The Myth of Government Debt

[Iseree22]

Do you live in a country that creates its own currency?

And your Government also has 'debt'?

And you think this 'debt' is evil, that it must be paid back using tax revenues ?

Well I'm sorry to inform you, but you have been the victim of a very effective propaganda campaign. A country that creates its own currency will never have an inability to pay back its national debt.

Has your country been experiencing economic growth in the last decade or so ?

And have also been experiencing inflation ?

I'm sure that you understand one of the basic rules of economics, that for an inflation to occur then the currency base must be expanding? Then if your experiencing inflation and economic growth, then someone somewhere is pumping a heap of money into your economy. Who? your Treasury is, Government Debt functions like money. So when your national debt is increasing, the monetary base of your economy is expanding.

http://www.atimes.com/atimes/Global_Economy/MG27Dj02.html

[1715152656]

1715152656

[hugolp]

It worked well in Zimbawe.

[BubbleBoy]

I'm sure that you understand one of the basic rules of economics, that for an inflation to occur then the currency base must be expanding? Then if your experiencing inflation and economic growth, then someone somewhere is pumping a heap of money into your economy. Who? your Treasury is, Government Debt functions like money. So when your national debt is increasing, the monetary base of your economy is expanding.

There is some truth to this, in that the central Bank is required by law to consider government debt a high quality asset, and the commercial banks have the option to swap debt for cash if and when the central bank decides to expand the monetary base. In effect it's like the central bank prints money for the government's use, and the commercial banks are pocketing the interest.

That being said, you have to look at the magnitude of these operations to judge if govt. debt is merely a way of issuing fiat. As it turns out, in the case of the United States it's not: the Fed holds a quantity of bonds in the low trillions of dollars, while the total debt is in the order of 15 trillion of dollars. Roughly a third of that 15T is held by international lenders, a third is intergovernmental debt (pensions for federal employees, federal insurance schemes etc.), and another third is shared by the Fed and the general US public: mutual funds, private insurers etc.

So if you are an international entity that lent money to US or a pensioner, there's absolutely no "myth" of government debt: the US treasury actually owes you money, and it's very evil if they don't pay it pack. The other face of the evil is the captive citizens that are held accountable for debt they can't control, and which for the most part goes to finance actions that don't benefit them. Yup, govt. debt is pretty evil alright.

[Iseree22]

There is some truth to this, in that the central Bank is required by law to consider government debt a high quality asset, and the commercial banks have the option to swap debt for cash if and when the central bank decides to expand the monetary base. In effect it's like the central bank prints money for the government's use, and the commercial banks are pocketing the interest.

Your smart. IMO this appears to be the only reason why government debt exists. Functionally it serves no purpose. Instead of issuing Treasuries, the Government(Treasury) should just print money.

That being said, you have to look at the magnitude of these operations to judge if govt. debt is merely a way of issuing fiat. As it turns out, in the case of the United States it's not: the Fed holds a quantity of bonds in the low trillions of dollars, while the total debt is in the order of 15 trillion of dollars. Roughly a third of that 15T is held by international lenders, a third is intergovernmental debt (pensions for federal employees, federal insurance schemes etc.), and another third is shared by the Fed and the general US public: mutual funds, private insurers etc.

Yea your right. The FED only holds a small fraction of Total Government Debt, but all private holders issue 'credits' on it. If you held a Treasury and deposited at a Private Bank, they would issue credits on it. By definition, when the Bond comes due, the Treasury must pay the value of Bond. Therefore Private Banks( or any smart Private Entity) will treat Bonds in exactly the same way as cash. So even though the FED holds a small fraction of Total Bonds, the Bonds circulating in the economy are functioning exactly like money.

So if you are an international entity that lent money to US or a pensioner, there's absolutely no "myth" of government debt: the US treasury actually owes you money, and it's very evil if they don't pay it pack. The other face of the evil is the captive citizens that are held accountable for debt they can't control, and which for the most part goes to finance actions that don't benefit them. Yup, govt. debt is pretty evil alright.

The 'myth' is that Government Debt behaves like Household Debt. Unlike households the state can create as much currency as it wants. So when the Bond comes due, the State can simply issue more money to pay back the Bond. This is a result of the interaction between the Treasury and the FED, where the FED purchases Treasuries in exchange for cash. But the total number of Treasuries that the FED can purchase is bound by the number of Bonds. Therefore the amount of money that the FED can create is bound by the size of the National Debt.

[onesalt]

Do you live in a country that creates its own currency?

And your Government also has 'debt'?

And you think this 'debt' is evil, that it must be paid back using tax revenues ?

Well I'm sorry to inform you, but you have been the victim of a very effective propaganda campaign. A country that creates its own currency will never have an inability to pay back its national debt.

Has your country been experiencing economic growth in the last decade or so ?

And have also been experiencing inflation ?

I'm sure that you understand one of the basic rules of economics, that for an inflation to occur then the currency base must be expanding? Then if your experiencing inflation and economic growth, then someone somewhere is pumping a heap of money into your economy. Who? your Treasury is, Government Debt functions like money. So when your national debt is increasing, the monetary base of your economy is expanding.

http://www.atimes.com/atimes/Global_Economy/MG27Dj02.html

inflation occurs essentially becuase more worth is created in a country and needs money to be available for it.

