Not Porn: Do Taxes and Borrowings Fund Spending
This is a continuation of the discussion started in Bill Mitchell's recent blogpost:
( http://bilbo.economicoutlook.net/blog/?p=38885#comments )
Please free to check in as a comment if you'd like further clarification on the issues raised in the blogpost.
Francisco J. Flores
Also don't forget the doggy's blurb for the path to a better world:
http://mmt-inbulletpoints.blogspot.com/2017/09/im-just-responding-to-various-economic.html
( http://bilbo.economicoutlook.net/blog/?p=38885#comments )
Please free to check in as a comment if you'd like further clarification on the issues raised in the blogpost.
Francisco J. Flores
Also don't forget the doggy's blurb for the path to a better world:
http://mmt-inbulletpoints.blogspot.com/2017/09/im-just-responding-to-various-economic.html
I will answer here because I believe you want to keep a meaningful discussion. I will ignore the sarcastic "coin" and "no porn" part and assume that you want to share some interesting thoughts.
ReplyDeleteIf find that this it not the case, I will stop answering (because, you know, we both have a lot of things to do instead of wasting time in non meaningful conversations).
"Now again: with new country, new bank, no reserves, no money. Bank creates $10 million in loans and deposits. Govt feels like taxing $1 million deposit holders just for the hell of it. (It doesn’t need to of course, they just feel like it because the holders were not obsequious enough.) Credit: Treasury Account at Central bank, Debit :Bank Account at Central Bank. That’s Federal Reserve Deposit creation out of bank deposits."
That is not making sense...
Bank Account at Central Bank is empty ("no reserves" as you said). It cannot be debited.
Before the Bank Account at Central Bank can be debited, the bank must earn currency somehow. Either the Bank will earn some currency by providing somehow labour, goods and services to the government, or it will earn currency from costumers by providing them labour, goods and services.
The bank deposits that the bank issued are no good for paying taxes. Treasury would not accept them. Those bank deposits are a promise of withdrawn on demand (that the bank made to it's costumers). It doesn't mean anything to the Treasury. Also, if the bank don't get currency somehow, it will not be able to fulfill the promise of withdrawn. Some day a costumer will want the withdraw currency or transfer it to another bank bit the bank will have to say "hey, we don't have currency right now, come back later"...
Yes, Andre. I was about to write the same thing. The problem is that as very often when discussing money, people use one word (money) for very different things. Banks issue bank-money. The Fed issues Fed- money (reserves). The two should never be confused when talking about banking. "X-money" should always be used until you are sure you can safely get away with being sloppy.
ReplyDeleteIn real life, what might and sometimes does happen is the same as would happen to a (good) individual customer at a bank in a similar situation. The bank would have an overdraft on its Fed account, a negative balance. The bank becomes a debtor to the Fed, rather than a creditor, as usual. The Fed could create reserves to put into the bank's reserve account in order to pay the tax and simultaneously, acting as the Treasury's fiscal agent, debit that account and credit the Treasury's.
So Francisco is right that you can have sort of have reserves created out of bank deposits. But only if the government, the Fed agrees to be part of this (crooked?) deal. It is not automatic ab initio. The point is that keeping "bankrupt" banks afloat is a fiscal operation, not a monetary one. China does this a lot, I believe. If this were done by a solvent bank with lots of good collateral that somehow made a mistake, (it happens) , the Fed would consider it a trip to the discount window and charge the discount rate for this temporary loan of reserves.
Analyzing Francisisco Flores's last comment at Billy blog
To demonstrate that banks don’t need money from the sovereign in order to create and lend money out of thin air.
Right. Banks and anyone else can create bank-money or anyone-else-money out of thin air.
And since they’re able to do so, it can be taxed to create reserve deposits
Sort of right, as above, but only by the process above.
all without relying on the govt to push it into the non-govt sector.
Wrong. This process relies on government (the fed) pushing reserves into the bank's (non-government) reserve account. It can be aborted by the Fed, which might mean the Fed closes the bank.
OK. Fine. I went through the T Acounts and of course banks can and do create trillions of dollars in money/bank deposits out of thin air. But reserve deposits is another animal and indeed Reserve Deposits must come from the Fed. And the Fed creates Reserve Deposits.
