If you believe most politicians the worst thing that a government can do is borrow. That is not true, of course. The reality is that right now many of the world's governments, including that if the UK, should be borrowing more, most especially to fund a Green New Deal. And the cost of doing so is, in effect, nothing because most government borrowing now has below zero net cost.
And markets agree. The FT published this today:
Government bonds issued by big developed economies have surged in price this year – pushing yields to record lows. A key reason is that these “safe assets” are in short supply.
A wide variety of investors and corporations prize the highest-quality government bonds for their cash-like qualities – and the near certainty of getting their money back. This demand has grown since the financial crisis as central banks hoover up a hefty slice of bond markets under quantitative easing programmes.
According to research by Oxford Economics, the resultant global shortage of these safe assets is going to get worse. The consultancy calculates that the supply of these assets will grow by $1.7tn annually over the coming five years – with a $1.2tn issuance of bonds to fund the US budget deficit the largest driver. But demand for these assets is estimated to grow more rapidly, creating a $400bn annual shortfall and indicating that government bond yields are set to remain low.
So, governments need to borrow. The world needs a Green New Deal. Business investors want to fund it. And I have shown that savers would too. And politicians don't want it to happen.
Someone has got something wrong here. And let me suggest it is the politicians. The reality is that the demand for government bonds is real, continuing and unlikely to dissipate for a long time, with QE as a back top if it ever does.
So why can't we get on and deliver what is required? Why do politicians want to stop what is so obviously desirable? I wish I knew.
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I thought the whole thing about MMT was that Bond Issue was tantamount to Corporate Welfare. Is this basically about neoliberal framing so as to keep the IFS happy?
MMT is a description, not a policy mandate
At negative interest rates where is the corproate welfare
And what is wrong with government being a place of safe deposit?
Hi Richard. In order to fend off potential critics would it not be helpful simultaneously to give a brief explanation as to why a sovereign currency issuing government needs to borrow via the bond market? I know you covered this last year (https://www.taxresearch.org.uk/Blog/2018/11/09/why-governments-need-to-issue-bonds-despite-modern-monetary-theory) but, when discussing macro monetary theory, I find it’s a perennial question and hence the need for a not-too-complicated answer.
Has there been any recent change in the ‘official’ MMT response that there really is no need for such governments to issue debt – as covered in some detail by Bill Mitchell in his blog of Sept 3 – http://bilbo.economicoutlook.net/blog/?p=31715? The topic is covered also on the GIMMS site – https://gimms.org.uk/fact-sheets/gilts-and-bonds. And there’s this clip from Randy Wray’s 2016 presentation: ‘Why Do Governments That Issue Their Own Currency Bother To Sell Bonds?’ – https://www.youtube.com/watch?v=pex89N9Oqog.
I’m not deliberately being controversial or contradictory, especially since I’m in no way qualified to be so. It’s just my feeling that bond issuance by a government such as the UK is one of those topics necessitating an explanation that any interested lay person can get their head around in order to better understand how a GND is to be funded without putting any unnecessary strain on the nation’s economy. Like ‘debt’ the word ‘borrow’ is highly emotive.
Does that make any sense or am I being naively obtuse?
Let me come back to it……
Remember, I have never wholly subscribed to all of MMT
It’s a good description. The policy consequences are a matter for debate – and are not implicit in it in my opinion
My understanding of the standard MMT view is that government spend and borrowing are entirely independent things. MMT doesn’t say not to borrow – it says bond issuance is monetary policy, which controls the overnight interest rate.
Judging the correct level of government spend is fiscal policy. Prof Randall Wray argues further that tax acts as an automatic stabiliser, so in some circumstances increasing tax will not be necessary to control inflation. Obviously he explains it far better than me, for example in this 3 minute video – https://www.youtube.com/watch?reload=9&v=8HmoA0zRAhs&feature=youtu.be&list=PLZJAgo9FgHWajc5BdOP8e75eddFmWhtzh&fbclid=IwAR1Ge0wVcSsLh7U19FT0-J_uwGBIZs_9lmXzjYsOMwOUG-m49FBgbtG6ovg
Might I suggest my recent Real World Economuc Review article on this issue
Once you start down this route of selling bonds you get into a position where the purchasers take control and it becomes the tail wagging the dog. According to Bill Mitchell MMT is how it works. It’s not a matter of whether you buy into it, or not. Anyway, QE appears to be the opposite of bond sales. You are reducing your debts with QE. As Bill Mitchell states, recognition of MMT opens up a lot more policy space. It can be good policy or bad policy. A GND is good policy. It doesn’t need bond sales to allow it to happen unless you wish the neoliberals to think they remain in control. I would think that would be the last thing you would want.
Let me be clear, Bill is not always right. In fact, on a great deal he’s just wrong.
And the idea that bond holders take control is ludicrous. QE ended that myth.
Bill promotes some pretty poor policy on occasion. It is not part of MMT.
Lets be clear about this, Bill Mitchell never says bond holders take control as you seem to be implying.
The very opposite in fact.
Perhaps you could rephrase what you wrote as it’s misleading.
