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.
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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...?
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nirgrahamUK: I don't understand the thrust of your question...?
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?
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.
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.
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.
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