The purpose of government debt…
An important post from Izabella Kaminska at FT Alphaville and recommended reading (h/t rjs):
On the new purpose of government debt – Frances Coppola has whipped up an absolutely fabulous commentary on this Bank of Iinternational Settlements working paper on safe assets, which cuts straight to the point of. As she neatly expresses, in our new looking glass world of finance… “the purpose of government debt is not to fund government spending. It is to provide safe assets.”
Therefore, governments whose debt is regarded as a safe asset must operate monetary and fiscal policy in such a way that their debt retains its value. They cannot allow inflation to rise significantly, and they must maintain control of public spending to ensure that they can always meet their liabilities when they fall due. The very existence of safe assets relies on the soundness of sovereign monetary and fiscal policy.
From a national economic perspective, this looks completely ridiculous. On the one hand, government must produce unlimited amounts of debt to meet the financial system’s demand for safe assets, and allow the central bank to exchange this debt freely for new money. But on the other hand, they must maintain strict control of inflation and government spending so that the safe assets they are producing remain safe. So the debt/GDP level can rise to the skies, though they will pay nothing much for it: in fact debt/GDP would become a completely meaningless measure of the soundness of public finances. But woe betide any government that ran a deficit. The BIS paper envisages governments running primary surpluses to fund debt issuance:
Lifted from comments Frances Copppola says…
This isn’t about private debt – it’s about public debt morphing into an asset that is so important to financial stability that governments must organise their monetary and fiscal policies around supporting it. In fact as people rely on public debt as a safe home for long-term savings, the more savings they have the greater the need for public debt.
Here is a slightly different perspective to this article (note that the mechanics of debt to drain reserves has changes with interest being paid on reserves):
Excerpts from piece:
Third, it is clear from the opening paragraph that various financial market players (corporate treasurers and pension funds) find the public debt very advantageous. And once you understand their needs you start to see beyond the simplistic and erroneous “debt funds spending” claims and you gain a much more nuanced appreciation of the value the debt has for private financial markets.
So the final sentence is in actual fact a statement about the current system not what would be the case should the US Treasury initiate this 2005 proposal. In other words, in a sovereign nation “the Treasury would be issuing securities not because it needs cash, but because market participants need securities”.
That is a very powerful statement and allows the reader to ask the right questions by way of gaining a better understanding of what is what. Under the mainstream lie that debt is issued to fund net spending, the right questions are more veiled. So the obvious question is why would market participants need securities?
Once you answer that question you gain an appreciation of what it is all about? Then you are in a better position to understand that governments issue public debt to drain reserves not to finance net public spending.
The NYFR paper said the motivation for suggesting the provision of a “backstop lending facility” stems from the increasing “chronic settlement fails in Treasury securities”. What is a settlement fail?
They are always relating it back to profligate government spending and the sovereign default. The reality is that public debt plays no fundamental role in funding government spending. But it plays a very crucial role in underpinning the risk management in the private sector.
In other words, public debt is really corporate welfare.
I wrote several papers some years back (2002) about the pressure the big financial market institutions (particularly the Sydney Futures Exchange) were placing on the then federal government to continue issuing public debt despite the government running increasing surpluses. Nowhere did we read the contradiction of this position.
Anarchists and corporate libertarian are opposed to government that gets in the way of the billionaires’ liberty to own the whole world. They oppose taxes would pay for that government.
However, the anarchists with lots of cash don’t mind lending to the government that might get in the way of the billionaires, then they start whining about the debt!
Government debt is deferred taxes. Those who benefitted from lending money that should have been taxed should see their taxes raised. Including the sovereigns.
The US bonds “sold” for the military industry congress complex provide cash for very low pay back corporate welfare in defense plants and private shipyards that spending is all opportuntiy cost to the economy. But the financing of which is not material.
The crowding out argument is more pertinent to the war welfare system.
Aside from the US debt held by the federal reserve to keep the bond bubble building, there is hardly ever better use for the cash than buying US bonds.