[Iseree22]

inflation occurs essentially becuase more worth is created in a country and needs money to be available for it.

Inflation occurs when the money supply grows faster than the real economy. Perhaps that is what you meant?

[JoelKatz]

Well I'm sorry to inform you, but you have been the victim of a very effective propaganda campaign. A country that creates its own currency will never have an inability to pay back its national debt.

Even if that debt is in the form of inflation-protected securities like TIPS?
http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

[Iseree22]

I'm not sure I follow, but yes even for TIPS.

[BubbleBoy]

IMO this appears to be the only reason why government debt exists. Functionally it serves no purpose. Instead of issuing Treasuries, the Government(Treasury) should just print money.

I think hugolp put it nicely. Sure, the government could print tiny amounts of money as required, and derive it's main revenue from taxation. Strangely enough, it never happened in history. The government will always abuse the money creation privilege by treating it as a revenue source (which is not!), and unleash hyperinflation. Always. The only way for fiat to work is it's issued by an independent central bank, and the government behaves just like a normal borrower on the market: if it needs more money that it can tax, it needs to find lenders, and appear trustworthy to them.

The 'myth' is that Government Debt behaves like Household Debt. Unlike households the state can create as much currency as it wants. So when the Bond comes due, the State can simply issue more money to pay back the Bond. This is a result of the interaction between the Treasury and the FED, where the FED purchases Treasuries in exchange for cash. But the total number of Treasuries that the FED can purchase is bound by the number of Bonds. Therefore the amount of money that the FED can create is bound by the size of the National Debt.

The only reason the govt. has any ability to borrow at all is precisely because the market expects it to treat it as household debt, i.e to tax and pay it back as opposed to simply print it into existence. Without that guarantee nobody would borrow money to the government. Nobody lends money to Zimbabwe in zimdollars: Mugabe's only option is to print more zimdollars or borrow in foreign currency. The Fed could monetize all 15 trillions of debt, yet it does not because it would create massive inflation, and that's against the Fed's raison d'etre. The slightest hint of such a strategy (default in real terms) would sent bond values to zero and prof. Krugman will have the dubious pleasure to meet those "bond vigilantes" whose existence he so adamantly denies.

[JoelKatz]

I'm not sure I follow, but yes even for TIPS.

Well then could you answer the implied question -- how?!

[Iseree22]

I think hugolp put it nicely. Sure, the government could print tiny amounts of money as required, and derive it's main revenue from taxation. Strangely enough, it never happened in history. The government will always abuse the money creation privilege by treating it as a revenue source (which is not!), and unleash hyperinflation. Always. The only way for fiat to work is it's issued by an independent central bank, and the government behaves just like a normal borrower on the market: if it needs more money that it can tax, it needs to find lenders, and appear trustworthy to them.

The Government does create, indirectly via the issuance of Treasuries, money. If the supply of Treasuries compared to cash is too great, then the Central Bank will step in, and purchase Treasuries with new cash. Therefore for the Central Bank to create money, there must be Treasuries circulating, and shows that Treasuries are the initial form of money. If your American, the Debt Ceiling is the true limit on the amount of money that can be created. Treasuries function like money, and since the Central Bank generally purchases Treasuries for fresh money, then this may have little effect upon inflation. So the the Government does not function like a normal borrower, because it can continue to create Treasuries indefinitely, but bound by the debt ceiling. The only issue, is if there is an inflation, but unlike popular opinion, if the Central Bank is only exchanging one form of money(M2) for another(M0), then this has little if any effect upon inflation, and this is what happened during Q.E 2.

The 'myth' is that Government Debt behaves like Household Debt. Unlike households the state can create as much currency as it wants. So when the Bond comes due, the State can simply issue more money to pay back the Bond. This is a result of the interaction between the Treasury and the FED, where the FED purchases Treasuries in exchange for cash. But the total number of Treasuries that the FED can purchase is bound by the number of Bonds. Therefore the amount of money that the FED can create is bound by the size of the National Debt.

The only reason the govt. has any ability to borrow at all is precisely because the market expects it to treat it as household debt, i.e to tax and pay it back as opposed to simply print it into existence. Without that guarantee nobody would borrow money to the government. Nobody lends money to Zimbabwe in zimdollars: Mugabe's only option is to print more zimdollars or borrow in foreign currency. The Fed could monetize all 15 trillions of debt, yet it does not because it would create massive inflation, and that's against the Fed's raison d'etre. The slightest hint of such a strategy (default in real terms) would sent bond values to zero and prof. Krugman will have the dubious pleasure to meet those "bond vigilantes" whose existence he so adamantly denies.

Sure if there is a disconnect between the issuer of the currency and the capacity of the economy then of course there will be an inflation. As I said before the FED doesn't create inflation if it is swapping one form of base money(M0-M2) for another.

http://research.stlouisfed.org/fred2/data/BASE_Max_630_378.png

As you can see, the amount of money that the FED has created since 2008 has increased dramatically. There is 3.8 times as much money now compared to 2008. So you would expect to see an inflation of atleast 200%, and that has not happened. In fact core inflation is around 3%. This is because when the FED created most of that money(inflationary), it also purchased a heap of assets that behave exactly like money(deflationary), therefore the inflation has not changed dramatically.

