Monday, January 2, 2017

Bill Mitchell — Foreign sales of US government debt are largely irrelevant

… there was an article in Bloomberg media (December 30, 2016) – Beware the Foreign Exodus From Treasuries – stirring up fear about the recent sales of foreign-held US government debt. I guess it was a slow news day or something because there is very little in the story that is relevant to assessing whether the US government can run an appropriate fiscal policy stance. The fact is that the foreign sales of US government debt are largely irrelevant for the US government’s capacity to maintain its net spending program. 
The sales are in US dollars and only the US government itself issues those dollars. To think that a foreign purchaser of a US Treasury debt liability are ‘providing dollars’ to the US government is to completely misunderstand the nature of the transaction. This blog considers the current data and explains how to think correctly about these matters. The question that financial commentators really should be asking is why should the US government extend that corporate welfare (risk-free bonds with income flow) to domestic bond-buyers and foreign governments/private investors. 
There is no financial reason (in terms of facilitating fiscal policy) for the bond issuance. It is just a form of welfare spending which helps the top-end-of-town....
[Introduced paragraphing by topic sentence to improve online readability.]

Bill Mitchell – billy blog
Foreign sales of US government debt are largely irrelevant
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

1 comment:

Andrew Anderson said...

There is no financial reason (in terms of facilitating fiscal policy) for the bond issuance. It is just a form of welfare spending which helps the top-end-of-town.... Prof. Bill Mitchell

Or deficits could be financed with negative to 0% yeilding sovereign debt - to maintain the central bank's ability to sop up reserves if deemed desirable. But who will buy negative to 0% yeilding sovereign debt? ans: Those who would otherwise have to pay even more negative interest on fiat account balances at the Fed.

But what about the non-rich? Should they pay negative interest too? ans: No, since SOME risk-free liquidity/savings is legitimate so an individual citizen exemption of up to, say, $250,000 US should accompany negative interest on reserves (NIOR).

But won’t the banks try to pass on negative rates to non-rich depositors? Yes, but who needs banks anyway since all citizens should be allowed inherently risk-free accounts at the central bank itself?

But what about the strength of the US dollar if it can no longer buy welfare proportional to wealth? ans: It’ll probably go down but that should increase US exports and increase jobs.