I’ve never understood why governments issue bonds rather than just creating money for themselves by decree. With bonds they have to pay interest, whereas if they create money by decree they don’t.
Yes, is another way of stealing. They steal through taxes (that pay the debt) and through inflation.
The key for me is that inflation also produces the boom and bust cycle so its not only theft but is alos making the whole country poorer through destroying productivity. If instead of building a lot of houses nobody needed or starting a bunch of useless internet companies, all this work would have been used to make things people actually wanted (as it would happen if they would not have been misled by excessive liquidity-inflation) then we all would be a lot better right now, even if we would have been robed a part of it.
Now, I am not advocating that it is ok that they rob us, I am just saying that inflation is not only theft, but also has a even bigger problem, and that is that misleads people and makes them work for useless shit, making the whole country poorer.
And particularly to the debt thing is not really the key, since the debt payment that the Fed gets comes from taxes the goverment takes from you, and then comes back (or should come back) to the goverment as part of the Fed profits. So its really a game of moving the cups so you dont see where the ball is.
All very interesting, but it doesn’t really answer the question. Why choose bonds rather than creating money by decree?
Financing all government expenditures by inflation would bring about hyperinflation within the decade. And the legal tender currency will be lost forever if it goes through hyperinflation, with the government forced to become a subsidiary of some foreign government. For all purposes, hyperinflation is the worst enemy of the state. So governments try to hit a balance between the need for free funds and the fear of total collapse.
Again, this is all very interesting, but it still doesn’t address the original question.
Indulge me, but weren’t you interested in the reason that forces government to use debt instead of inflation?
A bond is defined as a collateralized commercial paper loan. You can’t appropriate anything from the government. Which means that there is no such thing as a government bond.
Sorry I got the wrong end of the stick… so you’re saying that creating money by decree is inflationary, but issuing bonds is not. Presumably no new money gets created in the process of issuing bonds. Is that right? Does that really work in practice? Do governments follow up bond issuance periods with periods running a surplus and use the surplus to pay back bond holders?
In some cases. After Trudeau, the Liberal Party of Canada went into slashing mode for years. In other cases the debt builds up indefinitely and only delays inflation.
Ok, the government needs a million dollars, which cannot be taxed out.
You have two ways to go: you print the sum, or you borrow it (assume the bonds issued are consoles, paying only a 5% interest and never redeemed) .Now, if you borrow the sum, you’ll pay every year 50’000 dollars. Since you cannot tax those out of the population you print them. You print every year 50’000 USD.
But one has to see that even if the government plans to pay not a penny of its debt by taxes, but entirely out of inflation, creating a million dollars right away and creating only a fraction of that sum per year are every, very different things. The former will push the economy towards hyperinflation, the latter will start a boom which will bust in a decade. So, what would you do, inflate or take on debt?
Note that we assumed away two facts: 1) a portion of debts is actually paid from taxes in the real world, otherwise interest rates on bonds would be very, very high. US debts cannot be paid out of taxes in their entirety, but a part is serviced though taxes. The taxes-paid proportion will diminish inflation.
- Debt can be defaulted upon, unlike inflation. If you do default, you’ll have gained fund with no need to pay back anything or to inflate. To the degree that bankruptcy approaches, and default becomes more likely, the government will use more and more debt as a substitute for inflation.
Why does anybody ever have to borrow (issue bonds) rather than just being able to create money for themselves? With bonds they have to pay interest, whereas if they create money, they don’t. Everyone would have as much money as they need and no one would ever have to work for money, ever. Powerful, powerful stuff.
Z.
It seems that governments often target certain levels of inflation.. for example in the UK, Gordon Brown set the target at 2%. But if the government never created additional money by decree, then presumably the money multiplier would eventually reach its limit (as specified by reserve requirements) and inflation could rise no more. By what mechanism could the 2% target be reached after that point?
I assume that “targeting” is smoke blowing.
Because it’s easier.
When government issue bonds someone have to surrender money to the government. If it wasn’t for the bond that money would probably have gone into the banking system instead.
One common argument used by Keynsians is that debt is a better way to stimulate the economy. Supposedly there is a problem with a liquidity trap in the banking system. By issuing bonds the government can take money away from the banking system and make sure that is being spent.
This is much nonsense but is how they themselves explain why they don’t use the printing press directly for everything.
Also since money is taken out of the banking system when debt is issued the immediate inflationary effects are lower then just creating new money.
So using bonds makes it easier to maintain the stable price level goals that the Keynsians v2.0 (monetaristis) for some reason think are important to stabilise the economy.
If the government does not like to create money by decree, but prefers to borrow existing money through bond issuance, then how come the monetary base appears to be growing steadily year after year for decades? What’s driving that?
the government is not principally opposed to avoiding this or that means of inflating the currency. they are all tools in the arsenal. I don’t understand the thrust of your question…?
I had thought (perhaps incorrectly) that governments could make up for a shortfall in tax revenue by printing money. This would at least avoid them being in debt to anyone. I didn’t understand why they seem to prefer the route of issuing bonds and borrowing the money… so I asked my original question. Then people replied that they prefer to issue bonds because that’s not inflationary. So perhaps my question was answered… but then I thought if the government are not regularly printing money then how come the monetary base has been creeping up steadily for decades? How could that happen without creating money by decree (or literally printing it on paper)?
Now does my questioning make sense to you?
If this short video is correct, then it seems that government selling bonds to third parties in and of itself is not inflationary - but if the fed buys bonds that is inflationary. The monetary base grows year after year because of the process of the fed buying bonds with money created by decree… is that right?
And if that is right, then why not cut out the middle man and just print the money and avoid the debt?
I think I’m getting the gist of this now… The government has a massive shortfall of money from tax compared to their spending. They like to make up for this shortfall somehow. They don’t want to print all the shortfall because that would cause massive inflation, so they print a huge stack of bonds, they get the fed to buy just a few of them, leading to a small amount of inflation and then sell the rest to anyone else that will buy them.
So we could divide the bond sales in to two components A and B:
A) the part they sell to third parties in return for pre-existing money (non-inflationary)
B) the part they sell to the fed for freshly created money. (inflationary)
Now my question is, why don’t they just print money directly instead of selling the “B” collection of bonds?