The Truth about Money Printing. Do you want to understand?

[leo25]

I think it is very common to hear economists talking about the state of government debt. In the USA there is debt ceiling that paralyses the federal government every few years. In Australia the LNP regularly tries to bring the government accounts into surplus. The media plays a part questioning politicians on debt levels and brings ballooning debt levels to the public attention. If the debt levels are not visible and all we have is governments printing whatever they need this accountability and visibility, which I believe has been a constant constraint in the past is gone.

I understand all that, but what I'm saying is all that showmanship never achieved anything. Debt ceilings just got moved higher or got eliminated all together, so in reality having people talk and complain about the debt achieved nothing. In reality most don't care about government debt and most are incentivised for it to keep increasing due to their job depending on it.

Interestingly i know many people that are over weight and complain about the number the scales show them, yet they all want to keep eating excessively. Human psychology in an interesting thing...

 

[President Trump]

Ok but if they didn't have scales the problem would not only get worse it would be more difficult to quantify.
A problem you can quantify is a problem you can solve. It seems a bit like giving up to just throw away the scales

 

[leo25]

Ok but if they didn't have scales the problem would not only get worse it would be more difficult to quantify.

More difficult to quantify, yes. Would it get worse, maybe or maybe not.

Interestingly as debt/spending got discussed more, so did the level of debt/spending. It's almost as if the more people saw the numbers the more desensitised it made people. Billion, Trillion, Quadrillion... who cares anymore. You could almost make an argument that by not showing the numbers it would make people care more about the debt/spending.

 

[mmm....shiney!]

Shiney I get that you don’t see it as Debt. But if you bought a treasury or an Australian government bond. You would be lending money that you would expect back. You would expect interest to be paid and you would expect the principal to be returned at maturity just like any debt. The instrument you would receive ie the bond document would be written with all the standard debt instrument terms. So I just call it debt. Obviously when instead of you lending it is the central bank lending then you don’t think of it as debt anymore. But I do as the book entry is the same.

The concept of debt, assets and liabilities and even the fundamentals of budgeting within your means do not apply to sovereign national government balance sheets in the same way as they apply to everyone else. It's a really important point, but failing to grasp it means one is likely to fail in understanding how the modern monetary system works. Debt in the government sector is a completely different animal to debt in the non-government sector.

A couple of points, remember the double entry bookkeeping where liabilities equal assets? Well a bond is a dollar equivalent, they just have different maturity dates. Bonds have a maturity date in the future whereas dollars have an immediate maturity date. If the government sells say a bond worth $10 to the non-government sector, it gets $10 back in the form of money it previously issued and counted as a liability in its side of the ledger and an asset in the non-government sector's side. This money is then destroyed, there is a $10 bond in the hands of a grubby financial institution and the result is that there has been no net change in the balance between the government sector's liability and the non-government sector's assets*. And because the balance between liabilities and assets hasn't changed, there has been no increase in the government sector's debt obligation (apart from the very small interest rate it will pay on maturity). It only looks that way on paper when governments issue more currency and the numbers in the "liability" column get bigger. To use Mosler's analogy, (and he acknowledges that it's an 80's thing so you may be too young to get it) fiat currency is like a subway token - the trains not the sandwiches. Subway tokens can be issued in exchange for money (we have cards and apps for that now) until the cows come home by the subway owners, but the number of tokens issued has no bearing at all on whether the company is in more debt or not. They may choose to issue 1 million or 10 million, but just because they issue 10 million tokens doesn't make them more indebted than if they chose to just issue 1 million. They are just a simple tool that allows a user to pass legally through a turnstile. Bonds issued by the government sector as securities are the same - they are no indicator at all of whether the government is in more debt or not. They are just a tool that allow us to pass more easily through the various economic and financial turnstiles we face.

* See "Dollars and Government Securities" in https://soapboxie.com/economy/fiat_currency_economics.