ReplyDeleteBut this was a side note. It doesn't affect my beef with the narrative that "Taxes and Borrowings don't "fund" spending". UNDER CURRENT LAW and other constraint, taxes and spending are needed to create the electronic blips to become available for Treasury spending. Let's change the LAW. Or reinterpret the Treasury Coin option. Until we do: Taxes and Borrowings Fund spending.
Andre:
ReplyDeleteRE: "...1) Banks do not have $ 100 to buy the bonds.
What will they do? The banks will borrow $ 100 from the Fed. So the Fed will issue money out of thin air and lend to the banks. Then the banks will use the borrowed money to buy the bonds. ...The banks did not actually lent money to the Treasury. ..."
• OK. So what's another word for "banks...buy the bonds"? Whether you're a middle man or an end man, and whether the banks hold it for a day or a decade: Its called BORROWING! Treasury issued Treasury securities which are called DEBT. Whether the Fed buys them or not, its DEBT OUTSTANDING. It BORROWED. And the bonds are outstanding now, perhaps owned by the Fed but outstanding neverthelsss.
RE: "... any interest that the Fed earns will be remited back to the Treasury periodically. ... ..."
• This is irrelevant.
RE: "... lot of unecessary complexity ... ..."
• So explain to me the complexity of the periodic Debt Ceiling drama. What's that all about? Why was Obama making concessions to the Republicans?
"DEBT OUTSTANDING"
ReplyDeleteIn most countries, including where I live (Brazil) debt held by the Central Bank is not considered Debt Outstanding (because it will be remitted back to Treasury). Hence, it is very clear that such operation was actually money issuance.
I read some articles about US Debt Ceiling, and each one tells something opposite. I can't be sure whether Central Bank debt is considered in the US national debt.
Even if Fed debt was considered in the national debt, the fact is that Congress approves spending (and deficits) irrespective of debt limits, and, later on, if the debt reaches the limit, they raise it. The law allows the legislative body to raise (or lower) the limit. That is what has always happened. Of course, the opposition party explores the opportunity to blackmail the ruling party and get some varying concessions along the way, but that is how US politics works and has nothing to do with “taxes fund government” claim.
I feel that we have not reached yet the main disagreement point. I am having trouble in finding it. There is some specific hypotesis that I am using that you don't agree with, or maybe a hypotesis that you are using that I am not. Such hypotesis would be the core of our disagreement, but I don't know what it is...
Andre:
DeleteThe disagreement is WORDS. Because words have meanings.
- Treasury debt held by the Fed is still considered Debt Held by the Public: https://en.wikipedia.org/wiki/National_debt_of_the_United_States
RE: "...if the debt reaches the limit, they raise it ...and has nothing to do with “taxes fund government” ..."
• Then why would they need to raise the Debt Ceiling if the Govt didn't need to borrow in order to spend?
RE: "... I am having trouble in finding it ... ..."
• The disagreement is staring at you in the face. I say: "right now -> govt needs to tax or borrow in order to spend." You say: "they need to raise the Debt Ceiling because .......??????"
JT:
ReplyDeleteI've already addressed the money/reserves issue elsewhere. Reserve Deposits are only created by the Fed.
RE: "... When you say that taxes and borrowing fund government spending, what you mean to say is that the Congress has imposed legal constraints on the government’s issuance of currency. ... ..."
• I'm assuming you meant to say that I said: "Taxes and borrowing DON"T fund spending."
• I understand the construct of bonds being another form of money. But there is a thing called LAWS which regulate parts of our lives, including our economic lives. And when the law says that the Fed cannot exchange one form of money (reserves) for another form of money (bonds) directly with the Fed, it forces the Fed to get its funds from banks in a transaction called BORROWING, which MAKES statements like "Taxes and borrowings don't fund spending" ---> FALSE. Do you agree with me on this? (I'm not clear.)
Andre & Calgacus:
ReplyDeleteFurther to "banks creating money and not needing it from the sovereign". In my "new country" example, even if private banks can't create reserve deposits, which they can't, they can certainly create money, which they can pay taxes with by writing a check drawn on their bank, and
the Govt certainly has the option of accepting this check by depositing it in the bank, not the Fed. Correct?
