Thursday, August 25, 2011

Treasury bond sales: Welfare for the rich!

It's been well discussed here as well as in many other MMT blogs on the web, that the government doesn't need to sell bonds. It spends simply by crediting bank accounts and the sale of bonds isn't necessary for the government to have the funds to pay for goods and services.

On the contrary, bond sales have historically functioned merely as a tool used to manipulate the level of reserves in the banking system in order to set interest rates. But now that the Fed pays interest on reserves, the sale of bonds is even more unecessary. So why do we keep on doing it? I have no idea.

Who buys bonds?

Mostly affluent people. I don't know too many poor people or even middle class people who are wondering what Treasury securities they are going to buy with their extra savings. Only rich people have that worry. Warren Buffet owns over $40 billion in Treasury securities by his own admission. So our government is basically paying interest to rich people like Warren Buffet for no reason at all. It's welfare for the rich and the numbers are huge. Take a look...

Here's what the government pays out in interest and what it pays out on some other, important spending items.

Fiscal Year-to-Date

Interest payments $194 bln
Education $206 bln
Unemployment Ins $106 bln
Temporary Assistance to Needy Families (TANF) $17bln
Food Stamps $4.6 bln

So the government spends 40 times more money paying interest to rich people than it does for food stamps.

It spends twice as much paying welfare to rich people as it does to help the unemployed.

It gives more than 10 times more to rich people than it does to needy families.

It gives about as much to rich people as it spends, in total, on education.

Pardon me, but these are disgraceful statistics. It's one thing to say that we need to spend a lot on national security, because without that, even food becomes moot. (You can't eat if you're blown up.)

However, to spend this kind of money subsidizing the rich when so many people--kids, families, etc--are going hungry or simply desiring an education or needing a helping hand during an economic depression, that is totally immoral, I'm sorry. Welcome to our government, our leadership and our economic reality.


A.K.A. Damo Mackerel said...

What else do you expect?

Government by its nature is corrupt.

bosscauser said...

I make a tad less than 50 thousand a year and my 401 k buys bonds for my retirement. (I assume I qualify as poor or middle class.)

Also, what does China do with all their money from our trade deficits?

And why is rich people financing a large part of our deficits and supporting all our social programs during depression like times a bad thing?

mike norman said...


If you say that the rich are "financing" our deficit then you have to beef up on your MMT reading my friend. Please read the post a few back from this one that talks about Treasury issuance.

Insofar as China is concerned, yeah, we're paying welfare to the Chinese, too!

We killed welfare for the needy in this country back in 1997. (Welfare Reform, Clinton, remember?) But we kep it going for the rich! Bigger than ever!!! LOL!!!

Chewitup said...

Bill Gross might want to bone up on MMT as well...

wh10 said...

Very interesting take on things.

On one hand, one could say the amount we spend on interest represents what we could otherwise be spending on presumably more useful things without driving inflation.

On the other hand, maybe it's a bribe to the rich to allow the US Govt to spend on non-rich people.

Adam2 said...

NFAs = Deficit spending + interest paid on debt.

Matt Franko said...


I have a feeling that some of the equity sell off has to do with funds having to liquidate long equity positions to offset short bond positions... Gross was really wrong here and CNBC reported that one of John Paulsons funds was down 31% (he was very bearish on bonds)... that has to be a very big draw down for a hedge fund and I'd have to think it may force some broad liquidation and he is not the only one who has been so bearish on bonds...

As for Gross: This is no longer just a long term, 30 year bond rally from 1981. You are really going to have to know how things really work to be successful in this environment now that bonds are at a 30 year high... this may be his first test in this new environment and he apparently has failed it.

googleheim said...

Hi Mike

This is great.

I am going to pass this around to the local elementary PTO's who fight among each other's schools because some get Title 1 assistance ( poor ) while the others have rich PTO parties to raise money ( rich ).

The rich PTO's say the others are on welfare but looky looky whose getting the dole.

Chewitup said...

Cullen has a nice piece today on re: investing and MMT

beowulf said...

The food stamp program costs are way low ($68 billion spent last year). Maybe Tsy reimburses the cost accrued by each state ex ante (which is how highway projects are funded).
In any event, the food stamps program should be zero. When Cap Weinberger was Nixon's and then Ford's Secretary of HEW Secretary (renamed HHS after Carter carved out Dept of Ed), he came up with what it is still a damn good proposal: zero out all existing tax breaks, food stamps, housing vouchers and other programs for the poor (zeroing out as well the redundant administrative costs in USDA, HHS, HUD and every state govt to run them) and replace it with a single negative income tax system run by the IRS.
"Income Supplement Plan (ISP), a comprehensive negative income tax proposal that would replace all existing welfare programs. The proposal ensured that a "family would no longer both pay taxes and receive benefits at the same time, but instead would have either a tax liability or eligibility for a transfer".

Reasonable minds can differ how generous to make the benefit (see Martha Griffins proposal at link) but there's no reason to fund multiple welfare bureaucracies to issue separate checks (or these days, debit cards) when the IRS can simply issue a single check.

Tom Hickey said...

As Bill Mitchell says, interest from issuance of govts is a corporate subsidy.

But there is then the question about the interest paid on reserves involved in interest rate setting by the cb, which is really a subsidy to banks.

The answer? Warren recommends setting the overnight rate to zero and letting markets set rates based on demand for capital and credit analysis, with max issuance of govts limited to 3 mo bills as a near substitute for reserves.

Ralph Musgrave said...

Mike Norman is right: bonds are pointless.

Anonymous said...

I generally agree with MMT, but I think you need statistics on ownership of Treasuries. Non-rich, middle class people do own (often through 401k's and 403b's) Treasuries indirectly via money market mutual funds, government bond mutual funds, insurance policies, private pension plans, and local and state pension plans. Also foundations and endowments probably invest in Treasuries, although the beneficiaries might be more arguable in terms of rich/non-rich. Once again, I don't question the overall point, but statistics would be helpful.

Dan Metzger said...

Unless the Fed sticks with near zero rates for the distant future, higher interest will have to be paid on bonds to the rich or on reserves to the banks - someday - maybe - hopefully.

googleheim said...

"to manipulate the level of reserves" ... sounds like a tool of elastic currency theory. If you need to swell the reserves to prevent a run on the banks, then bonds might act as a buffer.

What happens if you take bonds away from the rich ? where are they are going to park their monies ?

this is like having to park your car in the street rather than inside the garage ?

or take it out of "lala land" fed/tsy domain and into the RReal economy ...

Anonymous said...

Horse$#!^ If it didn't pay the interest, the rich would send their money somewhere else, that's a fact. Interest payments placate the rich for the fact that the purchasing power of the dollar is always falling, always.