[Iseree22]

I'm not sure I follow, but yes even for TIPS.

Well then could you answer the implied question -- how?!

It would be paided back like other debt....

[johnyj]

From accounting point of view, debt always equal to credit. A's debt is B's credit, if both A and B have credit (saving), then there must be some one in larger debt to balance. American government's debt could be balanced by surplus countries' credit.

In gold standard era, money was created by gold miners, it was possible that everyone have a credit (through saving). But in modern time, money is created by central banks, and they become the biggest debt taker, because their money is just created out of thin air, not by hard work. In this sense, money just act as exchange media and value benchmark, if central bank abuse this power for their personal interest, then they will destroy the credibility of the currency

[TTBit]

So why do we have to pay taxes if the govt can create as much currency as it wants?

[mobodick]

So why do we have to pay taxes if the govt can create as much currency as it wants?

Cause the other countries would be jealous?

[Iseree22]

From accounting point of view, debt always equal to credit. A's debt is B's credit, if both A and B have credit (saving), then there must be some one in larger debt to balance. American government's debt could be balanced by surplus countries' credit.

How do you reconcile this within the Bitcoin economy? Do people with Bitcoin savings owe a 'debt' to some other party?

Or can such savings be viewed as loan with zero interest and no maturity? Which is the definition of money.

So why do we have to pay taxes if the govt can create as much currency as it wants?

Taxes are a tool that help regulate inflation and reallocate financial capital. Hypothetically, yes the government could simply print more money to fund public services, but the amount of money needed would probably cause some sort of dangerous inflation.

Given that States with a sovereign currency don't actually need to tax to fund themselves, then taxation performs some 'other' purpose. Taxation is a much more effective method of handling inflation, than interest rates, because taxes can be tailored to target the inflation causing areas of the economy, this is currently impossible with interest rates. Also since America, and most of the world is experiencing economic difficulties, taxation combined with spending, can reallocate money that is not being spent to areas of the economy that will cause spending. That is, taxing people with large sums of money, and giving it to people who will spend. For each financial exchange between people there is a corresponding 'real' exchange between people, and this exchange is the source of economic growth.

[johnyj]

How do you reconcile this within the Bitcoin economy? Do people with Bitcoin savings owe a 'debt' to some other party?

Or can such savings be viewed as loan with zero interest and no maturity? Which is the definition of money.

Good questions, there are still something I have not figured it out very clearly, but money sure is a very special product

In bitcoin economy, money is generated out of something (electricity, hardware investment and time), so it is not a debt

But in modern monetary system, money issuer created the money out of nothing, so its actually a debt, its credibility is backed by central banks and governments, through countries productivity. Everyone else is chasing the money, this created all kinds of economy activities. But if people chase money instead of real products, then the deflation will kick in

[kjj]

From accounting point of view, debt always equal to credit. A's debt is B's credit, if both A and B have credit (saving), then there must be some one in larger debt to balance. American government's debt could be balanced by surplus countries' credit.

How do you reconcile this within the Bitcoin economy? Do people with Bitcoin savings owe a 'debt' to some other party?

Or can such savings be viewed as loan with zero interest and no maturity? Which is the definition of money.

No.  Bitcoin is not debt.  Dollars really aren't either, but the idea persists.  Once upon a time, federal reserve notes could be traded for the equivalent value of gold, so the dollar was a debt that the government owed to the bearer.  Those days are long gone, so now dollars aren't really debt any more, since there is nothing that you can redeem it for, except another dollar.

So why do we have to pay taxes if the govt can create as much currency as it wants?

Taxes are a tool that help regulate inflation and reallocate financial capital. Hypothetically, yes the government could simply print more money to fund public services, but the amount of money needed would probably cause some sort of dangerous inflation.

Given that States with a sovereign currency don't actually need to tax to fund themselves, then taxation performs some 'other' purpose. Taxation is a much more effective method of handling inflation, than interest rates, because taxes can be tailored to target the inflation causing areas of the economy, this is currently impossible with interest rates. Also since America, and most of the world is experiencing economic difficulties, taxation combined with spending, can reallocate money that is not being spent to areas of the economy that will cause spending. That is, taxing people with large sums of money, and giving it to people who will spend. For each financial exchange between people there is a corresponding 'real' exchange between people, and this exchange is the source of economic growth.

Government spending would be 100% inflationary, but taxes are a way of destroying money, which sterilizes a portion of the spending.  I won't comment on the notion of stealing from the rich and giving to the powerful in the name of the weak beyond saying "ick".

[BubbleBoy]

The Government does create, indirectly via the issuance of Treasuries, money.

Government debt may have a value equivalent to cash if you are large financial institution able to trade them. But it's not monetary base, it's long term debt. You can't buy a Big Mac with bonds. They are not legal tender. You can't deposit them in bank for interest, they are already producing interest. If you are a bank you can't use them to constitute minimal reserves at the Fed onto which to extend credit. The bulk of debt is held by institutional investors for years or decades, and it's not traded. Debt held by foreign governments in reserve is rarely if ever traded, the same for debt held by pension funds or inter-governmental debt.
The velocity of treasuries is one order of magnitude lower than monetary base, so if you really want to count them as money you would do so towards the M3. As any macro professor will tell you, financing by bonds is less inflationary than financing by monetary expansion.