It is not crowding out R&D which which is what the military industry complex spending has done artificially raising the price of inept technical and engineering talent.
Sovereign debt is result of too low tariffs, dumping and the sovereign playing the money manipulation game.
Do raise taxes and cut the war machine from 5% of GDP to about 2%, 5% is three times the part the Germans and French spend.
Could you e-mail me at firstname.lastname@example.org?
Well Greenspan must have had a reason to be afraid that the US was paying down the debt too fast.
Given his record of “accomplishment,” why would anything Greenspan had or has to say be relevant to anything? He’s just another of the many talking heads paid to adhere to an ideological perspective in spite of facts in evidence.
Dan, email sent last night.
this is interesting enough that i wish those who understand it would write something for AB that a non expert with limited time could read and learn something from.
Greenspan’s diagnosis wasn’t crazy. His endorsement of the blood-letting cure represented by the Bush tax cuts on the other hand was.
I have a post up on Social Security (natch) and its relation to Public Debt and in comments talk a little about the secondary function of U.S. Public Debt in the world economy. In short as long as countries have their own currencies pegged formally or informally to the dollar and/or major world commodities are priced in dollars and/or there is a continuing need for a reliable financial instrument for ‘flight to safety’ purposes there is a certain irreducible amount of U.S. debt instruments needed just to lubricate the gears and fill the holding tanks.
Now what that amount is is an open question, and presumedly it is somewhere south of the $11 trillion in ‘Debt Held by the Public’ in circulation today, but absent replacing the dollar as a reserve currency (in effect anyway) it can’t be driven to zero. Because while Afghan politicians and bankers and Columbian drug lords may be able to operate by shipping pallets of wrapped Benjamins from here to there even your standard Wall Street vulture capitalist needs something a little more convenient and electronic. Somehow I don’t think 16 $1 trillion platinum coins could serve the same purpose as more or less infinitely dividable stocks of Treasuries do.
I have noticed a shift in the way these things are discussed…ie. SS has become more a device for stimulus needs of the economy (and hence needs manipulation) than a program that is made for worker to fund their own retirement and keeps seniors out of poverty at reasonable cost.
Some talk on stimulus can be legitimately described although other means were also theoreticly available through other means, but I have seen the talk expand from expert and narrow concerns to use in other circles to describe SS primary function as stimulus in at least the short run.
Late in the boom phase all manner of fraudulent and phony debt assets, MBS and various flavors of CDOs were gobbled up. Then boom they went. Former money good assets became worthless in actuality. Thus was born mark to make believe and fictional balance sheets kept the system alive.
Still new money needed a home and safety was #1 and sovereign debt, even Greek and the like, became the asset of choice. Governments obliged and borrowed like mad, and why not? Citizens needed it, economies needed the demand and the market was eager to give it. The sovereign debt explosion was thus the result of a perfectly understandable dynamic.
In the US in some months during the period mid 08 through 09 some months saw government spending of borrowed money reaching 15% of GDP. For the life of me I fail to understand how it is not grasped that absent that spending GDP would have been lower by a good percentage of that number. Note at the lowest point of the recession GDP was only 4% lower.
The mother of economic expansion and contraction, the business cycle, is always directly connected with the rate of credit expansion or contraction. A fact that is ignored by the economics profession and misunderstood or denied by our chattering class. Thus armed with ignorance the entire political economy is set adrift in an ocean of myth and misinformation
strangely, i agree with you.
mattt taibbi wrote something about the bailout and where the money has gone that might interest you.
Taibbi writes: “Not only did the bailout prevent another Great Depression, we’ve been told, but the money has all been paid back, and the government even made a profit. No harm, no foul – right? Wrong.”
So the obvious question is why would market participants need securities. PPI help
don’t see why that is an obvious question.
but an obvious answer might be..
people buy securities because that is in general a safer way to store money than under your mattress.
people sell securities because they think they can make more money with the money they borrow… enough to pay back what they borrowed plus interest and still come out ahead.