Recently, the neglected question of why the US government borrows, given that it can print money, has arisen in the context of discussions surrounding a new documentary, Finding the Money. As L. Randall Wray observes in this one-pager, Modern Money Theory has been providing answers to this question for some time; and, he argues, it is a topic that mainstream economists are ill-equipped to address, since very few concern themselves with the monetary operations that underlie the question of why a currency-issuing government issues debt.
Underground Network ONE-PAGER No. 72 | May 2024
If Government Can Print Money, Why Does It Borrow?
L. Randall Wray, Levy Economics Institute, 2005
L. Randall Wray, Levy Economics Institute, 2005
Also at Underground Network May 9, 2024
New documentary that explains how money works and how pretty much everyone today gets it all backwards.
37 comments:
As Matt would say, why does Wray state his question as if the government does borrow? It just reinforces the notion.
What is the point of these private screenings?
Release it on HBO or wherever the unwashed masses congregate. Twitter, YouTube, Joe Rogan...
Leave your ivory towers for a change.
Introduce Stephanie Kelton to Our Country Our Choice.
https://ourcountryourchoice.com/
Set them straight on the debt issue.
The title of the paper is “why does the government borrow?” Then in the paper he says “ very few concern themselves with the monetary operations that underlie the question of why a currency-issuing government issues debt.”
Two different things .. “borrowing “ and “issuing debt”…
Take some Science courses in Finance…. I don’t know what else to tell you,,,
🤔
Remember when David Bowie issued bonds against his music rights?
So David Bowie “borrowed the money!”?
No he didn’t..,
Here:
https://en.wikipedia.org/wiki/Celebrity_bond
Do a control-F on the wiki page for the word “borrow”…
I’ll save you some time the word does not appear there.
"Remember when David Bowie issued bonds against his music rights?"
Nice.
“New documentary that explains how money works and how pretty much everyone today gets it all backwards”
Ignorance of The difference between the 2 concepts in the science of Finance 1 “borrowing” and 2 “debt issuance “ is not “getting it backwards”… the ignorant person doesn’t have the technical skill of being able to discriminate between the 2 concepts…
Lack of the ability to discriminate between 2 different things isn’t the figure of speech “getting it backwards”…
Matt
In your David Bowie example, yes, to me he did borrow the money. He swapped his illiquid (or less liquid) asset (Music rights) for money, no different than a bank swapping your signed mortgage note for cash.
He does not matter that he was wealthy already, he did borrow money for some purposes.
Apple borrowed money (bond issue) in the US to execute its stock buyback even if the company has billions "stashed" overseas.
Doom thats like a kindergarten level understanding of securitization…
Dom, sorry
To me it is borrowing regardless what my "level of understanding" of securitization (debt piled up on debt, guaranteed by debt and so on).
I remember pre 2008 when the masters of financial universe used to say "sorry you common mortals cannot understand this stuff" like it was some sort of rocket science (it is not) and then everything came crashing down.
It's down to the basic definition of borrowing - taking something with the intention of giving it back.
If any financial instrument has a redemption clause into what was exchanged originally, then it is borrowing under the dictionary definition of the term.
Which is what we're talking about.
In the co-ordinated view the Treasury borrows from the central bank, because there is an asset and a liability created and an on-demand call in place to redeem.
That borrowing vanishes on consolidation (because cash and reserves are not redeemable in a floating exchange system), and only reappears if government issues bonds.
So we have a sort of Schrodinger's borrowing that only appears if you look at things in a different way.
The way I put it recently in a discussion with colleagues.
"any particular person outside the government sector has equity when they hold a sort of money, but the aggregate mass of persons hold a tax liability in that money. It's the aggregation that changes equity into a liability under the accounting standards. At the aggregate level it meets the definition of a liability. At the disaggregated level it doesn't even meet the definition of a contingent liability."
“To me it is borrowing regardless what my "level of understanding"
It’s called “Finance” you can earn a Bachelor of Science in it at every Land Grant institution…
Wray has Anthropology and Bernstein has Music.