You said he did as I recall it
I think you are confusing me with another poster as this is the first post I have made here?
Apologies then
It seems to me that the issuance of bonds is a better POLITICAL answer to the question `how are you going to pay for it all?`
MMT is fine and dandy but is DOES have problems (especially when your fiat currency is not the dollar) and selling this seemingly counter intuitive idea to the electorate as a whole is fraught with problems (Just spent an afternoon canvassing and any mention of MMT is met with deep suspicion)
MMT is not an issue with sterling
But the sell is as yet because the MSM and our politicians are in collective denial
Serendipitous for you to write this today Richard.
I was musing over saving and the desire to fund a GND this morning, basically coming to the conclusion that if government were to offer Green bonds or Green ISAs, I would happily put a decent chunk of my savings in.
Not that I’m claiming this as original thought of course :).
I’m well aware that you are an advocate for such options and have written about them recently (including above), but it’s nice to end up at the same point as someone else more experienced within the field by following your own thoughts, and not just via regurgitation.
Not that my comment adds much (anything) content wise. I just wanted to add my voice in support.
Thanks
One concept that might avoid the MMT argument that government bonds issue muddies perception of the government’s power to create money is whether a joint private sector bank/government savings scheme could be set up with a maximum savings limit. Government treasury bond issue might be limited to the clearing banks to act as collateral for the supply of central bank reserves.
No! Pension funds have always relied on the security they provide
Why deny this?
Accepted pension funds could be included in same category as clearing banks.
Helen Schofield says:
“… a joint private sector bank/government savings scheme could be set up with a maximum savings limit…”
Hmmm… Why a joint scheme? Because the private sector needs to be underwritten because it can’t hack it in the market place? (he enquired, cynically) I don’t understand your reasoning.
And why a limit ? What is that supposed to limit? Are you suggesting there is abuse built into this and only so much abuse should be tolerated? Again I don’t understand your reasoning.
The economist John Smithin made a point in his joint paper with Jeffrey Lau that whilst he agreed with Keynes interest rates should be kept low in a reserves based monetary system care should be taken that the interest rate remained positive. I believe he covered this in more detail in his 1996 book “Macroeconomic Policy and the Future of Capitalism.” This belief stemmed from the fairly obvious notion that a negative interest rate “signals” inadequate demand within an economy and therefore deters private sector investment. I’ve always thought, however, in addition to Smithin’s point that as far as the desire to save for future eventualities the state ought to accept that its ability to regulate both abnormal inflation and deflation is somewhat “hit-and-miss” simply because as Keynes might call it the “uncertainty factor.” Accordingly I believe the state should recognise this and ensure all citizens should be able to save at a positive rate of interest upto a certain limit. The limit being there to avoid deterring private sector investment.
https://www.researchgate.net/publication/5172361_The_Role_of_Money_in_Capitalism/link/548898b00cf2ef344790a152/download
Let the financial sector create its own benchmark asset that is used to calculate interest rates for the various loans that banks issue. The banking sector loves risk-free currency issuer bonds but that doesn’t mean these bonds are necessary. Warren Mosler’s understanding of the financial sector is second to none. His view is that currency issuer bonds are Basic Income for people who have money. The UK Government should stop issuing bonds, and stop reinforcing the false claim that the currency issuer ever has to borrow its own currency. Tories benefit from this false framing of government finance. Progressives don’t benefit.
Sorry, but that’s not the role bonds play
And like Bill Mitchell, Warren does not walk on water
Nicholas says:
” His view is that currency issuer bonds are Basic Income for people who have money. ”
Well at least you recognise that is a ‘view’ and not a statement of incontrovertible fact.
Given that some currency issuer bonds are these days bearing negative returns it can’t actually be always so can it?
When we target the implied criticism at ‘people with money’ we perhaps need to think about who those people are? Anyone with a private sector pension, or a nest egg for retirement is a person ‘with money’ and it needs a safe haven. Currency issuer bonds are one of the safest asset classes. Real estate, gold, shares can be effective for increasing value, but they are a lottery and can go (a long way) down aswell as up. Timing is everything and mostly relies on luck. Sure, stock markets, on average, keep climbing, but if you need to cash out at an unfortunate time when the market as just ‘corrected’ …….you are in a mess.
So currency issuer bonds have a function which is not just about government borrowing…. yes ?
Currency issuer bonds are not necessary for pensions. That is one of their functions now, but the currency issuer can make other arrangements for providing people with sufficient retirement income.
Currency issuer bonds are indeed used, at present, as a benchmark or reference point for the yields of other types of financial asset. That is one of the key reasons for the banks’ preference that bond issuance continue. In 2002 the Australian Government considered stopping bond issuance because the government was running fiscal surpluses at the time. The banking sector was successful in persuading the government to continue the gravy train that is government bonds. One of their main arguments was the benchmarking role that these bonds perform. Page 2 of the Commonwealth Treasury Discussion Paper makes this point.
https://treasury.gov.au/sites/default/files/2019-03/CCSMReview.pdf
Framing matters. Metaphors matter. Unfortunately, when the UK Government issues bonds it reinforces the belief that the government is financially constrained and needs to borrow its own currency. It evokes the metaphor of a household that has to “live within its means” in order to avoid insolvency. This framing is a major obstacle to progressive policy, and a boon to the Tories. It is important that progressives think politically and structurally when they consider what language they use to describe government finance.