If the supply of Treasuries compared to cash is too great, then the Central Bank will step in, and purchase Treasuries with new cash.

The Central Bank is under no obligation to do such a thing. The Central European Bank certainly did not step in to buy hundreds of billions of Greek debt when the supply was too great. And it is certainly too great: investors are currently unloading them at 50-70% discounts. The Central Bank can purchase bonds, but it's a policy option towards it's main goal of inflation, exchange rate or interest targeting.

Therefore for the Central Bank to create money, there must be Treasuries circulating, and shows that Treasuries are the initial form of money.

The swaps for treasuries is one option for monetary emission but it's certainly not the only one. The central bank could give money directly to the government for spending when it would decide to expand the money supply. The advantage of borrowing it to the government is that when inflation hits the excess liquidity can be sterilized by forcing the government to tax and pay the debt.

Sure if there is a disconnect between the issuer of the currency and the capacity of the economy then of course there will be an inflation. As I said before the FED doesn't create inflation if it is swapping one form of base money(M0-M2) for another.

[snip]

As you can see, the amount of money that the FED has created since 2008 has increased dramatically. There is 3.8 times as much money now compared to 2008. So you would expect to see an inflation of atleast 200%, and that has not happened. In fact core inflation is around 3%. This is because when the FED created most of that money(inflationary), it also purchased a heap of assets that behave exactly like money(deflationary), therefore the inflation has not changed dramatically.

I take your graph and raise you with one excess reserves graph:



From the money the Fed has created, a vast quantity sit as excess reserves in the Feds accounts. They are simply idle because the banks are unable or unwilling to find able borrowers. You will notice that the shape of the curve matches the total monetary base curve almost perfectly, and by subtracting the former from the later you will get the total monetary base that actually circulates in the economy. From the 1900 blns created since 2008 only 300 are circulating; the other 1600 blns are simply numbers in the fed's computers. That, coupled with a deflationary economic environment is the real the reason you don't see massive price inflation.

[Iseree22]

The Government does create, indirectly via the issuance of Treasuries, money.

Government debt may have a value equivalent to cash if you are large financial institution able to trade them. But it's not monetary base, it's long term debt. You can't buy a Big Mac with bonds. They are not legal tender. You can't deposit them in bank for interest, they are already producing interest. If you are a bank you can't use them to constitute minimal reserves at the Fed onto which to extend credit. The bulk of debt is held by institutional investors for years or decades, and it's not traded. Debt held by foreign governments in reserve is rarely if ever traded, the same for debt held by pension funds or inter-governmental debt.
The velocity of treasuries is one order of magnitude lower than monetary base, so if you really want to count them as money you would do so towards the M3. As any macro professor will tell you, financing by bonds is less inflationary than financing by monetary expansion.

See here, http://www.federalreserve.gov/releases/h41/current/h41.htm. This shows U.S Treasuries being counted towards Reserve Requirements. So yes Government Debt is a close equivalent to cash.

I can deposit the Treasury with the bank, and they will issue credit over it. Why? Because the Treasury is obligated to pay an amount of 'legal tender' notes in the future. From the Bank's perspective, the Treasury is an asset, and is willing to lend credit. You can then go purchase a Big Mac meal. The bank can then exchange the Treasury for cash with other banks or the central bank. It can use this money to issue new loans, and fulfill reserve requirements. IMO Krugman is very good fictional writer, who is looking out for vested interests.

If the supply of Treasuries compared to cash is too great, then the Central Bank will step in, and purchase Treasuries with new cash.

The Central Bank is under no obligation to do such a thing. The Central European Bank certainly did not step in to buy hundreds of billions of Greek debt when the supply was too great. And it is certainly too great: investors are currently unloading them at 50-70% discounts. The Central Bank can purchase bonds, but it's a policy option towards it's main goal of inflation, exchange rate or interest targeting.

I meant interest rates are affected by the amount of cash circulating relative to Government Debt. This has an affect upon interest rates, which the Central Bank will respond to, given that inflation is within the target band.

Also the Greek Situation is a little different, because Greece doesn't issue its own currency. If it did, then like Japan there would not have an issue with its public debt.

 The central bank could give money directly to the government for spending when it would decide to expand the money supply. The advantage of borrowing it to the government is that when inflation hits the excess liquidity can be sterilized by forcing the government to tax and pay the debt.

Please explain to me how bond holders have the power to force Governments to raise taxes to pay debt??

From the money the Fed has created, a vast quantity sit as excess reserves in the Feds accounts. They are simply idle because the banks are unable or unwilling to find able borrowers. You will notice that the shape of the curve matches the total monetary base curve almost perfectly, and by subtracting the former from the later you will get the total monetary base that actually circulates in the economy. From the 1900 blns created since 2008 only 300 are circulating; the other 1600 blns are simply numbers in the fed's computers. That, coupled with a deflationary economic environment is the real the reason you don't see massive price inflation.

I don't see the point of your graph. For the FED to create reserves it must purchase an asset. Therefore the growth in red-line means that the balance-sheet of the FED has dramatically expanded. That means that the FED has purchased assets from the Private Sector, in exchange for monetary base. A % of the 'new' monetary base, may stay with the FED(excess reserves), for which the FED will pay interest on, a tool the FED got in 2008.