So why do governments issue bonds? Simply to meet the needs of financial institutions clamouring for a guaranteed investment vehicle. They serve no other purpose. Bill Mitchell actually calls it a form of corporate welfare. It's just a sure fire way for institutional investors to earn risk free income. You could call it a fucking scam if you like. And I'd probably agree. And so would Bill Mitchell I'd say.
See: http://bilbo.economicoutlook.net/blog/?p=45108

God I hope that makes sense.

 

[leo25]

You could call it a fucking scam if you like.

 

[President Trump]

Yes I get that "The concept of debt, assets and liabilities and even the fundamentals of budgeting within your means do not apply to sovereign national government balance sheets in the same way as they apply to everyone else". I don't think our reasons for saying this are the same though. For me it is because the government, in theory, has unlimited ability to tax and to print. I say "in theory" because at the very extremes, the government cannot tax more than what is earned and under the current system the government can not borrow (have debt) more than investors (including central banks) are willing to lend. At this point I know you are throwing you hands in the air, but stay with me, I have read your post thoroughly and the part 1 and part 2 of Bill Mitchells posts. I understand you are both thinking "but that is the point how many times do I have to explain we can get rid of the government debt it is not really debt anyway".

I agree completely with your explanation of how a bond works, the money creation and destruction is perfectly described. There has been no net change in the balance between government sector liability and the non-government sector assets. But after this we start to disagree.

If the government sector liability has increased to match non-government sector assets how can you say "there has been no increase in the government sectors debt obligation... It only looks that way on paper when governments issue more currency and the numbers in the "liability" column get bigger.".

I would need an explanation from you here I don't understand this statement. To me, it only looks that way because it IS that way. And the numbers in the liability column getting bigger IS the debt getting bigger.

The subway analogy can actually be used to make my point. I agree the Subway company is not more in debt when it issues more tokens. But this is only the case because unlike the government issuing bonds the the company issuing tokens is not required to exchange them back. The government is more in debt when issuing bonds because it is required to pay them back and this is a good thing. We could change the monetary system so that bonds do not need to be paid back then the bonds would behave like tokens. So lets look at how the tokens work a) when the company doesn't have to exchange them back for cash and b) how it works when the tokens can be exchanged back for cash.

Tokens no exchange back. (no debt)

You are correct there is no debt the company can issue as many tokens as it likes and the company does not get more into debt.
There is a limit to how many trips people will take anyway because the economy for train trips is only so big. There is a limit to how many more trips people will take just because they are cheaper. So far so good.
But an oversupply of tokens that can't be exchanged back to the company means prices of tokens will drop as people sell there tokens elsewhere.

In our analogy tokens are money and money falling in value is inflation.
The company is the government and it must be trusted not to issue too many tokens and cause inflation.

Tokens with exchange back. (debt)

If the company was required to exchange the tokens the company would be restricted in how many they issued. Because they may have to take them back in exchange for funds.
The company must be careful how many they issue for this reason, but also the market will tell them through supply and demand. As the company is a buyer once there is an oversupply they will know because they are a buyer and people are trying to sell back to them.

This is the way the treasure market works.

So the difference between us is that I don't like the idea of the government being trusted to do away with debt and just issue the right amount of "tokens" not to cause inflation. I like the market to decide this.

Which bring me to the next matter which is the Central Banks. Particularly since 2008/9 the fed has distorted this treasury debt market buy introducing demand for treasuries and artificially pushing the treasury price up (yields down). The more they do this the closer we get to the no debt system. But I can see the benefits of a central bank (a different topic) but I could never support a system without government debt because I don't trust government I want that ledger entry that tells me what they are doing. So people like LEO can post that chart and say how outrageous the amount of gov debt is.

And in then end, I think that must be the difference between us. Our levels of trust in the government.

 

[mmm....shiney!]

If the government sector liability has increased to match non-government sector assets how can you say "there has been no increase in the government sectors debt obligation... It only looks that way on paper when governments issue more currency and the numbers in the "liability" column get bigger.".

Because there is a corresponding asset that matches the liability, that is why there is not net change in the balance between liabilities and assets.