So my point, other than being 60% right in this assertion, is that the assertion that ALL money comes from the sovereign is not even 100% right. The Govt can certainly get money and use it to buy stuff in an economy WITHOUT first spending it INTO the economy.
“Then why would they need to raise the Debt Ceiling if the Govt didn't need to borrow in order to spend?”
ReplyDeleteIf (i) Congress never allowed a raise in the Debt Ceiling and (ii) bonds held by the Fed are accounted in the national debt, than Treasury’s hands are tied. It means that the Treasury would have to spend less in order to keep the national debt at its limit. If it wanted to spend more, it would have to raise taxes.
However, we all know that when debt crises arrive, the Congress does allow a raise in the debt limit, so there is no reason for the Treasury to stop spending or levying taxes. With raised Debt Ceiling, the Treasury is allowed to issue money out of thin air (raising the outstanding debt with Fed, which is not problem, as the debt limit is high enough).
Why don’t people simply end the Debt Ceiling restriction? Well, because the opposition finds it useful to blackmail the ruling party, and because no one really understands how public finance works. People (politicians and the electorate) believe that money is like gold and governments are like households.
"the Govt certainly has the option of accepting this check by depositing it in the bank, not the Fed. Correct?"
In my country, the Federal Government is not allowed to do that (and the Federal Government accounts for 80% or 90% of the government spending). Taxes can be paid only trough currency (notes, coins and bank reserves). The Federal Government is not allowed to accept tax payments by accepting checks or bank deposits. However, local governments can and do accept checks as means of payment of local level taxes. I cannot tell you how the US works.
However, even if the local governments accept checks or bank deposits as payment, they usually withdraw or spend most of the money right away. If the bank that issued the bank deposits does not hold enough bank reserves to cover such necessity, it will go bankrupt.
“The Govt can certainly get money and use it to buy stuff in an economy WITHOUT first spending it INTO the economy.”
Well, in my country, the Federal Government can’t. He is allowed to use currency only. Either he issues new currency out of thin air, or it will spend currency recently collected as taxes (there is no difference, it is all the same: a single account called Treasury Account at the Central Bank).
The local level governments can, if you include bank deposits in the definition of “money” (as most economists do). For local governments, the “household analogy” does hold more or less. They need to earn before they can spend, unless we are talking about some particular local governments that live on Federal Government grants (and there actually many of them!)
What I can tell you is that bank deposits are a promise made by the issuer (the bank) to pay base currency on demand to its costumer. The “value” of a $ 100 bank deposit is 100% derived from the “value” of $ 100 base currency plus the confidence people put in the issuer. If the issuer is enjoys confidence, its $ 100 bank deposit will have the same value as $ 100 base currency. A bank deposit is more or less like a gold receipt. It was just a piece of paper issued by some bank, but, if the bank was creditworthy enough, then such piece of paper would be valued as if it was gold. Such a piece of paper would not make sense if gold did not exist or if gold was worthless.
Andre:
DeleteThis is all fine information. But again, my point about banks creating money and even receiving taxes without reserves from the sovereign is just to point out the weakness of the assertion that taxes and borrowing don't fund spending. Your problem with the new country narrative are all legalities which I don't think apply in the US. And even if they did, laws can be changed so the sovereign can accept bank deposits as payment in satisfaction of either taxes or spending on stuff.
RE: "... It means that the Treasury would have to spend less in order to keep the national debt at its limit. If it wanted to spend more, it would have to raise taxes. ... ..."
• ...or borrow. So doesn't this prove beyond any doubt that:
--- Instead of: “Taxes and borrowings don’t fund spending.”; which under current LAWS is FALSE, and consequently generates endless pushback from civilians.
--- How about: “Right now taxes and borrowing fund spending. In order to fund…(Job Gty, etc)… the best alternative is to amend the Federal Reserve Act to allow the Fed to directly fund Treasury spending which it can’t right now.”
RE: "... However, we all know that when debt crises arrive, the Congress ... ..."
• Again. That's the whole point. It has to raise debt, BORROW, in order to continue spending.
RE: "... Why don’t people simply end the Debt Ceiling restriction? ... ..."
