–China buying bonds. Who cares.

An alternative to popular faith

5/17/2001: WASHINGTON (AFP) – China boosted its massive US Treasury bond holdings in March for the first time in six months as foreign buying of long-term US assets set a new record high, official data showed Monday.

So, as always, the debt hawks have been proven wrong. Here we are, running huge deficits probably for many years into the future, and despite debt hawk predictions, other nations continue to buy our bonds.

Why? Are they being charitable? Just nice guys? No.

The interest rate is good, considering the U.S. never will default, and we will fight inflation. In short, our bonds are a good investment (although as a monetarily sovereign nation, China does not need to profit from investment), which is the sole reason countries ever buy them.

Of course, none of this really matters, since the U.S. does not need to create and sell T-securities, nor should we. The U.S. can create dollars at will, without bonds. Creating and selling bonds does not help the economy, nor does it affect inflation or any other economic problem.

The notion that we need to borrow the money that we exclusively can create, is obsolete — as dead as the gold standard.

But, for a while, at least, we won’t have to listen to uninformed pundits worrying that nobody will buy our bonds.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity

15 thoughts on “–China buying bonds. Who cares.

  1. Rodger–I agree 100 %.

    Now, there could be a problem with this though. Or rather, we don’t do it this way since there is an alternative. (And I say someone is getting the benefit from this system.)

    As the government increases its debt so does the private sector. As you have stated before Money is Debt. As the government borrows money it likewise increases the amount of money in the system thanks to deposits of debt purchases at banks. This is supposed to be the fractional reserve system at work even though we no longer really care whether the bank has money in the first place since they just assume they will or can get more money at the Fed window. Just remember that an increase in gov’t debt/money means a likewise increase in private debt/money.

    See here: http://www.creditwritedowns.com/2010/05/mmt-economics-101-on-federal-budget-deficits.html

    Now, what is interesting is that as we pay back our loans (not just taxes to “pay” for government debt) but any loan, that money is no longer in the system and thus there less money to “pay back” the government debt.

    So, what we must do is to continue going deeper into debt to ensure that there is enough money to eventually pay off the debt. Yeah, backwards thinking. And really, that can’t work, can it? No, it can’t.

    What’s that leave us with? We can’t really inflate our way out of this since it is our money to begin with. (Unlike Weimar, Zimbabwe, etc. who held debt in foreign currency.)

    What we must do is allow for contractions. Or rather recessions and if we don’t take our medicine, depressions.

    Note that both the D and the R use this system for their own gain. The D likes the idea that the government can spend more for their groups. The R like this because more debt means more money in the system for businesses to grow. Both the D and the R get the money first before it “trickles” down to the rest of us.

    But, like I said before, we can keep doing this only until we can’t continue to do this. We will need to contract.

    I still agree that the government doesn’t need to borrow. Natural wealth can still be created organically from one’s work which may include debt from a private bank. And likewise any government spending from real dollars created out of thin air to which will increase money supply.

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  2. You said, “[…]as we pay back our loans […], that money is no longer in the system and thus there less money to “pay back” the government debt.”

    Private money does not pay for federal debt. Federal government debt is “paid back” with federally created new debt/money.

    You said, “So, what we must do is to continue going deeper into debt to ensure that there is enough money to eventually pay off the debt. Yeah, backwards thinking. And really, that can’t work, can it? No, it can’t.”

    Yes, that is exactly what we do, and have been doing, and must continue to do. A growing economy requires a growing supply of debt/money. If you want the economy to grow forever, the supply of debt money must grow forever.

    Where will it come from? The federal government will create it. Dollars are not physical. They merely are an accounting — a balance sheet figure.

    The government creates dollars the same way a baseball scoreboard creates runs. What is the maximum number of runs a baseball scoreboard can create? That’s the limit to federal debt money creation.

    Rodger Malcolm Mitchell

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  3. “A growing economy requires a growing supply of debt/money. If you want the economy to grow forever, the supply of debt money must grow forever.”

    Yes, under the current system the debt must grow. But who sells us this debt? When you say the federal government will create it, how can they create it? The money creation doesn’t happen at the US Treasury. Instead that job is for the Fed, but it first must deposit money into a bank via the purchase of private debt. If there is no private debt to purchase, where does the Fed find the debt to purchase?

    The Fed and our banking system is dependent then on commercial banks creating loans. The fractional reserve system was to ensure that this always happens. (20% reserve would make $100 deposit be $450 in new money.) But now there isn’t such a system in real operation. The banks just assume the economy is elastic enough to always have enough new debt money in existence that they can create more. Loans create deposits. But at what point through foreclosures, bankruptcies, write-downs, credit line cuts, etc. do we actually take too much of this debt away from the system, thus decreasing loans which reduce deposits which reduce loans, which cause less and less money in existence, which continues this deflationary cycle down and down?

    Yes, I know we then lean on the government to spend more. But how can they? They can’t create the money. The Fed has to do that through the purchase of debt. What debt? It’s disappearing.

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  4. No one needs to sell debt to the government. The federal government creates money by deficit spending, which it does simply by crediting the bank accounts of its vendors. It can do this endlessly.

    Visualize a brand new country, with no money. How will the government get money into the hands of the people? By buying goods and services.

    The people will build roads, serve in the army, teach in schools, etc. and the government will credit their bank accounts. Voila! The people now have money.

    Rodger Malcolm Mitchell

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  5. “The federal government creates money by deficit spending, which it does simply by crediting the bank accounts of its vendors.”

