Economics Questions

Re: Why do governments issue bonds?

hkarnoldson — Fri, 19 Feb 2010 19:58:48 GMT

mickanomics:

And if that is right, then why not cut out the middle man and just print the money and avoid the debt?

It is not possible for the government to print money whenever they need it without direct political control over the printing press.
Which almost all economists agree is a bad idea.

In a system with "independent" central banks the government have to issue bonds to the central bank to get more money. While the central banks being unaffected by short term political goals can tend to inflation targets and refuse to buy so many bonds it would cause damaging levels of inflation

That is the general idea of the current system.

It doesn't work at all as well as they want us to believe obviously. But it does create at least some kind of institutional inertia for excessive using of the printing press, which is slightly better then leaving it in the direct control of elected politicians.

Re: Why do governments issue bonds?

Merlin — Thu, 18 Feb 2010 20:36:16 GMT

mickanomics:
Now my question is, why don't they just print money directly instead of selling the "B" collection of bonds?

Please see my preceding post: it’s a mean of having only a fraction of inflation for a long time, instead of having massive hyperinflation right now.

Re: Why do governments issue bonds?

DD5 — Thu, 18 Feb 2010 20:35:10 GMT

mickanomics:
Now my question is, why don't they just print money directly instead of selling the "B" collection of bonds?

It's more covert. Printing money sounds not right even to elementary 3rd graders. By complicating the process and pretending to borrow, the whole thing sounds much more financially sound. That's really what this is mainly about.

Also, this process greatly benefits the banks. Most of this government debt is not bought by the Fed directly, but by commercial banks. The government privilege granted to banks to operate with fractional reserves in a cartel like structure under the guidance and coordination of the Central bank, allows them to gain enormous purchasing power at the expense of the public. This also creates for the government more potential buyers for their debt without any apparent signs of deliberate government inflation.

Re: Why do governments issue bonds?

mickanomics — Thu, 18 Feb 2010 20:04:49 GMT

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?

Re: Why do governments issue bonds?

mickanomics — Thu, 18 Feb 2010 19:50:51 GMT

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?

Re: Why do governments issue bonds?

mickanomics — Thu, 18 Feb 2010 19:34:21 GMT

nirgrahamUK:

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?

Re: Why do governments issue bonds?

nirgrahamUK — Thu, 18 Feb 2010 19:25:45 GMT

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...?

Re: Why do governments issue bonds?

mickanomics — Thu, 18 Feb 2010 19:22:00 GMT

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?

Re: Why do governments issue bonds?

hkarnoldson — Thu, 18 Feb 2010 18:27:57 GMT

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.

Re: Why do governments issue bonds?

Stranger — Thu, 18 Feb 2010 18:13:34 GMT

Because it's easier.

Re: Why do governments issue bonds?

Caley McKibbin — Thu, 18 Feb 2010 17:06:59 GMT

I assume that "targeting" is smoke blowing.

Re: Why do governments issue bonds?

mickanomics — Thu, 18 Feb 2010 17:00:10 GMT

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?

Re: Why do governments issue bonds?

z1235 — Thu, 18 Feb 2010 13:40:17 GMT

mickanomics:
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.

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.

Re: Why do governments issue bonds?

Merlin — Thu, 18 Feb 2010 13:21:09 GMT

mickanomics:

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?

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.

2) 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.

Re: Why do governments issue bonds?

Caley McKibbin — Thu, 18 Feb 2010 13:17:53 GMT

mickanomics:
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.