• The issue at hand is that the Debt Restriction bites. Its a real impediment proving again that under current laws and restrictions, in the US, the govt needs to borrow or tax in order to spend.
RE: "... In my country, the Federal Government is not allowed to do that ... ..."
• But in our new country, the govt can certainly tax money, deposit it in the Only National Bank of Mitchell (not the Central Bank), and write checks against it to buy stuff. It can do all these things without initially spending reserves or anything else into the economy.
"Right now taxes and borrowing fund spending. In order to fund…(Job Gty, etc)… the best alternative is to amend the Federal Reserve Act to allow the Fed to directly fund Treasury spending which it can’t right now."
ReplyDeleteNo, right now taxes and borrowing do not fund spending. It doesn't matter whether the Fed is allowed to directly fund Treasury, because it is just smokescreen. The fact is that, right now, Fed funds Treasury! The proibition of direct funding is just a technicality circumvented everyday by the Treasury and Fed.
"But in our new country, the govt can certainly tax money, deposit it in the Only National Bank of Mitchell (not the Central Bank), and write checks against it to buy stuff"
Well, depending on how exactly you do it, either
1) The government will always immediately withdraw the banks deposits in cash, with means that the National Bank of Mitchell will always have to get cash from the Treasury or Fed, so we get to the usual MMT description kf the world, or
2) Cash (and hence bank deposits) will be worthless, because you would not need to provide labour, goods and services to the government in order to earn the cash you need to pay the government. You could just issue your own money with some third party and for some reason Treasury would accept it as payment for taxes. In such a scenario, cash would be meaningless, and probably banks would start denominating bank deposits in gold or some commodity...
You're twisting yourself into pretzels to avoid stating the obvious.
DeleteRE: "...No, right now taxes and borrowing do not fund spending ... No, right now taxes and borrowing do not fund spending ...right now, Fed funds Treasury! The proibition of direct funding is just a technicality.."
• So why the Debt Ceiling dramas? And really? Just a technicality? Perhaps, but in the US, as elsewhere, technicalities (LAWS) are enforced by men with guns. And as I have shown, the technicality FORCES the govt to BORROW from the private sector. (see: Debt Ceiling) The technicality is called BORROWING. The prohibition is circumvented every day by BORROWING. Say it!
RE: "... government will always immediately withdraw the banks deposits in cash, with means that the National Bank of Mitchell will always have to get cash from the Treasury or Fed ... ..."
• Why would they do that? They can simply right checks against their bank account at the Only National bank of Mitchell. Since its the ONLY Bank in MitchellLand, it will then be deposited by the Payee into the Only National Bank of Mitchell.
RE: "... Cash (and hence bank deposits) will be worthless, ... ..."
• This is totally wrong. My new country story even includes the bank levying a tax on folks. This creates demand for the currency. (The tax is the whole point. The sovereign doesn't NEED to spend in order to tax.)
"So why the Debt Ceiling dramas"
ReplyDeleteThink of the Debt Ceiling as a 50 MPH speed limit, that changes to a 70 MPH speed limit when drivers get to 49 MPH speed. It is worthless.
The drama is because the opposing party blackmails the ruling part until it can. US politics, go figure.
The only purpose of the Debt Ceiling is to give some headache to some legislators from time to time, and for the ruling party to give some concessions to the opposing party from time to time. No other purpose.
"the technicality FORCES the govt to BORROW from the private sector"
Yes, the technicality forces the government to borrow from the private sector, which means nothing, because at the end of the day, it is just the Treasury borrowing from Fed. And it is not even a normal borrowing operation, as the interest paid to the Fed will go right back to the Treasury. There is no cost.
I mean, it is as if i prohibit you of buying apples from John, because I believe the apples produce by John are bad for your health. Then you are obligated to buy form smart Mary, who buys her apples from John. You know, at the end of the day, you would be consuming John's apple nonetheless. My prohibition just made you life more complicated and created an intermediary. Yes, tehnically you are buying Mary apple's, but that doesn't matter for year health - it will be as bad as John's apples, because actually they are John's apples.
"This is totally wrong. My new country story even includes the bank levying a tax on folks."