    Okay, but looking at my 1984 macro economics book it tells me this:

    “Suppose the Board of Governors orders the Federal Reserve Banks to buy government bonds in the open market. From whom may these securities by purchased? In general, from commercial banks and the public.”

    So if I understand this (it’s been years) the commercial banks and you and me buy from the Treasury bonds, etc. We can then sell these to the Fed who creates the money to pay for these. This deposit of cash from the Fed is then deposited into my bank. Which helps generate more supply of money for loans, etc., etc.

    As you have said, Money is Debt. If debt goes down due to credit contraction (foreclosure, write-downs, credit line cuts) then there is less money for someone to buy bonds from the Treasury. And thus less bonds held in private hands for the Fed to purchase from us. Which means less money gets created.

    Everyone is worried that we’ll have inflation. And with inflation people will require higher rates of return on these bonds from the Treasury. That then competes against interest rates in the market. But, in our current situation there is no inflation and won’t be until we get closer to full employment. We can’t even think about full employment for quite a few more years.

    In the meantime the cycle continues to deflate. Less bonds are purchased by private companies from the government (since there is less and less money/debt in the system) and thus less creation by the Fed is available too. Thus, in my opinion, the government can’t inflate it’s way out of the problem.

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  6. Again, the federal government creates money by deficit spending, which it does simply by crediting the bank accounts of its vendors. The government doesn’t need to sell bonds to anyone, ever.

    “[…]the government can’t inflate it’s way out of the problem.” There is no problem. The “inflate their way out” line is used by people who think this helps the government pay its debts. But since the government has the unlimited ability to pay its bills, there is no need to “inflate out.”

    Rodger Malcolm Mitchell

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  7. “which it does simply by crediting the bank accounts of its vendors.”

    From what I understand, the government can’t just “credit bank accounts”. It has to first create the debt via a transaction that combines the US Treasury, debt buyers, the Fed, and debt sellers.

    Are you speaking of what happens today? Or what should happen?

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    1. Okay, found it.

      On page 20 of Free Money you say, “People who buy T-securities send money to the government, and they receive a credit to their account, which shows they own these debt instruments.

      Yes, you and I are saying the same thing. My concern is the step before that.

      On page 39 you say just that: “An economy without debt is an economy without money.” If we all stop borrowing from the bank to buy houses, cars, etc. Or we lose our jobs and default on our mortgage, car loan, etc., that is deflation or a contraction of the money supply. There is thus less money to perform that step you say on page 20, “buy T-securities”.

      (BTW, after looking over many books and internet resources, your book explained monetary policy pretty clearly. Any search for treasury, fed, bonds, turns up way too much garbage.)

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    2. There is a somewhat complex process that boils down to this: To pay its bills, the government credits bank accounts and debits a balance sheet. The balance sheet is called “debt,” but it merely is a score sheet, showing how much money was created. No one has to pay that “debt.”

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  8. “the government credits bank accounts”

    Please explain. Is this what the Fed does when it buys government debt off the hands of people who have already purchased it from the government? Or, is this the process when the private individual sends money to the government and gets a t-security in return?

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      1. So, when the government wants a new airplane from Boeing, it can just pay Boeing a check for them to deposit into their bank? Does the government have to first have money in their account before doing so? Can they deficit spend without first entering the bond market or selling debt? Seems to me if the government can spend without first borrowing the money from the market, then someone will be upset.

        Note: I feel that this is certainly how they should be able to spend, but I don’t think the government is allowed to do this.

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  9. The government never has money in their account. They have no account. They merely credit Boeing’s bank account and debit their own balance sheet.

    The balance sheet is just a score sheet, showing how much money the government has created. There is no limit on the score sheet.

    Deficit spending is what puts money into the economy. Visualize a brand, new nation with no money. How does the new government get money into the people’s hands. It deficit spends by crediting bank accounts.

    The government does not need to borrow its own money. Borrowing is a relic of the gold standard days.

    Rodger Malcolm Mitchell

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    1. “The government does not need to borrow its own money. Borrowing is a relic of the gold standard days.”

      Yes, the government does not NEED to borrow its own money. But, can they spend without borrowing first TODAY!?

      Why does the Treasury sell bonds? (http://www.marketwatch.com/story/treasury-to-sell-113-billion-in-bonds-next-week-2010-05-20) Just because it wants too? Or does it do this in order to buy an airplane?

      From the US Treasury site (http://www.ustreas.gov/education/duties/):

      “The Department of the Treasury operates and maintains systems that are critical to the nation’s financial infrastructure, such as the production of coin and currency, the disbursement of payments to the American public, revenue collection, and the borrowing of funds necessary to run the federal government.”

      See that? “the borrowing of funds necessary to run the federal government.” So again, does the government just spend money because it doesn’t need it, or does it first borrow in the bond market and then spend that money? According to the US Treasury the government has to borrow first.

      If you look at the history of this country, you might find some dead people who decided to not use the bond market for government funding.

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  10. The writer of the Treasury article is wrong, as are the debt hawks and the media.

    The government spends first, borrows after. That’s how the money is created that the government borrows. Federal borrowing is unnecessary, as the government can spend endlessly, without borrowing.

    This is different from you and me and every other entity in America. The government could stop borrowing tomorrow (and stop taxing, too) and this would not change by even one cent the government’s ability to spend.

    Again, borrowing is a relic of the gold standard, which ended in 1971, forget about dead people and “the history of the country.” The government has the unlimited ability to spend, without borrowing or taxing.

    Rodger Malcolm Mitchell

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