[BubbleBoy]

You seem to operate under the mistaken assumption that M2 and M3 are interchangeable with M1 and expanding one has the same inflationary results. That is not correct. Treasuries are long term debt that is very liquid and secure, but it's still traded long term debt . It's liquidity comes from the underlying assumption that a very small portion of the debt is traded in a given period, in other words that investors in treasuries don't make a "run on the bank". This guarantees a very small velocity of this pseudo-monetary base so it has very reduced bearing on the inflation (as I hope you agree, there is a direct proportionality between the price level and the velocity of money; if you don't I will be forced to withdraw from this debate).

You are saying that because this debt is traded, and you can always get close to 1 FRN dollar for 1 T-Bill dollar, then the two are functionally equivalent. To make an analogy, you are saying that if AAA mortgage-back securities traded very liquidly before the Lehman fall, then they were inflationary cash equivalents, in other words the private sector can expand the monetary base indefinitely. Well the cash equivalence of MBS stopped as soon as investors made a run on the market in a failed attempt to increase the velocity - the price dropped near zero. This is similar to what happened with Greece.

The point of the graph should be self explanatory: the bulk of the base money emitted by the Fed it's still with the Fed! Indeed, it was created by swapping long term debt for cash, but that long term debt has low velocity and it's not inflationary. The new base money would create massive inflation if it were to hit the market, yet the banks don't or can't do that.

Bottom line: the government does not create money when it issues debt; it can create debt up to a limit where the market will no longer deem it credible. Govt debt really is an appropriation of taxes from the future, a lease on society and the future generations, a proof of the current society's self-indulgence. The idea of financing deficits by printing money is a way to destroy the currency as a stable medium of exchange.

[Iseree22]

You seem to operate under the mistaken assumption that M2 and M3 are interchangeable with M1 and expanding one has the same inflationary results. That is not correct. Treasuries are long term debt that is very liquid and secure, but it's still traded long term debt . It's liquidity comes from the underlying assumption that a very small portion of the debt is traded in a given period, in other words that investors in treasuries don't make a "run on the bank". This guarantees a very small velocity of this pseudo-monetary base so it has very reduced bearing on the inflation (as I hope you agree, there is a direct proportionality between the price level and the velocity of money; if you don't I will be forced to withdraw from this debate).

I'm not sure what you mean. M2-M1 are exchangeable with M0 with little change in prices. M3, Credit Money, is different. I am definitely not saying that M3 and Treasuries are functionally equivalent.

If you deposit a Treasury with a face-value of $1000 upon expiry, but its current value is only say $950, then banks will issue the Treasury holder with $950. Did you read the FED Statement I posted, and do you understand the structure of a Treasury? The FED Statement clearly shows Treasuries being counted towards Reserve balances, therefore Treasuries are cash-like. If someday you decide to 'run' the bank, then you will receive the current value of the Treasury minus the value of any credits you  have spent. Therefore the velocity of the Treasury deposit is similar to the velocity of a Cash Deposit, and a large portion of the Treasury value is 'tradeable'.

You are saying that because this debt is traded, and you can always get close to 1 FRN dollar for 1 T-Bill dollar, then the two are functionally equivalent. To make an analogy, you are saying that if AAA mortgage-back securities traded very liquidly before the Lehman fall, then they were inflationary cash equivalents, in other words the private sector can expand the monetary base indefinitely. Well the cash equivalence of MBS stopped as soon as investors made a run on the market in a failed attempt to increase the velocity - the price dropped near zero. This is similar to what happened with Greece.

I haven't said anything directly about the Treasuries being traded. I have described properties of Treasuries being similar, if not the same to normal cash. So if cash is being Traded, then would one expect Treasuries to be traded also? Of course, but I have not really talked about that, and I don't need too, its implicit. If AAA Lehman securities or MBSs were also backed by the U.S Treasury, then yes they would be functionally the same. But they are not backed by the Treasury, and so they are quite different and constitute a proportion of the Credit Money supply.

What happened in Greece is different to what happened during the Financial Crisis. Greece's debts are denominated in Euros, and Greece is unable to create new Euros to pay back the debts.

Bottom line: the government does not create money when it issues debt; it can create debt up to a limit where the market will no longer deem it credible. Govt debt really is an appropriation of taxes from the future, a lease on society and the future generations, a proof of the current society's self-indulgence. The idea of financing deficits by printing money is a way to destroy the currency as a stable medium of exchange.

How can a country that issues its own money run out of money ?!? This is absurd.

The only way for America to create more wealth and solve the current unemployment crisis, is to issue more debt and thereby create more money. This will soak up excess supply(unemployment) and create the next 'wave' of growth. There is nothing indulgent about people being unemployed.

The recent debt crisis has been nothing but a vehicle to justify cutting spending to regulatory agencies that are responsible for seeking Justice for the GFC.

[BubbleBoy]

Your conclusion about how states can always and easily print their way out of recession is almost surreal, so I'm going to limit myself to a few closing remarks.

