Bond Issuance Does Not Reduce Inflation

>> YOUR LINK HERE: ___ http://youtube.com/watch?v=vKymAsuxDGg

Professor Bill Mitchell, debunking a commonly held misunderstanding of government borrowing. Most people believe that a government has 3 choices to raise funds : it can tax, borrow, or print money. Further, they believe that printing money is more inflationary than borrowing. This could not be more wrong. In fact, a government deficit (spending more than taxing) will be exactly as inflationary regardless of whether it's matched by bond sales (aka. borrowing ) or not (aka. printing money ). • First, the conventional narrative gets the order that things happen in wrong. When the government borrows, it sells Treasury Bonds. But the private sector can only purchase Treasury Bonds using the government's own currency (paper notes or bank reserves). Where did the private sector get the currency that it uses to purchase the bonds? It can only come from previous government spending: the currency is created by the government only, and the way they get it out there is by spending it (or lending it). So any funds that the government borrows are necessarily funds that it has previously spent (or lent). • So it is incorrect to say that government is borrowing and then spending. Logically, this is wrong. First it is creating funds by spending, and then borrowing back funds it has previously spent, effectively destroying them. That is the way the cycle works, every time. The case that people call borrowing is in fact the government spending and then selling bonds, and the case that people call printing money is in fact the government spending and then not selling bonds. Nothing more. • Next, a lot of people think that choosing borrowing over printing money is more inflationary because it increases the money supply. This is false. It might (only might) be true that the money supply increases, but in fact they are equally inflationary. Remember, the government is only borrowing back funds it has previously spent. After the government spent them initially, they circulated and eventually wound up in somebody's savings, when that person decided not to spend them. Then that person can use their savings to buy a Treasury bond. Thus we see that a Treasury bond is nothing more than an alternate way to hold savings: an interest-bearing asset, rather than a non-interest bearing asset. And when the government borrows all it is doing is changing the form of the private sector's savings, from currency to bonds. • Note that the key word here is savings. The fact that somebody purchased a Treasury bond indicates that they weren't spending their money. If Timmy needed his $100 for groceries, then he wouldn't have been participating in a Treasury Security auction! The total amount of spending in the economy would be the same regardless of whether the government changed the form of Timmy's savings from currency to bonds, because Timmy wasn't spending in either case. And if there's no change in the amount of spending on goods and services, then how can prices change? They can't. The two scenarios ( borrowing vs printing money ) have exactly the same impact on on prices, output, and employment. • Now, clever readers might say, aha, but wait! Timmy might not need his $100 at the moment he buys the bond, but what if he needs it later? What if he buys a 30-year bond, but next week he realizes he needs to spend the $100? In the scenario where the government sells him a bond ('borrowing') he can't spend the $100, whereas in the scenario where the government doesn't sell him a bond ('printing money') he still has the $100, and can spend it next week. So 'printing money' is still more inflationary. • This is clever, but incorrect. The reason is because there is an extremely robust secondary market for Treasury bonds. In fact, in the US in particular, the Treasury bond market is the deepest and most liquid market on Earth. This means there is always somebody standing ready to buy your Treasury bond from you, in exchange for currency/deposits (often a dealer bank), to give you the funds you need if you decide to spend, nearly instantaneously. • This means there is no such thing as being in a situation where you are prevented from spending because you're holding a Treasury bond instead of cash. And that means that the same amount of total spending would occur regardless of whether the government sold Treasury bonds or not. And that means that borrowing is exactly as inflationary as printing money. • Watch the whole video here: • Professor William Mitchell - Thinking... • Follow Deficit Owls on Facebook and Twitter: • / deficitowls • / deficitowls • And follow our sister page, Modern Money Memes: • / modernmoneymeme • / modernmoneymeme

#############################

New on site