Brian Romanchuk — Do Central Governments Need To Issue Bonds (Again)?

The old "should the government issue bonds" debate has come up again. I would point the reader to this article at Mike Norman Economics, as well as the Richard Murphy article it refers to. I would argue that there is limited room for debate. The Treasury of the central government certainly can stop issuing bonds, conditioned on there being changes to the legal/regulatory framework for the central bank. The more important question is whether such a policy is a good idea. My argument is that doing so would run into a variety of consequences, and other policy decisions would need to be rethought (mainly the structure of pension provision).

Bond Economics
Do Central Governments Need To Issue Bonds (Again)?
Brian Romanchuk

Richard Murphy — Why governments need to issue bonds despite modern monetary theory

I wrote this in June. In the light of my blog on modern monetary theory today and the comment I made in it that the government must act as the borrower of last resort I think it appropriate to republish it. I do so knowing it contradicts modern monetary theory. Political judgement and the needs of financial markets suggests that doing so is appropriate for the reasons I note. Modern monetary theory is not, in other words, the answer in all cases: it can just inform the process in which a government decides to engage…

While MMT holds that governments do not need to issue bonds, MMT does not hold that government's should not issue bonds. MMT only holds that bond issue is not necessary operationally for funding deficit spending. Therefore, bond issuance may constitute a subsidy for savers unless issuance can be justified on grounds other than funding. 

Some MMT economists recommend retaining bond issuance for reasons other than funding. For example, the issuance of safe assets contributes to the stability and operation of the financial system, and it protects ordinary savers, e.g., through pension systems. In the US, individuals can purchase Treasury securities through Treasury Direct. 

In addition, like the policy rate, the rates along the yield curve serve as benchmarks.

So, issuance of government securities plays other roles than funding. 

In short, safe assets bearing some interest reduce risk in the system to some degree. For example when the ratio of public debt to private debt is higher, systemic risk is lower. And owing to the safety factor, savers are willing to accept lower rates on public debt than private debt. This serves as a check on accumulation of private debt. This is significant in the financial cycle based on Minsky's financial instability hypothesis, for instance. 

From the operational standpoint, a government could choose to issue only settlement balances in the payments system and set the policy rate to zero. But this may not be the only factor or even the chief factor. It is a matter for debate whether a government is best advised to do this.

If iit is decided to issue bonds, then a governments should tie securities issuance to the deficit but rather issue securities to meet demand for safe assets. There is no operational need to limit securities issuance, and in spite of conventional views, bond issuance doesn't reduce the putative inflationary effects of government currency issuance through spending appropriations.

In the case of continued bond issuance, interest rates along the yield curve would have to be kept low enough not to compete with investment funding by encouraging saving over investment. That is, interests rates on longer term securities would have to be lower on average than the profit rate.

MMT economists recommend that the current monetary policy of raising the policy rate to "control inflation" by increasing yields toward the profit rate should be abandoned in favor of functional finance, pointing out that monetary policy is a shotgun approach while functional finance is a targeted one. In addition, monetary policy favors savers over borrowers and the current approach to monetary policy based on NAIRU uses the inflation rate as a target and the unemployment rate as a tool, disadvantaging workers.

Functional finance aims at achieving optimal growth, actual full employment and price stability using fiscal policy based on automatic stabilization and a job guarantee that also works as a price anchor. MMT economists have developed a considerable literature articulating this approach, which they admit is not original with them. Rather, it has been dismissed by conventional theory with conventional economists asserting that the methodological debate is over as justification for ignoring heterodox theories and policy proposals based on them.

Choices involve tradeoffs. In policy formulation, if options are divergent, it becomes a political question. Regarding bond issuance, there are arguments on both sides of whether to issue bonds. There is not unanimity among MMT economists on this issue.

My view is that if there would be a political decision to go to a no-bonds policy, then the policy should be implemented gradually to allow the system to adjust to the new rule.

Tax Research UK
Why governments need to issue bonds despite modern monetary theory

Richard Murphy

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

Bill Mitchell — Bond issuance does not sterilize government spending; overt money financing is not necessarily inflationary

Question 1:

Issuing government debt reduces the risk of inflation arising from deficit spending because the private sector has less money to spend. 

The answer is False.

Bill explains why this is so.

This objection keeps coming up, it seems. This is nice short explanation to save for the occasion.

Bill Mitchell – billy blog
Saturday Quiz – January 2, 2015 – answers and discussion
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Total Gov't debt issued since 1998: $229 TRILLION! And guess what? Rates are at zero!!

The daily Treasury statement is a fascinating document. Each day at 4pm on the dot you get a look at the Treasury's checkbook. Every item of expenditure (withdrawals) and every item of revenue (deposits) is shown in detail down to the dollar. And it's compiled to give daily, monthly and fiscal year to date totals.

Also included in that statement are the total amount of public debt that the Treasury has issued. This includes bonds and notes along with T-bills, savings bonds and whatever other debt the Treasury sells.

The numbers are really unbelievable and they shed light on how we really just live in a world of "Monopoly money." I don't mean that in a pejorative sense; I simply mean that this is all just a matter of accounting and record keeping, that's it. Nothing more than that. And the reason you know that's true is because the trillions $$ that come in and out on this statement are just mind boggling. There's not that much money in the whole, entire, world, yet there it is, in black and white, right on the Treasury's books.

For example, here's one crazy number: $53.7 Trillion. That's the amount of public debt that has been issued by the Treasury so far this fiscal year. (Less than 10 months.) Fifty-three T-R-I-L-L-I-O-N!

See for yourself by looking at the statement below:

I bring this up because the only thing we hear about, every day, is what a huge debt we have ($14 trillion) and that we ought to be scared because there is massive "supply" of Treasuries (usually only 10s of billions $) about to be auctioned off. (This usually comes as a rant from resident CNBC imbecile, Rick Santelli).

We are also told that this supply is going to cause rates to spike or that no one is going to buy this paper. OMG, what if the Chinese don't step up and buy?

Yet the fact is, the government has already sold nearly $54 trillion of debt in the last 10 months with no trouble or consequence. That is nearly four times the outstanding national debt (which took 220 years to accumulate). We sold four times that in 10 months and what happened? Nothing. Rates are at ZERO!

Even more enlightening is the fact that over the past 13 years (as far back as this data goes) the Treasury has sold a mind-numbing $229 trillion of debt and rates have gone down to zero.

I went back and jotted down the total annual debt sales that the Treasury has conducted from 1998 until now. (All came from the archives of the Treasury Statement.)

Here it is:

And finally, here's what interest rates did over that time when we issued $229 trillion of debt:

Fed funds 5.5% to zero
2yr note 5.5% to 28 basis points
5yr note 5.5% to 1.15%
10yr note 6% to 2.5%
30yr bond 6% to 3.7%

So my question is, when are we going to stop with this ridiculous hysteria about gov't debt issuance, spiking rates, our national debt "problem," and all the other nonsensical talk that we have been hearing? It's really worse than any warped myth.