Sunday, May 31, 2020

Bill Mitchell — Why do currency-issuing governments issue debt – Part 1

One question that continually comes up when I do interviews is this: If governments are not financially constrained in their spending why do they issue debt? Usually, the question is expressed in an incredulous tone, meaning that the person asking the question considers this to be the gotcha moment, when they pierce the impeccable logic of Modern Monetary Theory (MMT) and show it for what it is – a sham. One problem is that there is a tendency to confuse motivation with function and many people sympathetic to MMT reduce it to simple statements that belie the reality. One such statement, relevant to this topic, is that government’s issue debt to allow the central bank to maintain a specific short-term interest rate target. Central banks have traditionally used government debt as an interest-rate maintenance tool. But that is a function of the debt rather than being the motivation for issuing the debt in the first place. So we explore those differences today as a means of clarifying the questions and confusions around this issue. This is Part 1 of a two-part series, which I will finish tomorrow....
Bill Mitchell – billy blog
Why do currency-issuing governments issue debt – Part 1
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

8 comments:

Matt Franko said...

"So for this otherwise “worthless” currency to be acceptable in exchange (buying and selling things) some motivation has to be introduced. That motivation emerges because the sovereign government has the capacity to require its use to relinquish private tax obligations to the state.

Under the gold standard and its derivatives, money was always welcome as a means of exchange because it was convertible to gold which had a known and fixed value by agreement. This is a fundamental change."

There were federal taxes before the gold convertibility was abandoned...

So nothing was "introduced"...

Where is the legislation that was "introduced" to establish utility for the USD?

Doesnt exist...

Matt Franko said...

"So we traverse from thinking about financial constraints and the need to ‘fund’ spending to avoid compromising central bank responsibilities to maintain a particular exchange rate parity, to a focus on real resource constraints defined in terms of available productive resources and available final goods and services.

This is a dramatic shift in thinking."


Who is "we"?

99.999% of people havent "traversed" anything....

Matt Franko said...

"One question that continually comes up when I do interviews is this: If governments are not financially constrained in their spending why do they issue debt?"

Why dont you just say "because the banks dont have enough capital to finance the over $20T of USD current savings in the Treasury accounts that would then have to be instead saved in a bank deposit account... if we stopped issuing Treasury securities all of the banks would soon be insolvent and incapable of providing any credit..."

That would shut them up...

Matt Franko said...

Neil over there:

“the government offers interest bearing debt as a favour to currency users (households and firms) that have a propensity to save; the rich save the most, so they benefit most from this arrangement.”

Not sure that analysis stacks up in reality any more."

Neil is Science trained and is able to make the adjustment... Bill is not able to make such an adjustment..

Ralph Musgrave said...

OMG: yet another 2,000 word article by Bill....:-)

Anyway, since he doesn't answer the question "Why do currency issuing governments issue debts" (though he does promise an answer in the next item in this series), I'll answer it. I'll do it more like 100 words.

Govt (that's govt in the sense "govt and central bank") have a habit of spending too much relative to what comes via tax. That tends to result in excess demand, ergo demand must be reined in. And that can be done via increased interest rates (including making sure that any further govt spending which is not funded via tax is funded via interest yeilding govt debt.

As for GOOD REASONS for funding gov spending via debt, there aren't any: at least Warren Mosler and Milton Friedman opposed all forms of interest yielding gov debt. I.e. the reality is that in practice, interest yielding gov debt is a way of countering the tendency of politicians to spend too much relative to income from tax.

S400 said...

Who is "we"?

Matt’s cherry picking is now down to two letters.

Peter Pan said...

Is it 'we' or 'wi' ?

Nithya said...

I actually wanted to know about the exact reason behind the government issuing debts. The post talks about modern monetary theory which reveals the logic behind the debts issued by the government. My economics teacher in the Top IAS coaching centres in Chennai made me clear about this theory.