Are Government Bonds Just Another Form of Money?

Most mainstream economists would argue they are not. They would say  cash and bonds are not economic equivalents.  They would argue that issued money wasn’t debt but issued bonds were. A common counter argument would run as follows:

“This idea  falls apart at the local gas station…  you can’t go shopping, bar-hopping, or on vacation to Miami with a bunch of T-bills and not notice the difference compared to cash…therefore, they are NOT ECONOMIC SUBSTITUTES. Let’s be very clear here: nominal financial *value* DOES NOT EQUAL purchasing power.”

I’ve quoted here from an on-line discussion I’ve just had on this same topic.

The argument on whether bonds are, or can be considered to be money, has perhaps to be considered on several levels. Of course if we need to pay a £9 grocery bill a (genuine) £10 note will be very acceptable  to the cashier. A £10 bond, were it to exist in paper form wouldn’t be. Neither of us would know exactly what it was worth at the time. If it was close to maturity it could well be worth something close to £10 but if not, it might not be enough to cover the £9 bill. That’s the only difficulty.

The acceptability argument, though, would also fail €500 notes in Europe. They aren’t easy to spend! No-one wants them.  Does that mean they aren’t cash or even money? The best way to get rid of them is to take them into a bank where you have an account and pay them in. The cashier will probably take a note of the serial number in case there is any problem. In that respect a €500 note is no more useful than a paper bond. We’d be able to pay that into our bank account too.

To answer the question we need to consider what money is and why it has a value. To fit in with the concept of financial sector balances, money has to be classed as a liability or a debt to the issuer and an asset to the holder.

So, if we have a closed system of say 100 currency users and their ‘government’ issues 10 currency units to each, the government then has a fiancial debt/liability of 1000 currency units and the users have total assets of 1000 currency units.

The users later switch half their assets to bonds. Say they each buy, at auction, 5 cu of bonds from their government (on the promise that they will be worth, say, 10 cu at some future time) their total assets are still 1000 cu as they can trade the bonds for exactly what they paid for them between each other or even sell them back to the government, if it should have a policy of QE!

The government still has total liabilities of 1000 cu. The fact that it created new IOUs (bonds) and swapped them for its previously issued IOUs (Cash) is of little signficance. If the effective interest rate on those bonds is zero, then zero significance.

The commonly held view that cash and bonds are somehow fundamentally different probably is a hangover from gold standard days. If the government had a policy of backing its cash IOUs but not its bond IOUs with gold,  it would make some significant difference. If gold held in bank reserves by government was counted as a financial asset, then issued money wouldn’t represent any net debt, providing it was always on a strict 1:1 basis.

Of course it is arguable that gold is just a commodity like all the other commodities owned by the government and shouldn’t be counted. But if the mindset is that MONEY=GOLD it’s possible to see the logic of the alternative argument.

John Quiggin, MMT and Russia

Professor John Quiggin ruffled a few MMT feathers with his recent blog entitled “MMT and Russia”

MMT and Russia

Does he have  a point? Well, yes and no.  He’d have been on safer ground if he’d challenged MMT advocates to suggest a suitable policy for Russia which has both double figure inflation and unemployment rates. Or soon will have, if they aren’t quite there at the moment.

Sometimes there is tendency, in MMT circles,  to make glib comments along the lines of “sovereign currency issuing governments don’t need taxation to finance expenditure” which while technically correct, perhaps don’t give quite the right impression. They suggest we are irresponsible about creating high inflation.
There is that danger in Russia. The MMT fix for Russia wouldn’t simply be about letting their public sector deficit increase as it might be in America, the Eurozone or the UK.  Deficits in the UK and the USA are only possible because there are willing international buyers for government securities denominated in the currencies of those countries. The demand for Russian securites denominated in rubles is much lower.

There would have to be a JG in Russia, with possibly strict wage and price controls, and those on that JG would have to work very hard to replace imported goods, previously made affordable by relatively high oil revenues, with domestically produced ones. Those JG jobs wouldn’t be an easy option for the currently unemployed.

Instead, JQ gets quite a lot wrong about MMT. Saying , for example:

“To sum up, while MMT provides a different and sometimes useful way of looking at the interaction between monetary and fiscal policy, it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes.”

What’s the long run? As Keynes famously remarked we are all dead in the “long run”. See Bill Mitchell’s blog:  http://bilbo.economicoutlook.net/blog/?p=29761
for a more comprehensive discussion of just why MMT isn’t wrong.

According to the principle of sectoral balances its is easy to show that:

Govt Deficit = Private Saving + Net Imports.