The link you have supplied shows the Fed's balance sheet, on one hand the assets (table 1) it has acquired in exchange for freshly printed monetary base, and on the other hand it's liabilities, things like outstanding currency and bank reserves (table 1 continued). Commercial banks can't simply deposit treasuries towards the reserve requirements as you claim, the Fed only acquires treasuries when it decides to do so, so banks looking to meet reserve requirements need to trade the treasuries on the market. This clamps the money multiplier to a value controlled by the Central Bank, and not an ever increasing quantity proportional to the national debt.

The tradeability of treasuries is essential when equating them to money, and you implicitly acknowledged you need to trade them before you buy a Big Mac. Well then, inflation, as defined by the price of a Big Mac, can only rise if many holders of treasuries go out to exchange them for cash and buy a Big Mac. A limited fraction of the owners might be able to get 950$ for a 1000$ T-bill, but when or most of them do so in a short period of time, when most of them want a Big Mac the value of treasuries tanks, there aren't enough buyers. By definition the market will crash before inflation can happen. Buying government debt is a long term deposit and the treasuries market is no different fundamentally from the Lehman MBS market. Overborrow and you will loose investor confidence.

[Iseree22]

Your conclusion about how states can always and easily print their way out of recession is almost surreal, so I'm going to limit myself to a few closing remarks.

What about Bitcoin? Bitcoins are literally created out of thin air, how come bitcoin hasn't fallen apart? Are you saying it will?

The link you have supplied shows the Fed's balance sheet, on one hand the assets (table 1) it has acquired in exchange for freshly printed monetary base, and on the other hand it's liabilities, things like outstanding currency and bank reserves (table 1 continued). Commercial banks can't simply deposit treasuries towards the reserve requirements as you claim, the Fed only acquires treasuries when it decides to do so, so banks looking to meet reserve requirements need to trade the treasuries on the market. This clamps the money multiplier to a value controlled by the Central Bank, and not an ever increasing quantity proportional to the national debt.

Read it properly please. The FED accepts Treasuries in exchange for reserves when it conducts Repo transactions. If you don't know what a Repo is, please look it up. Therefore, if someone is short reserves, and wants to convert a Treasury into reserves it simply enters into a Repo Transaction with the FED. The Repo transaction involves the FED holding a Treasury(or other form of public debt) for a short period of time, in exchange for Reserves given to the private sector. The private sector will then treat these reserves like cash.

[Iseree22]

Which is the definition of money.

Money is an agreed upon medium of exchange and store of value or just a medium of exchange.

Modern fiat is just a medium of exchange in most countries, and if you are in a country with it's own printing press powers there are several ways in which it is produced, but the debt as money has far outpaced the printing press.

Debt as money is not inherintly a bad thing, but interest on that debt is.  Let's assume for the sake of argument there is no printing press and all money comes from a promised debt with some amount of interest.  You have 100 people "borrow" into existence 20 dollars each so there is now $2000 dollars in the economy, and it is all borrowed at 10% non-compounding interest for a total of $200 in interest.  Now the money lender turns off the borrowing faucet because they have taken on too much "risk" or they are retiring... whatever reason.  $2000 (current total in circulation) / $22 (Principle + Interest paid in full) = 90.909... (The number of people who *could possibly have a chance to pay off their loan in full, because in the realm of fake money once the $ is paid back it ceases to exist again.)

This is why debt based monetary creation has exploded and why the printing presses have no hope to keep up and this is the race the world is in now, so long as the money creation can outpace healthy repayment then economies move along swimmingly but as soon as the Interest monster starts catching up and potentially exceeding what an economy can sustain then collapse is inevitable.

Yea I agree with most of this. But there are two types of money, Credit Money( the money you talk about) and 'State' money. Simply, Credit money is derived from 'State' money, and to pay interest on 'credit monies' there must be an ever expanding supply of 'State' money. When I say 'State' money, that could also mean Gold, or other similar token type.

[kjj]

Yea I agree with most of this. But there are two types of money, Credit Money( the money you talk about) and 'State' money. Simply, Credit money is derived from 'State' money, and to pay interest on 'credit monies' there must be an ever expanding supply of 'State' money.  When I say 'State' money, that could also mean Gold, or other similar token type.

See the bold part.  What makes you think this?

One physical paper dollar bill would be sufficient to extinguish all debts (credit money), if it was busy enough.

[Iseree22]

Yea I agree with most of this. But there are two types of money, Credit Money( the money you talk about) and 'State' money. Simply, Credit money is derived from 'State' money, and to pay interest on 'credit monies' there must be an ever expanding supply of 'State' money.  When I say 'State' money, that could also mean Gold, or other similar token type.

See the bold part.  What makes you think this?

One physical paper dollar bill would be sufficient to extinguish all debts (credit money), if it was busy enough.

Equation of Exchange

MV = PQ,

Money Supply = MV. So when I say money supply I mean this quantity.

[BubbleBoy]

The link you have supplied shows the Fed's balance sheet, on one hand the assets (table 1) it has acquired in exchange for freshly printed monetary base, and on the other hand it's liabilities, things like outstanding currency and bank reserves (table 1 continued). Commercial banks can't simply deposit treasuries towards the reserve requirements as you claim, the Fed only acquires treasuries when it decides to do so, so banks looking to meet reserve requirements need to trade the treasuries on the market. This clamps the money multiplier to a value controlled by the Central Bank, and not an ever increasing quantity proportional to the national debt.

