of the textbook government budget constraint) see
http://e1.newcastle.edu.au/coffee/docs/education/op_ed/Divisions_among_Progr
essives_Part_1.pdf

>TROND- 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.

BILL:

In Australia, unlike Japan and the USA (as examples), the RBA pays a
support rate on
overnight reserves at 25 basis points below the current target cash rate.
So if the
liquidity injection via net government spending is just above the amount
they drain via
bond sales (say), then the RBA will be unable to hold the current target
cash rate and
unless they altered the support rate, the cash rate and the support rate
would converge.
The BOJ sells less debt than would be "required" under a GBC model and that
is why
the cash rate is virtually 0. A 0 cash rate target would be a good policy
strategy for Australia
to follow actually but that is taking the discussion further into desirable
monetary policy.
Paddy McGuinness this week (rather offensively) talked about getting rid of
the bulk of the
ACT and shunting it back into NSW. An analogy (and not offensive at all)
would be to
get rid of the RBA and make it a division of the Treasury (a radically
reformed Treasury at that).

Additionally, we may make a more general statement. Government debt
issuance at any maturity
will support the yields at whatever maturity segment of the yield curve it
is at. So long-term
government bond issuance merely keeps the cost of investment funds higher
than they would otherwise
be. The normal and erroneous Keynesian argument that it is sensible (for
so-called intergenerational
matching of burdens) to "finance" consumption spending by government with
taxation and use
debt to "finance" capital formation falls foul here. Any "social" returns
that may accrue to public
sector capital formation accrue anyway, regardless of whether the
government issues debt or not.
the idea of burdens is mistaken. Once you start believing that government
spending has a financing
constraint then you also start believing in the "money in the tin shed"
argument when it comes to
surpluses. The ability of the government to spend in period t+1, t+2, t+3
or t+j is the same, irrespective
of the history of its accounting statements (which we call the deficit) in
previous years. So just because
we are all getting older and going to get sick etc, does not threaten the
budget position of the government.
In Australia, the entire generational accounting exercise carried out by
Treasury in the last few years to
try to justify running surpluses "to store away" resources for the future
was plain wrong.

So the government SHOULD ISSUE DEBT IF IT wants: (a) to provide a risk free
asset to unproductive speculators
unproductive speculators manage their risk more easily and thus support and
encourage
speculation, rather than real investment behaviour; (b) to provide the
non-government sector with a
government annuity rather than expecting that sector to direct real
investment via privately issued
corporate debt, as an example?; (c) to satisfy the special pleading by the
financial industry sector
for public assistance in the form of risk-free CGS for investors as well as
opportunities for trading profits,
commissions, management fees, and consulting service and research fees.
Isn't it is ironic that the
arguments advanced by financial sector interests are inconsistent with the
rhetoric forthcoming from the same
sector about the urgency for less government intervention, more
privatisation (for example, Telstra), more
welfare cutbacks, and the deregulation of markets in general, including
various utilities and labour markets.

Government debt is a form of government price level intervention in
interest rate markets and there is
sufficient evidence to show that financial markets will function well
enough without this price support.

Progressive economists (including some on this list) who advocate the
continuance of debt issuance
have to also provide a justification of why (a) to (c) are examples of
desirable public policy. I would have
thought they were the anathema of a sound progressive public policy stance.

>TROND- Money collected through taxation may in this model be considered to
>be destroyed.
>
>RANDY-right. govt taxes by debiting private bank accts. this necessarily
>reduces
>HPM by the same amt.

BILL: as above (the tin shed argument). Even the ALP (Australian Labour
Party) fails to understand this.
In the months leading up to the last election, once it become reported that
the incoming budget surplus
that they "would inherit" was very small (an accounting statement) the
scale of their promises that
they brought to the voters was drastically cut back because "there was no
money in the war chest".
With this sort of logic ......

The tax revenue is accounted for but does not "go anywhere". Ed Nell tells
a nice story
of tax payments that are made to the US government in actual money bills
(paper) are all rounded
up and taken away and burnt!!! When its gone its gone.

best wishes
bill

William F. Mitchell
Professor of Economics
Director, Centre of Full Employment and Equity
University of Newcastle, NSW, Australia
E-mail: ecwfm@alinga.newcastle.edu.au
Phone: +61-2-4921 5065
Fax: +61-2-4921 6919
Mobile: 0419 422 410

http://e1.newcastle.edu.au/economics/bill/billeco.html
http://www.billmitchell.org
Received on Fri Jan 24 23:25:57 2003