But an oversupply of tokens that can't be exchanged back to the company means prices of tokens will drop as people sell there tokens elsewhere.

Supply and demand. It's not applicable to the government business of issuing a currency (unless of course the government is corrupt and incompetent and has lost the faith of its citizens), none of which characterise most modern Western governments by comparison with the tinpot nations mentions previously. Let's just simply call it faith in the nation's currency - I mentioned the prerequisites in post #84.

The value of the tokens would only decline if demand for the tokens declined. This would only happen if the subway company was to get into some kind of financial trouble and had to cut services as a result or it could not honour its token offering, or a competitor was offering a better product. None of those scenarios are applicable to a national government because (a) they have a monopoly on the tokens, (b) they don't have to run a profit to stay in business, (c) there is no alternative government and (d) we are forced to their tokens by law.

If the company was required to exchange the tokens the company would be restricted in how many they issued. Because they may have to take them back in exchange for funds.
The company must be careful how many they issue for this reason, but also the market will tell them through supply and demand. As the company is a buyer once there is an oversupply they will know because they are a buyer and people are trying to sell back to them.

This is the way the treasure market works.

Central banks are tasked with buying securities in order to maintain their value. The subway company doesn't have a central bank mate it can use to support the value of its tokens. This is why the bond market is a scam.

The subway company has a limited supply of funds so it has to manage the amount of tokens it offers in case the funds exchanged are called on (though I'm not sure why). The government has an unlimited supply of funds, it can never exceed its capacity to meet its obligation in issuing a currency token.

So the difference between us is that I don't like the idea of the government being trusted to do away with debt and just issue the right amount of "tokens" not to cause inflation. I like the market to decide this.

There's no difference between us on this point. I don't like what's happening either. It's just that I understand how it works and how all of the old concepts around governments, currencies and debt are now irrelevant.

But I can see the benefits of a central bank

I can't.

And in then end, I think that must be the difference between us. Our levels of trust in the government.

You mean to tell me that there is another political philosophy and economic theory out there that has even less trust in the government than we anarcho-capitalists?

 

[leo25]

Particularly since 2008/9 the fed has distorted this treasury debt market buy introducing demand for treasuries and artificially pushing the treasury price up (yields down). The more they do this the closer we get to the no debt system. But I can see the benefits of a central bank (a different topic) but I could never support a system without government debt because I don't trust government I want that ledger entry that tells me what they are doing.

I guess the question is at what point would you consider it a no debt system?

The FED has mandated that all government treasury auctions must clear, so no matter how much "debt" the government issues, FED affiliated Primary Dealers must buy all bonds. So in theory atm there is no limit to how much government can spend.

Also if government directly spent without the need of bonds there will still be a ledger. The FED holds all accounting of USD, so they can still openly display what government is spending if that's your main concern.

 

[JohnnyBravo300]

They dont openly display anything, that's another problem.
Theres one balance sheet we see then the other one we dont see. Theres no honesty or integrity among the sellouts.

 

[President Trump]

Because there is a corresponding asset that matches the liability, that is why there is not net change in the balance between liabilities and assets.

I think there must be a substance over form thing happening in our discussions. We agree there is matching of assets with liabilities. The assets are going up so you must agree liabilities are going up to match. The liabilities are debts, they have to be paid back but you are saying debt in not increasing. I guess you are just saying in substance the liabilities are not debt. I don't get that way of thinking so I think we are at an impasse.

Supply and demand. It's not applicable to the government business of issuing a currency (unless of course the government is corrupt and incompetent and has lost the faith of its citizens), none of which characterise most modern Western governments by comparison with the tinpot nations mentions previously. Let's just simply call it faith in the nation's currency - I mentioned the prerequisites in post #84.

Again we just have to disagree I think. All currencies are traded for goods and services domestically and internationally against other currencies. I agree western governments are not corrupt and incompetent but they have politics to worry about and have to get reelected by an electorate who cares less about freedom and more about free stuff. So governments offer free stuff to get re-elected. Its not corrupt but it can destroy an economy, unless you believe in MMT I think.