That doesn't make any sense. The purpose of taxes is to bring resources from the private sector to the public sector. People need to pay taxes or face the consequence. The only way they can earn currency to pay such taxes is to somehow provide labour, services or goods to the government (or to someone who did). That is the whole point.
In the structure you are suggesting (which is not what happens today!) the government will demand taxes from Bob, who happens to be the banker's cousin.
The bank will issue bank deposits out of thin air to Bob, who will then transfer it to the government and pay his taxes. As you can see, no private resources we're transferred to the public sector. Taxes are meaningless. Money is worthless. Remember, taxes drive money.
RE: "... Yes, the technicality forces the government to borrow from the private sector ... ..."
ReplyDelete• Thank you. End of discussion.
RE: "... which means nothing, ... ..."
• Actually it does. The Govt - under current LAWS and restrictions - needs to BORROW or tax in order to SPEND. It may seem like a technicality, but it renders the statement: "Taxes or borrowing don't fund spending." as FALSE. And that may sound like a technicality and impolite in academic circles, but in human world, when you prominantly state FALSEHOODS upfront and loudly, you quickly discredit everythng else you say. So I'm just trying to improve the MMT narrative. And its obviously tough. Its like a fricken religion. Almost like debating an Austrian or a Padre on the existance of God. The sun is YELLOW and the sky is BLUE! Say it!
RE: "...The only way they can earn currency to pay such taxes is to somehow provide labour, services or goods to the government (or to someone who did). That is the whole point. ... ..."
• This statement is FALSE, and that's the whole point. My point is to demonstrate the obviously FALSE statement that "all money comes from the govt". In my New Country, the banks create money out of thin air and pay some of that money to the govt. The Govt, being a benevolent govt, accepts a check drawn on the Only National Bank of Mitchell and deposits it in a govt account at the Only National Bank of Mitchell (NOT the Central Bank). They can then use it to buy private sector goods and services. No Central Bank is necessary. No Reserve Deposits are necessary. No money from the sovereign is necessary.
"Thank you. End of discussion. "
ReplyDeleteNo, that's not the end of discussion, because it doesn't change anything: the government still can issue how much currency it sees fit.
You answer me now: why would the prohibition of direct sell to the Fed hinder Treasury ability to spend how much it sees fit? What stops the Treasury from accessing the Fed through intermediaries that are acting as straw-man? It is impossible to enforce such prohibition. Even if it was possible, the fact is that governments do not enforce it. They could, but then it would not be the world we live in.
"needs to BORROW or tax in order to SPEND."
Oh, I see. Maybe that is what you are confusing. The Treasury does need to borrow from the central bank to spend in current law. It also needs to borrow from private straw-man for one day in order to spend. Such straw-man will transfer the debt to the Fed at the same day and will earn a small fee for being straw-man. Yes, that is true.
However, that is a very special kind of borrowing:
1) The Treasury is not incurring in any kind of interest expenses, because the Fed will pay back any earned interest. It is an interest free borrowing. Hence, can it be called a loan? I don't know, and it doesn't really matter.
2) The Treasury can borrow infinite interest free money. The Fed will issue it, and send it to the Treasury via a straw-man.
When MMTers say that the government doesn't need to borrow, they are saying "borrowing from the private sector".
"This statement is FALSE, and that's the whole point"
I can assure you that there is no country that works like your illustrative country (if I could understand it right, which I'm not sure I do).
If I could understand it right, there is no proof or evidence that your country would work in the real world.
Hence, it is just theoretical discussion. The real world doesn't work like this and there is no relevance in discussing it if we want to analyze how governments work today.
@André
Delete"With raised Debt Ceiling, the Treasury is allowed to issue money out of thin air (raising the outstanding debt with Fed, which is not problem, as the debt limit is high enough)."
It is not within T's capacity or discretion to issue money out of thin air. The Fed will play nice only as long as it institutional goals, accountability standards and perhaps ideological convictions nicely aligns with the T's spending appetite. The T cannot coerce the Fed into doing anything. The T and the Fed belong to the govt only in the sense in which they exercise governmental functions, but to infer from that that they are one agent (the govt), and then to impute to that agent operational capacities that are true only for either the T or the Fed is a non-sequitur and a fallacy of composition.