In other words, all money spent by the Government will be returned in taxation, as that money is spent and respent in the economy. Where else can it go? That is unless someone saves it. Either in a piggy bank or in a bank account. Or if it is spent on net imports. That means that money gets saved in the central bank of the big exporters. Then, and only then, it becomes unavailable to the taxman.

We see that countries like the UK, the USA can happily go on running deficit after deficit for year after year. These governments aren’t just funded by taxation. They are funded by these deficits too.

So can it continue? Will they have to repay it in the “long run”? Are these deficits a burden to British children and grandchildren?

Could a job guarantee work in Russia and other less affluent countries? Well, yes it could. The idea has worked in the few cases where it has been tried. Notably in Argentina and India in recent times. In addition, though, the taxation system would need to be improved considerably to ensure taxes were collected as required and, equally importantly, on time and before the receipts weren’t eroded in value by inflation. The lack of  decent taxation system is a common factor found in many countries which are still suffering from high levels of inflation and which does indeed blight those economies. It isn’t being neoliberal to say that.

All Governments should also think in resource terms rather than solely in monetary terms. That includes especially human resources. Having a high percentage of the workforce hanging around doing nothing is wasteful in the extreme.  Incidentally, and to that extent MMT is badly named. It is not really even about money per se. Neither is it even that modern! Is it a theory? Maybe. But then so is gravitation. So, if we do think in resource terms we can see that if, say,  food production, for whatever reason, doesn’t keep up with food demand then, all other things being equal,  there will be less to go around that is required and it will rise in price.  Price being the mechanism by which scarce resources are rationed. Neither MMT nor any other economic theory can change the reality of that.

Can government debt ever be termed good, bad or irrelevant?

There’s an interesting article by Greg Jericho in the Guardian today. It’s typical on many articles which have appeared in the left-of-centre press which criticise the unfairness of Joe Hockey’s recent budget. Greg likes his graphs and statistics to make his point but, even so, he never really gets to the nub of the matter.

For instance he claims:  “Now, I know none of this will change anyone’s view that our debt position is good, bad or irrelevant, but at the very least it gives us some proper context.”

Does it? I wouldn’t use any of the words “good”, “bad” or “irrelevant” about the debt or deficits. The parallel would be the exchange rate of the A$ and, clearly in that case, what’s good for some is bad for others, but it isn’t irrelevant to anyone.

The Australian National debt can best be understood as the store of all financial assets, held both domestically and internationally, which are denominated in Aussie dollars. So the only way the government can remove its debt is to remove everyone’s assets too. I guess we all know that instinctively as no-one has questioned the imposed “debt levy” or “deficit levy”. We all know that it will transfer financial assets to government from the private sector.

Even Norway which could afford to pay it off actually has a National Debt of some $200 billion. It needs that ND to store everyone’s assets.

So whilst the conclusion of the article is correct, ie there is no debt problem, the reasons why aren’t quite correct. The simple reason there is no debt problem is that Australian inflation is very low but unemployment is higher than it should be. End of story.  The hidden assumption of all neo-liberal economists, even the ones like Greg with a social conscience,  is that government debt can be compared to household debt. That is not at all correct for countries which are sovereign in currency issuance.

It is correct for the Eurozone countries though. They have lost the ability to issue and are now currency users like the rest of us. Which is why many of them, and many of us,  are having a hard time right now!

No government debts need ever be repaid !

No government debts have ever to be repaid provided they are denominated in their own sovereign currency. All that governments have are pieces of paper, or the digital equivalent in a computer, called currency, bonds or stock.

When bonds mature they can pay them off with currency. If they don’t have enough currency they can print some more. Or they can print some more bonds, to roll over the bonds previously issued, or create some more stock and sell them or swap them for shares of companies if they are in the process of nationalising something.

That’s all they can do. They can issue bits of paper, and tap keystrokes into their computers,  and call the end result whatever they like! But, their ability to net de-issue bits of paper is extremely limited. It hardly ever happens but when it does it is usually a mistake and is the cause of the recession that follows later.

So if no government debt has to be repaid why don’t they run up huge debts? Some would say they already have. The USA has a National Debt of $17 trillion. The UK $2 trillion. Germany $3 trillion etc. The answer, in a word,  is ‘inflation’. If that’s a problem it is a sign that governments are spending too much and/or taxing too little.

If inflation is too low, as it is considered to be in the Eurozone and Japan right now,  then it is just the opposite. The governments there need to crank-up their printing presses and start to bash away a lot harder on those computer keyboards!