Central banks are tasked with buying securities in order to maintain their value. The subway company doesn't have a central bank mate it can use to support the value of its tokens. This is why the bond market is a scam.

Sure, I agree central banks totally distort of the value of the bonds and therefore the real cost of government debt. The Subway company doesn't have a central bank and nor should Treasury. The Government should be forced to borrow domestically and internationally at market rates and we would quickly see that Treasury would have to slow down its borrowing as it is forced to pay higher rates of interest. That interest could only be paid back from taxes and more borrowing at market rates.

The value of the tokens would only decline if demand for the tokens declined. This would only happen if the subway company was to get into some kind of financial trouble and had to cut services as a result or it could not honour its token offering, or a competitor was offering a better product. None of those scenarios are applicable to a national government because (a) they have a monopoly on the tokens, (b) they don't have to run a profit to stay in business, (c) there is no alternative government and (d) we are forced to their tokens by law.

In a free market an oversupply of anything will cause a price decline. Only market manipulation will prevent it. I'm all about ending market manipulation.

The subway company has a limited supply of funds so it has to manage the amount of tokens it offers in case the funds exchanged are called on (though I'm not sure why). The government has an unlimited supply of funds, it can never exceed its capacity to meet its obligation in issuing a currency token.

Yep and that may be the crux of it for me. You keep saying the government has an unlimited supply of funds and I pretty much agree with this. But the reason is because it can tax and it can just borrow more from the central bank. I fear higher taxes. I agree with a system in which the market is allowed to set interest rates for treasury borrowings. A system where the government does have to pay back its treasury borrowings and doesn't have an unlimited supply. The more funds the more spending the more spending the more borrowing and taxing. The cycle only ends if the governments supply is restricted. I understand the argument that funds will be soaked up by available goods and services and once this happens the government would stop printing. I don't believe it. You and LEO keep arguing that we are already there. So why is all this printing not soaking up all available goods and services and creating prosperity. Why is it only inflating financial bubbles?

 

[President Trump]

I guess the question is at what point would you consider it a no debt system?

I don't really understand what your position is. If you believe we already have a no debt system and you support MMT then there is no need to change anything.

You say you don't support MMT. But you appear not to like me pointing out why I think the theory has some issues and you seem to support taking steps that take us further in the direction of MMT rather than away from it.

Not to be funny but I guess I would say any government is in a no debt system when that government stops issuing debt. Probably not before then, no matter how farcical the amount of the debt becomes because I believe consequences will eventually flow from the level of debt. I wont mention the consequences because its a discussion I can't have again. lol

 

[mmm....shiney!]

You keep saying the government has an unlimited supply of funds and I pretty much agree with this. But the reason is because it can tax and it can just borrow more from the central bank.

Taxation has nothing to do with the capacity of governments to issue currency. And the capacity to issue currency really has nothing to do with central banks either, governments just go through CBs because that is a legislative requirement. If CBs were abolished tomorrow it would not change the ability for governments to issue currencies for infinity in any way at all. The reason governments can issue more and more currency for eternity is because they make the currency. And they don't need to get funding from anywhere else in the universe to make it. Tax has nothing to do with it. And more spending doesn't mean more taxation because governments are not revenue constrained. It's better to view the function of taxation as destroying dollars rather than revenue raising.

So why is all this printing not soaking up all available goods and services and creating prosperity. Why is it only inflating financial bubbles?

Because the full scope of MMT hasn't been implemented as of yet. Because monetary policy is a scam and benefits financial institutions. Because fiscal policy as opposed to monetary policy is the cornerstone of MMT. And because politicians and government bureaucrats are self-serving. And the electorate has a short-sighted interest in keeping the system going.

 

[leo25]

I don't really understand what your position is. If you believe we already have a no debt system and you support MMT then there is no need to change anything.

You say you don't support MMT. But you appear not to like me pointing out why I think the theory has some issues and you seem to support taking steps that take us further in the direction of MMT rather than away from it.