"If (i) Congress never allowed a raise in the Debt Ceiling and (ii) bonds held by the Fed are accounted in the national debt, than Treasury’s hands are tied."
How about (i) Congress may allow a raise in the debt ceiling, but not anytime, not in any circumstances, and not for any figure that would fit the T's spending whims. You make it sound not only like the Fed is the 'agent' of the Treasury, but the Congress as well. This is absurd. Also, calling a spade a spade, issuing T liabilities is borrowing, and you can see that the 'govt' is not only revenue constrained but it is also borrowing constrained even with an ever increasing debt ceiling. A monetary system with a consolidated T which can create money out of thin air, is a entirely different creature.
"The Treasury is not incurring in any kind of interest expenses, because the Fed will pay back any earned interest."
Servicing the treasuries will require paying the principal as well. Re interest: the T pays the interest to the Fed ('earned interest'), the Fed extracts its operational costs and returns what is left back to the T. So T is still losing money on interest.
Andre:
DeleteRE: "... "needs to BORROW or tax in order to SPEND."
Oh, I see. ...Yes, that is true. ...However, that is a very special kind of borrowing:............"
• End of discussion again. Its called BORROWING. Very Special Kind of BORROWING but still BORROWING. Interest coming and/or going is irrelevant.
RE: "... "borrowing from the private sector". ... ..."
• And they are WRONG. As you conceded earlier they have to sell the bonds to a private dealer, for less than a day perhaps, but they have to do it. Its called BORROWING. Say it!
RE: "... I can assure you that there is no country that works like your illustrative country ... ..."
• That's why its called a THOUGHT EXPERIMENT as I indicated. Its an illustration that the assertion that "all monies have to come from the sovereign" is also WRONG. They don't HAVE to come from the sovereign (although they generally do). And again the whole point is to note that even the underlying principal that MMT is pushing that the sovereign doesn't have to get any money from non-government sector because ALL money comes from the sovereign is not always right. And for the benefit of MMT acceptance, all I'm saying is: QUIT SAYING FALSE STUFF.
Wallflower:
Delete- You've been a bit of a wallflower for about a day. But welcome back to the discussion.
- My proposal includes the following:
"3) Revise Federal Reserve Act so Federal Reserve Bank reports to the Treasury." That should take care of any institutional restrictions. See Blurb:
http://mmt-inbulletpoints.blogspot.com/2017/09/im-just-responding-to-various-economic.html
"As you conceded earlier they have to sell the bonds to a private dealer, for less than a day perhaps, but they have to do it"
ReplyDeleteDoesn't matter. The private sector will not refuse to earn a risk free spread. It does not anyhow constrain the ability of the Treasury to issue any currency it wants. The Treasury will never have to ask desperately for the private sector to borrow money. There will always be the Fed there to buy all the necessary bonds, and private banks willing to earn the free spread between them.
"They don't HAVE to come from the sovereign (although they generally do)"
Don't know why you are discussing that. The US don't have to be called US, it could be called "Trump's Heaven". So what? Such a useless discussion.
"MMT is pushing that the sovereign doesn't have to get any money from non-government sector because ALL money comes from the sovereign is not always right.
The government could indeed lift the prohibition of selling bonds directly to the Fed. It can also consolidate itself (actually, that is how government worked before the creation of central banks). It is not false. It is true. The government can do that. However, I am sure that no one never said what you are saying. Money is a very broad concept and it includes bank deposits or other kinds of IOUs. No MMTer ever said "ALL money comes from the sovereign", unless it was in a very specific context where "money" was used to mean base currency.
"The Fed will play nice only as long as it institutional goals, accountability standards and perhaps ideological convictions nicely aligns with the T's spending appetite. The T cannot coerce the Fed into doing anything."
Yes, Treasury cannot (and does not) coerce. However, Fed's open market operations are "automatic", they don't need to be asked for by the Treasury. If the Fed wants to keep its interest rate at the target, then it will necessarily buy the Treasury bonds. Such situation would stop only if the Fed did not want to keep interest rates at a target anymore. The interest rate target is probably the most important part of Fed's "institutional goals".