Read it properly please. The FED accepts Treasuries in exchange for reserves when it conducts Repo transactions. If you don't know what a Repo is, please look it up. Therefore, if someone is short reserves, and wants to convert a Treasury into reserves it simply enters into a Repo Transaction with the FED. The Repo transaction involves the FED holding a Treasury(or other form of public debt) for a short period of time, in exchange for Reserves given to the private sector. The private sector will then treat these reserves like cash.

Repo and reverse-repo  transactions are a tool for implementing monetary policy on the short run for up to 65 days, but usually overnight. Their total annual volume is in trillions, it's nonsensical to claim the Fed's whole security inventory is the result of repos. Furthermore, unlike US many countries don't have a repo market. You are also confusing the agents roles: the Central Bank initiates the repo as a tool of monetary policy, a bank short on reserves can't request a repo. A bank can either sell securities on the open market or in cases of emergency request financing at the discount window, at above market rates. If it could simply request a repo then what's the purpose of the discount window ?

Bickering about the technicalities of US monetary policy loses sight of the root issue: the bulk of govt. debt is not traded, they are held in reserve by institutional investors. So the MV quantity you mentioned has a very low aggregate V, thus the contribution of govt bonds in the the general price level is negligible despite the large M. On the contrary, monetizing the debt injects base money into the economy and the medium-long term effect is inflation.

[Iseree22]

Repo and reverse-repo  transactions are a tool for implementing monetary policy on the short run for up to 65 days, but usually overnight. Their total annual volume is in trillions, it's nonsensical to claim the Fed's whole security inventory is the result of repos.  You are also confusing the agents roles: the Central Bank initiates the repo as a tool of monetary policy, a bank short on reserves can't request a repo. A bank can either sell securities on the open market or in cases of emergency request financing at the discount window, at above market rates. If it could simply request a repo then what's the purpose of the discount window ?

Table 1 is a result of the purchase made during Q.E 1, and Q.E 2. Table 10, shows the current collateral held by the FED in exchange for reserves, emphasis on Treasuries.

For an explanation of what can be pledged as collateral at the discount window, see here. As written, "obligations of the United States Treasury".

Yes, your right generally, when short liquidity a bank will try to obtain a repo from another private institution before going to the FED. The discount window set by the FED forces the interest rate between primary dealers. If the bank is short reserves and has eligible collateral, it can goto the FED and obtain reserves at the discount window. The discount window is implemented by Repos.

Bickering about the technicalities of US monetary policy loses sight .....

But such bickering is necessary in order to establish the function of Government Debt in an economy.

Furthermore, unlike US many countries don't have a repo market.

Incorrect,

Sweden Repo explanation
Australian Repo Market
Canada Central Bank

[melvster]

From accounting point of view, debt always equal to credit. A's debt is B's credit, if both A and B have credit (saving), then there must be some one in larger debt to balance. American government's debt could be balanced by surplus countries' credit.

How do you reconcile this within the Bitcoin economy? Do people with Bitcoin savings owe a 'debt' to some other party?

Or can such savings be viewed as loan with zero interest and no maturity? Which is the definition of money.

So why do we have to pay taxes if the govt can create as much currency as it wants?

Taxes are a tool that help regulate inflation and reallocate financial capital. Hypothetically, yes the government could simply print more money to fund public services, but the amount of money needed would probably cause some sort of dangerous inflation.

Given that States with a sovereign currency don't actually need to tax to fund themselves, then taxation performs some 'other' purpose. Taxation is a much more effective method of handling inflation, than interest rates, because taxes can be tailored to target the inflation causing areas of the economy, this is currently impossible with interest rates. Also since America, and most of the world is experiencing economic difficulties, taxation combined with spending, can reallocate money that is not being spent to areas of the economy that will cause spending. That is, taxing people with large sums of money, and giving it to people who will spend. For each financial exchange between people there is a corresponding 'real' exchange between people, and this exchange is the source of economic growth.

One important part that I think is missing.  Currencies also work on trust.  We trust bitcoin because it's open source, right?

It's been shown that many economies can operate quite well on very low taxes, but the trust in the currency actually falls when there is less tax. 

IIRC Keynes advocated printing up to 20% GDP a year for the 'public good', which could take the form of lower taxes.  It's a double edged sword, because printing leads to inflation, but capital injections boost the economy.  Yes, you need to be careful not to print too much.

I've been pondering for a while this question about the need for a national debt or not.  Still undecided, but there seems to be an element of 'we should do it this way, because that's what we've always done'.   

As bitcoin has proven, pre conceived notions can sometimes be turned on their heads!

[Iseree22]

As bitcoin has proven, pre conceived notions can sometimes be turned on their heads!

Precisely!

I've been pondering for a while this question about the need for a national debt or not.  Still undecided, but there seems to be an element of 'we should do it this way, because that's what we've always done'.   

My personal opinion is NO, National Debt is an obsure invention that allows Bond Rentiers to collect interest for doing nothing productive. Plus people don't understand the function of national debt within Society, and makes it harder for the general public to grasp the underlying mechanics of their economy.

