Friday, May 27, 2011

The Government is not like normal people

From Megan McArdle:
But the government does not borrow and save like normal people--its constraints are different. The closest it can come to saving is to pay off debt. And our debt is not yielding 5.25% right now; our highest-yielding debt is paying 4.375%, which the government is trying to sell more of, not pay off, in order to lengthen the average time-to-maturity of the debt held by the public, which lowers the risks to the Treasury of a sudden interest rate spike.
The constraints of a currency issuer are different--in that "saving" as a concept makes no sense. The Government doesn't "have" or "not have" money. It prints money when it spends. It unprints when it taxes. Its goal is to have printed as much as the non-govt sector wants to save.

Why would any entity need to stockpile what it can create costlessly at will?

12 Comments:

Blogger Neil Wilson said...

Printed as much as the non-govt sector wants to *net-save*.

Saving that is recycled via private borrowing will come back as taxes.

That 'net-savings' concept is an important distinction. I wish there was another word for it.

'anti-deficit' perhaps?

7:34 AM  
Blogger winterspeak said...

Right!

9:22 AM  
Blogger The Arthurian said...

I'm not even sure it makes sense for a business to save. Business is supposed to invest.

9:23 AM  
Blogger winterspeak said...

Well, it might be prudent for a business to set aside cash for a rainy day, or a big purchase (depending on their cost of financing etc.)

A business can run out of money. A currency issuer, but definition, cannot.

11:51 AM  
Blogger Musgrave said...

“Why would any entity need to stockpile what it can create costlessly at will?” Also, re government borrowing, why would any entity want to borrow what it can create costlessly at will – particularly when it has to pay for the privilege of borrowing in the form of interest? I.e. what’s the point of attempting stimulus via the traditional Keynsian “borrow and spend” policy? Abba Lerner’s “print and spend" policy makes more sense.

Second, borrowing has an anti-stimulatory effect. What’s the point of an anti-stimulatory element in a policy which, overall, is supposed to be stimulatory?

Conclusion: Keynsian “borrow and spend” is crackers.

8:42 PM  
Blogger Neil Wilson said...

"Second, borrowing has an anti-stimulatory effect. "

In what sense is it anti-stimulatory? The extra interest paid is additional government spending - which at the very least is potential stimulus.

What are the offsets against that? And what evidence is there to support the theory?

11:00 PM  
Blogger Ralph Musgrave said...

Neil, When government borrows $Xbn from the private sector, that is $Xbn the private sector cannot spend. It strikes me that has to be anti-stimulatory. Or to be more accurate, the private sector gets $Xbn of bonds which are less liquid, i.e. more difficult to spend than cash.

Of course when that money is spent, the stimulatory effect of the spending may counterbalance or more than counterbalance the anti-stimulatory effect of the borrowing (depending on your views about crowding out). And as you suggest, the interest may be stimulatory. But the initial act, the borrowing, is anti-stimulatory. So I’m saying: “don’t bother with it”.

6:25 AM  
Blogger Neil Wilson said...

"When government borrows $Xbn from the private sector, that is $Xbn the private sector cannot spend"

Nope. Our current banking arrangments can get around that. Bonds can be repo'ed.

Classical financial 'crowding out' theory is demonstrably false.

You can't affect the quantity of money available, only its price.

11:51 PM  
Blogger Neil Wilson said...

This comment has been removed by the author.

12:17 AM  
Blogger Neil Wilson said...

Additionally the causality implied doesn't stack up under MMT. Borrowing doesn't remove money. It just increases the interest rate paid on money the private sector has already decided not to use in this period.

If that is the case then it comes down to whether the interest rate likely offered on bonds is actually the variable that is causing the private sector not to spend money.

QE seems to show that yields don't alter according to the borrowing theory. It is something else that is stopping the private sector spending their cash.

12:19 AM  
Blogger Ralph Musgrave said...

Neil, “Bonds can be repo’ed”. Yes, of course. But as I said above, bonds are “less liquid, i.e. more difficult to spend than cash.” I.e. it’s easier to spend $X of cash than use $X of bonds (or any other asset) as the basis for an $X loan.

“You can't affect the quantity of money available, only its price.” The US monetary base trebled over the last three years.

I’m baffled as to why “Borrowing doesn't remove money.” If I send a cheque to government for $X of bonds, my bank debits my account and the central bank debts my bank in the CB’s books. The money is out of my control.

I agree that “something else is stopping the private sector spending their cash.” Put another way, record low interest rates haven’t worked too brilliantly, and QE is not much better. Re interest rates, the recession was sparked off by irresponsible borrowing. People won’t make the same mistake again for a few years, even if offered money at low rates. Re QE, many of us predicted the only significant effect would be to boost asset prices.

3:15 AM  
Blogger Neil Wilson said...

"The US monetary base trebled over the last three years. "

OK. Wrong words perhaps. You can't affect the quantity of money *that will be put to use* just the price.

"The money is out of my control."

That's micro thinking that doesn't scale up.

It was out of your control to start with. If you write a cheque you are drawing on a bank demand deposit - not state money.

In other words there was no 'money' involved when you wrote that cheque. You swapped a private sector bank asset for a government sector bond.

The reserve position might alter at your bank, but that doesn't prevent them advancing another loan to somebody else and reversing that reserve position. The limit on money has not altered.

5:09 AM  

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