So ofc they use non professional language and terminology.,,
https://www.undergrad.osu.edu/majors-and-academics/majors/detail/65
NeilW
I totally agree, yesterday I was reading an article about MMT focused on the difference between federal tax payment (government token redemption per MMT) and paying off debt.
From a Balance Sheet perspective, when I pay what I owe to someone, my assets and liabilities go down together and on my counterparty asset column there is a swap (the dollars I pay, the government IOUs, replace my IOU).
When I owe taxes, I clearly have a tax liability on my liability column and, similarly to my debt payment, both my assets and liabilities go down on payment day but what happen on the other side?? Should the consolidated government entity (meaning including the Central Bank) record my tax liability as an "asset"?? The Treasury BS actually does record cash from tax payments as an assets but here we are talking from the consolidated balance sheet perspective. Bringing up Stephanie Kelton example comparing tax payment with airline miles redemption, miles are a liability for the airline after all they have to provide the free flights but what are really tax payment on the consolidated government balance sheet??
I guess we can see the "ability to impose a tax" (and get work done for the government) as an asset for the consolidated government and the tax credit (government money) the corresponding liability.
So when I pay my federal taxes, both my assets (government IOUs) and liabilities (the tax bill) go down and the consolidated government regain the ability to impose a tax on me again next year (an asset increase) so we square the accounting rules.
“ Should the consolidated government entity (meaning including the Central Bank) record my tax liability as an "asset"??
Yo, That's NOT how Modified Accrual Basis works..
Under Modified Accrual you don’t accrue on the left (Asset) side of the balance sheet….
https://www.investopedia.com/terms/m/modified-accrual-accounting.asp
“ What Is Modified Accrual Accounting?
Modified accrual accounting is an alternative bookkeeping method that combines accrual basis accounting with cash basis accounting. It recognizes revenues when they become available and measurable and, with a few exceptions, records expenditures when liabilities are incurred. Modified accrual accounting is commonly used by government agencies.”
Maybe take an Accounting course I don’t know what else to tell you…
None of the MMT people even know what Basis of Accounting is or certainly what basis the Federal government uses,
https://en.wikipedia.org/wiki/Basis_of_accounting
You can get a Science Degree in Accounting at any Land Grant institution….
https://online.iu.edu/degrees/accounting-bs.html
That is NOT what I was asking Matt.
Thank you for your link to the education resources, I do not want/need to get an accounting degree to discuss what we are discussing here.
It rather appears yes you do…
Your question is not applicable
Your question should rather be: “should we consider using a different Basis of Accounting for the Federal Government accounting?”
And again all your MMT heroes I can practically GUARANTEE don’t even know what the concept of Basis of accounting is much less which basis the federal government uses…
Matt I do not have any MMT heroes, I'm here just like a lot of other people trying to understand and exchange thoughts and ideas.
Now, you made an interesting point " “should we consider using a different Basis of Accounting for the Federal Government accounting?”"
So, when I pay my taxes,, from the perspective of the consolidated government Balance Sheet, how should we treat this cash?
Yes I know the difference between Accrual Basis and Cash Basis and that the government use Modified Accrual Accounting.
The ACTUAL Treasury accounting documentation treat it as a cash asset for the government.
MMT literature consider tax payment "destruction of money" I assume because the consolidated government (Gov + CB) end up with its own IOUs (left pocket to right pocket) making them null.
Stephanie Kelton went as far as claiming that the government does not even keep track internally of the money received from taxes before spending again (she brought up the Airline Frequent Flyer analogy, for example, Delta does not need to store his redeemed points before issuing more) the two process are completely separated.
This, to me, is clearly not true, the government at least keep track of money received from taxes and bond sales (TT&L accounts, "refilling" the TGA, etc...)
Warren Mosler made a famous (and dubious) claim that if you pay your taxes in cash, the IRS employee will thank you and shred the currency in the office backroom, this was patently false. It has been confirmed by IRS management that there is categorically no paper money destruction happening at the IRS, cash is normally sent by banks, through the proper channels, for destruction if it gets too worn out. Mosler was later forced to admit he was wrong.