Again, it's not about what i support or don't support, you seems to going in circles on this one. @mmm....shiney! and i are just describing what the system is atm, nothing more. And no you don't need to change anything, but for transparency reasons i think we should all stop the BS shell games and see it for what it is.

I have no issue with you talking about the issues there are today with the system, my only issue is you describing a system that doesn't exist anymore. It would be like someone telling you that we are on a gold standards when you know that system ended along time ago.

 

[leo25]

So why is all this printing not soaking up all available goods and services and creating prosperity. Why is it only inflating financial bubbles?

I'm guessing because governments still believe in the trickle down theory, so they have been pumping money up high and hoping it flows down. Though i hear Trump want's to spend $2 Trillion in the general economy. Also if governments waste the spending on useless social programs then no prosperity will be created. Hence why I've been saying that no monetary theory will fix corruption and stupidity.

The system will break at some point (for human reasons), just i think it will take a bit longer then others.

 

[Silver260]

https://www.abc.net.au/news/2020-07-17/what-is-modern-monetary-theory/12455806

 

[Silver260]

So why is all this printing not soaking up all available goods and services and creating prosperity. Why is it only inflating financial bubbles?

Because it was never intended for the "real" economy. It's purpose is to lubricate the financial system, not stimulate the economy. Monetary policy, at its best.

Fiscal policy stimulates economies.

 

[mmm....shiney!]

@Silver260, that link to the ABC article is a great summary.

 

[President Trump]

Taxation has nothing to do with the capacity of governments to issue currency. And the capacity to issue currency really has nothing to do with central banks either, governments just go through CBs because that is a legislative requirement. If CBs were abolished tomorrow it would not change the ability for governments to issue currencies for infinity in any way at all. The reason governments can issue more and more currency for eternity is because they make the currency. And they don't need to get funding from anywhere else in the universe to make it. Tax has nothing to do with it. And more spending doesn't mean more taxation because governments are not revenue constrained. It's better to view the function of taxation as destroying dollars rather than revenue raising.

Governments are artificial entities created by laws and regulations (similar to how companies are created). These laws and regulation are put in place by men and women and control the workings of government. The right to legislate with respect to “currency, coinage, and legal tender was given to the federal government in Section 51(xii) of the Australian Constitution. So there will be statutes that control how the Treasury raises funds. If the government is constrained it is because we choose that it is constrained and write our laws and regulations accordingly. If the government is not to be constrained we write our laws the other way. It is just a choice. You and I have different ideologies and beliefs. I like a system where spending is constrained by making it only possible from tax receipts and borrowings that have to be paid back. You have explained what you believe so I wont attempt to repeat it again but it is certainly different to what I just stated.

In any event I have to say I certainly respect how you have persevered with me and remained civil. Its not something you find on forum very often. In the end perhaps you are right and I am just too conservative. I think there is a possibility that we will find out in practice.

 

[President Trump]

Because it was never intended for the "real" economy. It's purpose is to lubricate the financial system, not stimulate the economy. Monetary policy, at its best.

Fiscal policy stimulates economies.

Hi Silver260, yes I get that. There is long thread here being carried on by two or three people (me included) with a bit too much time on their hands. Have a read from the beginning if you are able I'd like to hear your opinion.

 

[Silver260]

There is long thread here being carried on by two or three people (me included) with a bit too much time on their hands.

Hi @President Trump,

Yea, I've been one of those people with too much time on their hands... Lol. I've been interacting with Shiney and Leo for sometime......

I just finished taking a break from all forms of media, so I've been a little quite.

I like a system where spending is constrained by making it only possible from tax receipts and borrowings that have to be paid back.

So do I, that's how I live my life.

But unfortunately we now have a two tier system.

Central Banks... Print, spend and stimulate, without recourse.

Governments spend..... And we, the tax payers, are expected to repay.

Think about the implications of that. Assets inflate, independent of the underlying economy.

And BTW. Nice to see a civil conversion taking place