Funding deficits with cash, not bonds could help avoid oversized stimulus debt — Felix Salmon

My thought bubble: There's a paradox here. The people who want to print money to avoid adding to the national debt are also the people who say that the size of the national debt doesn't matter. The hope is that monetization would placate the deficit hawks, but that seems unlikely.

Yes, it is only a paradox and not a contradiction. A paradox appears to be a contradiction but it not on analysis.

There are several reasons that some MMT economists favor not necessarily offsetting fiscal deficits with interest-bearing government securities.

In the first place, it is not necessary operationally. Therefore, since public payments are involved, the question arises about public purpose or some others justification based on public interest — instead of being directed toward special interests.

The obvious fact is that the policy of paying interest on public debt favors savers, for two reasons. First, owing to the interest and also owing to default-free risk. Why is paying interest to hold default-free securities not a favor to those that save. Is it in the public purpose to encourage saving?

Those who say that favoring savers is beneficial in that it provides funds for lending are mistaken. Saving doesn't cause investment, but rather investment causes saving, in that saving is the residual of income after consumption. New money is either issued by the currency issuer or results from credit extension by banks that have access to the central bank. No prior saving needed.

There could be public interest in providing default-risk free securities at interest even though it is not necessary operationally. For example, it is argued that this provision of "safe assets" reduces systemic risk. It also plays a role in the operation of the monetary and financial system. For example, debt issuance is used in monetary operations when the central bank is not setting the policy rate directly. Government securities are  also the highest form of collateral.

While Bill Mitchell recommends ending the subsidy to savers as waste, since it is not needed operationally, Warren Mosler recommends limiting securities issuance to the short-term.

On the other hand, some argue, and I assume that Stephanie Kelton is in this group, that although securities issuance is not necessary operationally, there is widespread belief that it is. "Monetizing" as least part of the deficit instead of offsetting it with securities would break that false view.

One more observation is in order here. Paying interest on the debt adds spendable funds to the economy and it is therefore more inflationary than not doing so. Under ordinary circumstances, this might not show up. However, under current thinking, raising the policy rate and thereby increasing  interest rates over the curve, is the preferred tool of monetary policy, in the belief that raising interest rates across the board dampens investment and cools inflationary pressure. But as rates rise, government securities pay higher interest and that adds spendable funds, increasing inflationary pressure.

While there is no operational problem in increasing the government's interest burden, since the interest is paid with issuance, there could be a problem with exacerbating inflation when inflationary pressure is rising owing to monetary policy as currently administered.

Paradox resolved.

Axios
Funding deficits with cash, not bonds could help avoid oversized stimulus debt

Felix Salmon