People have also issues with another famous Mosler answer to the common rhetorical question "What happen if one day China want to sells all of its US government bonds??" Mosler states "the Fed will simply debit the China securities account at the Fed and credit their reserve account at the Fed".
What that means in actual operational terms? The Fed will simply buy (putting them in its balance sheet with corresponding reserves) all the Chinese held US bonds?? What is the "US Government securities account at the Fed??" So US Gov bonds sold to the public and institutions are "stored" in some Fed accounts but they do not show up in its balance sheet??
Thanks!!
"None of the MMT people even know what Basis of Accounting is or certainly what basis the Federal government uses"
That doesn't matter. It's simple a matter of opinion. MMT goes beyond the rigid thinking you want to use Matt.
No accounting policy is handed down by God from Mount Sinai. It's just a particular viewpoint. *All* the others are available.
The rigid viewpoint and the inability to see others is the hallmark of a Monetarist, not somebody who understands the underlying institutional basis.
There are lots of interesting anomalies the accounting standards, or any accounting policy struggles to capture.
"What that means in actual operational terms?"
In operational terms it means they replace the Treasuries with a 'Certificate of Indebtedness' at 0%. That's how all Treasuries are repaid initially.
CoIs are essentially Treasury dollars.
To replace them with Fed dollars, the Fed debits the TGA and credits the reserve account of the bank of whoever is cashing them in, while the Treasury credits their mirror TGA and debits the CoI account.
The net result at the consolidated government level is to debit the CoI account and credit the reserve account.
In terms of a basis for government accounting that fits with the MMT view, what you want to do is record expenses when a physical resources is consumed or deployed.
So you really want to expense capital items as revenue, and accrue revenue items at the point of physical consumption rather than when the bill is settled.
Cash is close, but it needs to be accrued as Work.
What happen if one day China want to sells all of its US government bonds??
What happens if one day the Fed decides to seize all of China's US government bonds??
Thank You Neil
Why the need for an intermediate step (the CoI) when redeeming treasuries??
So the Treasury can credit its own TGA? I though only the Fed "touches" the TGA (it is part of the Fed Balance Sheet) with the Treasury simply keeping track of it, no different than a Bank keeping track of its own reserve account at the Fed with no editing privilege.
Thank You again.
The " Unit "
https://sputnikglobe.com/20240513/de-dollarization-bombshell-the-coming-of-brics-decentralized-monetary-ecosystem-1118409748.html
Expected to be announced soon.
A right wing fuckfest.
Banks, business and free trade. That's all they care about while promising unicorns for workers.
BRICS are excellent at talking left while sprinting right.
Optimism, Foot. Invest in optimism. Bankers, businessmen and merchants will lift everyone's boats.
Trust the Unit.
"Why the need for an intermediate step (the CoI) when redeeming treasuries??"
That's what the Treasury Bond T&Cs says.
> The redemption proceeds will be automatically used to purchase a zero-percent certificate of indebtedness registered in your name and held in your TreasuryDirect account.
It also means the Treasury can never default since they just swap one debt at interest for another at no interest.
All general ledger accounts sit on two balance sheets. The TGA is a Treasury asset and a Fed liability, so really it is the Treasury that manages the account and the Fed, as the Treasury's agent, records what it currently owes Treasury. Every payment is recorded at Treasury and at the Fed in equal and opposite amounts.
“ MMT literature consider tax payment "destruction of money"
That’s either a figure of speech from their Liberal Arts training or they are making the same reification error as monetarists and think the abstractions of the Accounting Science are REAL and can be “destroyed!”… you’d have to ask them which one…
The proper description is how Neil more or less describes it in Accounting terms…
You have all these uneducated “armchair” forensic accountants claiming debt doomsday and money printing then if you’d ask them if accounts payable was an asset or a liability they couldn’t tell you..,
Same with climate nutters they tell you all the icebergs are going to melt yet they couldn’t tell you the atomic number of Hydrogen…
Or ask them what basis of Accounting the federal govt reports in and they not only couldn’t tell you which one but wouldn’t even know what basis of accounting is..,
Yet they are “experts”…
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