The notion of National Debt should be removed. Instead, their should be a popular body that decides how much money should be created/destroyed each year/month. This money is added to the Treasury Account, and spent by the Government into the economy. There would then need to be another body responsible for managing the 'Credit Money' supply, similar to the function of the current FED(Reserve Bank). However, interest-rate policy is implemented by paying interest only on Cash Deposits, as opposed to using Repos. This makes the Monetary System easier to understand and more straightforward.

[kloinko1n]

Do you live in a country that creates its own currency?

Nope!
Do you?

And your Government also has 'debt'?

Yep!

Well I'm sorry to inform you, but you have been the victim of a very effective propaganda campaign. A country that creates its own currency will never have an inability to pay back its national debt.

Well, I'm sorry to inform you, but it's you, not me, who has been the victim of a very effective propaganda campaign.
Your country (i.e. your government) does not create its own currency, and neither does mine.

You see, it's the private banks that create the currency, and it's the governments that borrow this money from them. With compounding interest.

And you think this 'debt' is evil, that it must be paid back using tax revenues ?

Well..., yes and no.
The debt is evil indeed. Because for instance in the USA this debt shouldn't have existed in the first place, as according to the constitution it is congress only that has the right to print and issue money.
And so, as the national debt of the USA has been created illegally, there is no legal necessity to pay it back.
And the same goes for the interest.

[snipped away some nonsense]

How can a State(Country) that creates its own currency run out of Money?? It can't.

Exactly!
So, the first step the POTUS should take is to abolish the (private) FED and print the money himself, instead of borrowing it from that private bank.
(And then, just as Garfield, Jackson and Kennedy, get shot in the process, and this is exactly why the FED, and the national debt, are evil and should be abolished respectively cancelled by presidential directive.)

[Iseree22]

You see, it's the private banks that create the currency, and it's the governments that borrow this money from them. With compounding interest.

Don't worry your not the only one that has been conned into believing this. This is partly true, private entities create Horizontal Money(Credit Money), and the State creates Vertical Money. 

The debt is evil indeed. Because for instance in the USA this debt shouldn't have existed in the first place, as according to the constitution it is congress only that has the right to print and issue money.
And so, as the national debt of the USA has been created illegally, there is no legal necessity to pay it back.
And the same goes for the interest.

What have you been smoking?? The debt-limit is the true source of Vertical Money in the U.S, which is under Congressional Authority, so yes, currently as it has always been, Congress remains the body with control over the creation of money(Vertical Money).

You obviously have not read and understood what has already been written in this topic, please do so!

[kloinko1n]

You see, it's the private banks that create the currency, and it's the governments that borrow this money from them. With compounding interest.

Don't worry your not the only one that has been conned into believing this. This is partly true, private entities create Horizontal Money(Credit Money), and the State creates Vertical Money. 

The debt is evil indeed. Because for instance in the USA this debt shouldn't have existed in the first place, as according to the constitution it is congress only that has the right to print and issue money.
And so, as the national debt of the USA has been created illegally, there is no legal necessity to pay it back.
And the same goes for the interest.

What have you been smoking?? The debt-limit is the true source of Vertical Money in the U.S, which is under Congressional Authority, so yes, currently as it has always been, Congress remains the body with control over the creation of money(Vertical Money).

You obviously have not read and understood what has already been written in this topic, please do so!

I could engage in a literally endless discussion about circuitrist, chartalist, Austrian and whatever more school's monetary theories about horizontal money supply curves and their bending to vertical curves as well as their relationship to exogenous and/or endogenous money creation, but I won't.
Instead I wil just vent my own very humble opinion that in my view selling bonds to China is not much different from selling them to the private banks (i.e. the federal reserve bank).

The only difference is that China obtained their dollars through exporting produce to the USA, in a sense contributing to the wealth of the American population, whereas the federal reserve obtained their dollars through printing, thus debasing the currency and reducing the wealth of their own people.

Both bonds sold represent a liability.

P.S.: I'm a non-smoker and believe that there is a difference between the issue of money (no interest due) and controlling the issue of the same (with interest due).

[Crypt_Current]

The only difference is that China obtained their dollars through exporting produce to the USA, in a sense contributing to the wealth of the American population, whereas the federal reserve obtained their dollars through printing, thus debasing the currency and reducing the wealth of their own people.

Both bonds sold represent a liability.

P.S.: I'm a non-smoker and believe that there is a difference between the issue of money (no interest due) and controlling the issue of the same (with interest due).

Outstanding!

[BitterTea]

I'm not sure I follow, but yes even for TIPS.

Well then could you answer the implied question -- how?!

It would be paided back like other debt....

I think the answer is that TIPS are tied to CPI. Given that the government determines CPI, they can simply create more currency, cause an equivalent amount of real monetary inflation (decrease the real purchasing power of existing money), change the way CPI is calculated, and voila!

[johnyj]

It's sounds very funny: A central banker will obviously cause trouble if he print money and buying things/services with these money. But, if he use the money to buy other's bonds, or loaned to others, then it is much more acceptable...

I'm still considering this process, there seems something is very wrong here: Any one can produce anything to meet other's need, money definitely is also one of such things, and producing money has become the most profitable business in the world since gold has been replaced by paper money and digital numbers. But obviously the right of producing money is only hold by the central banks, where do they get that right from? Do voters have the right to select who should be the FED chairman?