important thoughts from Frances Coppola this afternoon:
Government debt isn’t what you think it is – Government debt is not debt in any meaningful sense of the word. Let me clarify. The debt of genuinely sovereign governments that issue their own currencies, have properly functioning central banks and full control of monetary policy is not debt in any meaningful sense of the word. This all stems from the nature of our fiat money system. In a fiat money system, governments create money. More accurately, money is created by private banks as agents of the state, backed and supported by the central bank which is part of government. The “independence” of central banks is pure fiction. Central banks may operate independently of political control – if politicians allow them to – but they are part of the government machine just as much as government treasury departments are. Most central banks – with the notable exception of the Federal Reserves – were originally created to fund governments, but their role has changed over the centuries and we have now reached the interesting position where central banks are not allowed to fund governments directly, though they can and do fund them indirectly via the banking system. But there is no reason under a fiat money system why a sovereign government could not simply instruct its central bank to issue money to meet spending commitments, rather than issuing debt..
jerry, the point is to shift the overton window…we cant let the public discussion be dominated by the likes of glenn beck…we have to repeatedly expose the ruse perpetrated by the deficit scolds that government spending in a fiat currency is somehow limited by the amount of taxes it collects or the amount of debt outstanding…
Well you could argue that is exactly what QE2 and in part QE3 are accomplishing. Since the Fed rebates ‘profits’ to Treasury purchases of relatively high yield long bonds financed by sale of lower bound yielding short bonds effectively pays off debt with the equivalent of fiat money all to the ultimate benefit of Treasury.
This is all disguised a bit in that Fed holdings of Treasuries still score as ‘Debt Held by the Public’ and NOT as ‘Intragovernmental Holdings’ but to some extent long debt with high yields held by the Fed is not really debt at all. Not when Treasury is effectively repocketing the interest it is paying out on what is by all accounts right around 20% of “Debt Held by the Public”
bruce, the next (unquoted) sentence in her post addressed that:
“When governments do this it is known as monetization, or “printing money” – although these days not much printing would be involved. It is NOT the same as QE, which exchanges various forms of government debt for money.“
this ties into her earlier posts about the importance of government debt, aka “safe assets”. in the same vein as david beckworth and izabella kaminska have posted on recently…it lurks in the back of my thinking too, which i first attempted to explain in the last 2 linked paragraphs here…
rjs, If what Frances says is true,(I agree), then why can’t the President instruct the Secretary of the Treasury to print the money necessary to pay the bills without worrying about Congress raising the debt ceiling? If you look at the Treasury’s mission statement it is clear that one of its functions is to “protect the integrity of the financial system.” I’m not so sure that I’d agree that QE isn’t the same as monetizing debt. While it is certainly true that the government still holds the debts purchased, did the Fed borrow the money for the purchases or not? And let’s remember that some purchases were for private debt that is backed by government credit. All asset purchases under QE were at par value. We know that a large portion of the toxic assets were not worth anywhere near 100% of value. At some point in the future, the government will either sell these assets at a loss, at par or not at all. I guess what I’m arguing is that in the event that these assets do not bring in 100 cents on the dollar, that in effect the amount below full value will have been “monetized.”
nanute, im not sure how explaining the truth about debt is supposed to influence a political decision; the president still thinks we’re just a big household and have to “tighten our belts” when times get tough… i think what you’ve asked ‘why can’t the President instruct the Secretary of the Treasury to print the money necessary?‘ is what the White House could do under the provisions of the 14th amendment “the validity of the public debt of the United States…shall not be questioned.” to get past the debt ceiling, but the administration appears to have rejected invoking that constitutional provision…
maybe the reason QE isnt being considered monetizing the debt is that the underlying premise of QE has been to unwind the portfolio of Treasuries & MBS at such time in the future as the crisis is over…(dont hold your breath) whereas monetizing the debt would be outright money printing with no intention to undo it in the future…as far as the toxic assets owned by the Fed goes, seems i’ve seen they’re been selling them off; if you check the Fed’s balance sheet here you’ll see the three Maiden Lane porfolios have been reduced to damn near nothing compared to what they once were; but i couldnt tell you how much of a loss they took in so doing..