Further Reading Debt is not Debt – Bill Mitchell

PS A nice D-Day cartoon from the Guardian:

“Why, sometimes I’ve believed as many as six impossible things before breakfast.” (or what’s so hard about MMT)

Guest Post by John Armour

Last week Australia’s Prime Minister, Tony Abbott, said; “we are now borrowing to pay the interest on the money we’ve borrowed.” He added that if this didn’t stop we were “stuffed.”

This must make Abbott lead contender for the title of “The Stupidest Man in Australia.” His only serious challengers would be the Treasurer, Joe Hockey, and sidekick Mathias Cormann, who say equally dumb things on a daily basis.

Behind Abbott, Hockey and Cormann, one could reasonably nominate every member of the Press Gallery, the journalists (supposedly our best) who cover the important political issues of the day for the MSM, for the runner-up awards.

Last weekend, on the ABC’s “Insiders” program, four of the nation’s top journalists nodded sagely as one of them expounded on the necessity for “fiscal consolidation,” an oxymoron.

To those well versed in the mechanics of our monetary system it must seem as if our politicians and the press corps live in a parallel universe where black is white and water flows uphill.

Only in the blogosphere does one learn about the reality. Why is this so?

The answer seems to be that non-mainstream academic economists like Bill Mitchell decided to try using the internet to reach a wider audience, to describe how our monetary system really works, and bust a few myths, in the hope that the insights of MMT would then trickle up to policy makers and cut the rug from under the Neo-Liberal experiment.

One would have to say they have been spectacularly successful, but only up to a point.

Despite an enthusiastic lay following that seems to be growing exponentially, the advancement of MMT seems to have hit a wall when it comes to getting around the gatekeepers of the Neo-Liberal madhouse, the economists and financial and political journalists, who write for the MSM.

Keynes said the problem is not in understanding new ideas, but in getting rid of the old ones.

That’s certainly true, but MMT is just so damned confronting to deeply embedded “self-evident” truths. The instincts and “common sense” of Keynes’ “practical men” are of no help. MMT is counter-intuitive.

Proponents of MMT generally can’t understand why people don’t “get” MMT as it seems so obvious.  They may have forgotten however, that at their critical point of ‘enlightenment’ they had to jump a number of conceptual barriers to get to the other side.

In my experience, these are the six (seemingly) “impossible things” you have to believe (before or after meals, it doesn’t matter) to have any hope of ‘getting’ MMT.  Once you believe these “impossible things” however, the getting of wisdom follows quickly and logically.

The order of priority is based on my experience of the degree of ‘jaw dropped-ness’ as I’ve sought to explain to friends, family, and household pets.

(1) Taxes don’t fund anything

(2) The government doesn’t borrow from anybody to finance its spending

(3) The government’s fiscal balance (deficit) is the non-government sector’s surplus.

(4) The government creates currency by fiat (‘out of thin air’)

(5) Bond issuance is  not borrowing.

(6) Banks lend without reserves constraints imposed by the central bank.

They are of course not “impossible things” but the absolute reality of the sovereign fiat monetary system we actually operate under.

I could’ve added a few more but I needed just six to fit my literary allusion (“Through the Looking Glass”).

Warren Mosler’s great little book “Seven Deadly Innocent Frauds of Economic Policy” covers all these points in detail as does Frank E. Newman’s “Six Myths that Hold Back America.”

Do we need to balance our books in Australia? Yes, maybe, except they already are!

There is a lot of talk about Australians living beyond their means, previous Governments spending like drunken sailors, running an unsustainable economy, maxing out their credit cards, etc etc and we all need to learn to be more fiscally responsible. The Government is keen to help us balance the books by cutting services and increasing taxes.

They needn’t bother. The books are already balanced. According to the Reserve Bank of Australia their total assets are $146.356 billion and their liabilities ( as of 21 May 2014)  are also $146.356 billion. What a co-incicidence! The balance sheet balances!

http://www.rba.gov.au/statistics/frequency/stmt-liabilities-assets.html

Of course those keen to see children taught in classes of 35 or more, except their own of course, will point to the $79 billion in government securities shown on the asset side of the balance sheet. Presumably we have sold these securities and all others too, willingly to people who have wanted to buy them willingly. They balance the books not just of the RBA but the Treasury and the whole of governement too. So what’s the problem? If they hadn’t wanted to buy then I’m sure we’d have managed somehow. We wouldn’t have had to say “sorry kids no-one wants to buy Australian securities so you’ll have to put up with us sacking your teacher.”

But then the neo-liberals would have had to think of another reason!