"How about (i) Congress may allow a raise in the debt ceiling, but not anytime, not in any circumstances, and not for any figure that would fit the T's spending whims. You make it sound not only like the Fed is the 'agent' of the Treasury, but the Congress as well."
Then the Treasury would not be able to spend according to the approved budget, unless government reduced the spending or raised taxes. Don't know where you want to get. And don't know what "agent of the Treasury" or Congress means...
@André
Delete"However, Fed's open market operations are "automatic", they don't need to be asked for by the Treasury."
You are wrong again. Read prof Wray's explanation in his book 'MMT: A Primer..' p.98 to get all the details. It is a coordinated operation. The T will be in touch with the Fed before it will organise an auction for its T bonds. The Fed will provide the primary market with the needed reserves for the purchase (through repos), then there will be a compulsory bidding for the T bonds, the bidders get the T bonds, the Fed buys the T bonds back from the market, the TGA is credited and everyone is happy. The Fed doesn't have to do that to safeguard the interest rates.
"Then the Treasury would not be able to spend according to the approved budget, unless government reduced the spending or raised taxes. Don't know where you want to get."
I was getting at the revenue/borrowing constraints part, based on, I would say, a highly plausible account of how things work in the real world.
Sorry, that was still me, wallflower. Clicked on the wrong ID before posting.
DeleteAndres:
DeleteRE: "... Doesn't matter. The private sector will not refuse to earn a risk free spread ... ..."
• You have to remember the question at hand: Does the Govt have to borrow or tax in order to spend? Since it has to BORROW, perhaps for less than a day, the answer is YES. The saleability of the bonds is irrelevant.
RE: "...The government could indeed lift the prohibition of selling bonds directly to ... It is not false. It is true. The government can do that. ..."
• It CAN do it, by changing the LAW. But until it does: the govt must BORROW or TAX in order to spend.
RE: "... No MMTer ever said "ALL money comes from the sovereign", unless it was in a very specific context where "money" was used to mean base currency. ... ..."
• Per Bill Mitchell: "Any payment flows from the government sector to the non-government sector that do not finance the taxation liabilities remain in the non-government sector as cash, reserves or bonds. Note the causality here – the government finances the taxation revenue. ...Also note, that there is no capacity in this economy for the non-government person to pay the government person the $100 in taxes until at least that much is spent into existence by the government person. This is the same causality noted above: spending funds taxation revenue, rather than the other way around. ...central banks, in one way or another, fund treasury operations. ....
• These assertions are not always true. Since my New Country example demonstrates how the govt can collect taxes before it spends.
"The T will be in touch with the Fed before it will organise an auction for its T bonds"
ReplyDeleteThat varies from country to country, but in the US, if Treasury doesn’t tell the Fed that it is going to issue bonds, the interest rate would slip that day (and the Fed wouldn’t be happy in letting the interest rate depart from target) and/or the intermediaries wouldn’t be prepared for buying all bonds right away (and they wouldn’t be happy in losing the free spread), even more if it is a big issuance.
"based on, I would say, a highly plausible account of how things work in the real world."
The Congress letting the government shutdown? Not being able to spend what was planned in the budget? Is it plausible?
Again, such things happens as a means for the opposition party to blackmail the ruling party. It is a random crisis generator that allows some concessions for the opposing party. Nothing more than that. Congress have not allowed such kind of spectacle to happen for much time. Also, it is contradictory allowing deficits through the budget process and prohibit deficits through the debt limit process.
That said, such scenario could happen. It hasn’t happened, but it could. Actually, that is why US ratings should be lower than Japan or the UK. They don’t have those crazy self-imposed rules.
However, the fact is that, until now, Treasury was free to issue how much money it needed to achieve the spending allowed in the budgeting process.
“You are wrong again”
Are we kids trying to earn a trophy or something? Or are we adults interested in some meaningful conversation that is rewarding for both sides of the discussion? You both love the word “wrong”, “false”, and some caps locking. I am starting to think that this is not a real conversation and just you trying to making a fool of me… I am not wrong. We cleary have differents points of view. I would like to explore that, but not in such childish way...
@André
Delete"That varies from country to country"
I was talking about US, obviously. I usually like my writing short so I rely on context and what has been said to keep it brief.