important thoughts from Frances Coppola this afternoon:
Government debt isn’t what you think it is – Government debt is not debt in any meaningful sense of the word. Let me clarify. The debt of genuinely sovereign governments that issue their own currencies, have properly functioning central banks and full control of monetary policy is not debt in any meaningful sense of the word. This all stems from the nature of our fiat money system. In a fiat money system, governments create money. More accurately, money is created by private banks as agents of the state, backed and supported by the central bank which is part of government. The “independence” of central banks is pure fiction. Central banks may operate independently of political control – if politicians allow them to – but they are part of the government machine just as much as government treasury departments are. Most central banks – with the notable exception of the Federal Reserves – were originally created to fund governments, but their role has changed over the centuries and we have now reached the interesting position where central banks are not allowed to fund governments directly, though they can and do fund them indirectly via the banking system. But there is no reason under a fiat money system why a sovereign government could not simply instruct its central bank to issue money to meet spending commitments, rather than issuing debt..
So what? That’s not what countries actually do.
jerry, the point is to shift the overton window…we cant let the public discussion be dominated by the likes of glenn beck…we have to repeatedly expose the ruse perpetrated by the deficit scolds that government spending in a fiat currency is somehow limited by the amount of taxes it collects or the amount of debt outstanding…
Well you could argue that is exactly what QE2 and in part QE3 are accomplishing. Since the Fed rebates ‘profits’ to Treasury purchases of relatively high yield long bonds financed by sale of lower bound yielding short bonds effectively pays off debt with the equivalent of fiat money all to the ultimate benefit of Treasury.
This is all disguised a bit in that Fed holdings of Treasuries still score as ‘Debt Held by the Public’ and NOT as ‘Intragovernmental Holdings’ but to some extent long debt with high yields held by the Fed is not really debt at all. Not when Treasury is effectively repocketing the interest it is paying out on what is by all accounts right around 20% of “Debt Held by the Public”
Or what am I missing?
This comment has been removed by the author.
bruce, the next (unquoted) sentence in her post addressed that:
“When governments do this it is known as monetization, or “printing money” – although these days not much printing would be involved. It is NOT the same as QE, which exchanges various forms of government debt for money.“
this ties into her earlier posts about the importance of government debt, aka “safe assets”. in the same vein as david beckworth and izabella kaminska have posted on recently…it lurks in the back of my thinking too, which i first attempted to explain in the last 2 linked paragraphs here…
I guess I am missing something here. If taxes and spending have no relationship, why tax at all?
that’s a good question, jerry…one reason might be to avoid the kind of inflation that open ended issuance of money would lead to…but that’s not a threat now…in fact, at this point in time, we could forgo taxes…economist karl smith showed that with interest rates as low as they have been, we could eliminate all federal taxes today & borrow 30 years out, & make a profit on that borrowing if the economy grows just 1.1% annually or more over that 30 year stretch…
rjs,
If what Frances says is true,(I agree), then why can’t the President instruct the Secretary of the Treasury to print the money necessary to pay the bills without worrying about Congress raising the debt ceiling? If you look at the Treasury’s mission statement it is clear that one of its functions is to “protect the integrity of the financial system.”
I’m not so sure that I’d agree that QE isn’t the same as monetizing debt. While it is certainly true that the government still holds the debts purchased, did the Fed borrow the money for the purchases or not? And let’s remember that some purchases were for private debt that is backed by government credit. All asset purchases under QE were at par value. We know that a large portion of the toxic assets were not worth anywhere near 100% of value. At some point in the future, the government will either sell these assets at a loss, at par or not at all. I guess what I’m arguing is that in the event that these assets do not bring in 100 cents on the dollar, that in effect the amount below full value will have been “monetized.”
nanute, im not sure how explaining the truth about debt is supposed to influence a political decision; the president still thinks we’re just a big household and have to “tighten our belts” when times get tough…
i think what you’ve asked ‘why can’t the President instruct the Secretary of the Treasury to print the money necessary?‘ is what the White House could do under the provisions of the 14th amendment “the validity of the public debt of the United States…shall not be questioned.” to get past the debt ceiling, but the administration appears to have rejected invoking that constitutional provision…
maybe the reason QE isnt being considered monetizing the debt is that the underlying premise of QE has been to unwind the portfolio of Treasuries & MBS at such time in the future as the crisis is over…(dont hold your breath) whereas monetizing the debt would be outright money printing with no intention to undo it in the future…as far as the toxic assets owned by the Fed goes, seems i’ve seen they’re been selling them off; if you check the Fed’s balance sheet here you’ll see the three Maiden Lane porfolios have been reduced to damn near nothing compared to what they once were; but i couldnt tell you how much of a loss they took in so doing..