"but in the US, if Treasury doesn’t tell the Fed that it is going to issue bonds, the interest rate would slip that day"
Remember, the claim is that 'govt spending is not revenue constrained because it can create money out of thin air'. It's not about the T raising funds from the primary market and how the Fed would react to that to safeguard interest rates. It's about explaining how the US monetary system, having an unconsolidated T can mimic the functionality of a consolidated T which would be able to create money out of thin air in order to enable spending. In other words, how does the T get the Fed to create fresh money out of thin air for the sole purpose of crediting the TGA balance. This is Wray's point (have you read his book?), and he provides you with the mechanics of how these specific operations work. In this scenario, the Fed's part is active not reactive, the Fed is involved in making a certain quantity of reserves available in the market, even before the auction has even started. In your scenario it doesn't.
"the intermediaries wouldn’t be prepared for buying all bonds right away (and they wouldn’t be happy in losing the free spread), even more if it is a big issuance."
Again, a moot point to make if you read Wray's stuff. The bidding is mandatory, the bidders are bound by agreements to bid for the T bonds, the Fed provides them with the needed reserves. It's all part of a streamlined process.
"The Congress letting the government shutdown?"
My point was that the Congress not letting the govt shutdown doesn't entail a lack of revenue/borrowing constrains. You seem to uphold that implication. I think it is a non-sequitur.
"Not being able to spend what was planned in the budget?"
It's not about the budget, it's about the debt ceiling.
"Are we kids trying to earn a trophy or something? Or are we adults interested in some meaningful conversation that is rewarding for both sides of the discussion? You both love the word “wrong”, “false”, and some caps locking. I am starting to think that this is not a real conversation and just you trying to making a fool of me… "
'You are wrong' is short for I think your statement is wrong. Has nothing to do with you as a person. I didn't make any comments on any participants in this discussion, didn't insult or condescend and wouldn't do so especially under a fake name. I am sure you are a fine chap. I don't know anything about any trophy, I am just a dude writing some comments on a blog under a false name, and as you can see I write negligently with typos and even clicked on that wrong stupid ID. Can't put that on my CV and say well done me, can I? I don't even know Francisco or if that is his real name, and I haven't used CAPS at all. Aren't we having a conversation, because I thought we did?
"It's not about the budget, it's about the debt ceiling."
ReplyDeleteUnfortunately, it is all connected. "DoDeals" (or Francisco?) is claiming that because of the debt ceiling and the prohibition of Treasury issuance directly to the Fed it is possible to say that the government needs to borrow or tax before it spends.
I am trying to tell him that if (i) the debt held by Fed is accounted in the national debt and (ii) if the debt ceiling was never raised then (iii) we would get to a point where the government will have no options but lower spending or raising taxes. The Treasury would not be able to issue more bonds and sell it to the market or to Fed, because both options would raise the national debt. The government would have to raise taxes or reduce spending.
However, Congress has never allowed such circumstance to happen. There is always a lot of drama, but, at the end, the Congress raises the debt limit and life goes on (the Treasury issues bond to the Fed or the market as normal).
It would be very odd if the government didn't raise the debt. In that situation, the Treasury wouldn't me able to spend according to the approved budget, because there would be no money to spend. It would not be able to issue bonds to Fed to get new currency.
OK, Let's review. All I’m saying is:
Delete• Instead of: “Taxes and borrowings don’t fund spending.”; which under current LAWS is FALSE, and consequently generates endless pushback from civilians.
• How about: “Right now taxes and borrowing fund spending. In order to fund…(Job Gty, etc)… the best alternative is to amend the Federal Reserve Act to allow the Fed to directly fund Treasury spending which it can’t right now.”
The alternate has the advantage of being true, and making total sense.
DeleteRE: "... However, Congress has never allowed such circumstance to happen. ... It would not be able to issue bonds to Fed to get new currency...."
• Again, the probability of Congress doing so is totally irrelevant to the question at hand. The issue is the fact that the govt would need to issue bonds (BORROW) in the first place. My beef is in the wording used over and over by MMT folk. Its not a footnote. Its the title of blogposts and articles, repeated in interviews, yelled at the camera, that: "taxes and borrowing don't fund spending". The WORDING IS FALSE. Don't say it MMT!