Calling for more bond issuance to “fund” a Green New Deal plays into the hands of the Tories. The bonds don’t fund anything – they are just an asset swap (bonds for reserves). Talking as though the bonds are necessary makes it so much easier for Tories frighten people into backing the status quo instead of getting behind ambitious structural and systemic changes to the economy.
Your argument would be so much more credible if it was logical
Where’s the gravy train in negative yields?
And do you really know why pension funds want bonds? It’s not income, but security
And saving is a reality. What would you prefer, that they hav no social use or do have one?
I’m sorry, but I live in the real world and you’[re living in your fantasy
And yes, I do understand MMT, and it does require stupid commentary about playing into the hands of the Tories to be useful
Nicholas says:
“Currency issuer bonds are not necessary for pensions. That is one of their functions now, but the currency issuer can make other arrangements for providing people with sufficient retirement income.”
Like Margaret Thatcher did when she threw the nations pensions to the wolves of a barely regulated finance industry….Something like would be a good idea and due for a rerun perhaps …..?
But maybe you have a sensible idea you’d like to explain ?
So far you are not bringing me round to your way of thinking.
Interesting debate. Bonds may not be necessary but are they useful?
I would say yes because they give savers an opportunity to invest in the collective democratically agreed aims of the society, in particular public goods.
If you did not have bonds then savers could only invest in shares which are more unstable,
if poorly regulated more likely to result in negative externalities like pollution , and generally not good at addressing public goods like health, education and security.
Precisely
There are a number of fundamental points here :
1. New money has to be created continuously.
2. It is the responsibility of government to do its best to ensure there is enough money in circulation to allow the country to function adequately ( not perfectly ).
3. Money is created by government when it spends whatever it spends regardless of the heading under which the spending is put. Banks create money when they make loans.
4. Government collects tax to offset the money it has created and prevent unnecessary inflation. If government chooses, as a matter of policy, to spend more money than it collects in tax this is not in itself a problem because it can issue bonds to make up the difference and make its balance sheet balance.
5. Savers need a safe place to put their money. Government bonds provide this ; government borrowing is other peoples’ savings.
6. Everything implied by points 2. and 4 . acknowledges that there are issues of politics and judgement involved, but acknowledging that does nothing to alter the mechanism described in point 3. ; and that mechanism Is not changed by the political persuasion of the government under our present democratic system ( for all its faults ).
The pity is, that our politicians, for the most part, don’t know that this is how money works. We made the comment in our film Money for Nothing that when money creation was last debated in Parliament in November 2014 under the heading ‘ Money Creation and Society ‘ that was the first time such a debate had taken place in 170 years. And how many MPs turned up ? Thirty. No further comment necessary.
Good explanation
If only more people knew it
A central bank can pay a positive rate of interest on reserve deposits. Today many central banks do precisely this. In Australia, for example, the reserve deposit rate is currently 0.5 percent. Bonds are not necessary for the purpose providing the non-government sector with a completely safe interest-bearing asset. If the government wants to set a policy interest rate above zero this rate can be the rate on reserve deposits. Alternatively, the government can give people the option of having a term deposit type of account at the central bank that pays a higher rate of interest than the reserve deposit rate.
Nicholas
This does not stack: you ignore institutional needs
Try working the repo market without gilts, for example
And yes, we do need it
This discussion misses the obvious point that to avoid sending the message that government needs to borrow in order to fund its spending there are other means of achieving a positive rate of interest in an economy than issuing treasury bonds or other forms of bonds under-written by government. What is the central point that needs to be recognised and form the basis of discussion is one that Lau and Smithin make in their article I referenced in a previous comment namely that “…if real interest rates became negative…then the real value of financial resources would be eroding over time.” It’s appropriate methods of achieving this that ought to be the focus.
I do nit suggest we need positive rates of interest
Interest is nit the reason for gilt investment, per se
Security is
Some interest helps but is nit all this is about
I am not sure you have understood the market
I think there are various reasons for gilts. Their use as collateral by the clearing banks for obtaining reserves is one. Obviously because “they’re as good as gold” they make for good collateral for both short and and long term collateral generally. This is why they are also called securities.
Using the word security in the sense of preserving both money for use including its value when not aiming to borrow is another meaning of the term. The government providing security guarantee for deposits upto a limit is one means of achieving the security for use it seems not unreasonable the government could extend this to preserving value whilst attempting to avoid perpetuating the myth treasury bonds fund government spending. I believe there is an issue to be addressed here you clearly disagree.
I completely understand MMT and how the government is financed
But I argue that we still need gilts.
I set out a short form argument here https://www.taxresearch.org.uk/Blog/2018/11/09/why-governments-need-to-issue-bonds-despite-modern-monetary-theory/
In support of of my argument that government can play an enabling role in supporting value of money but not necessarily treasury bonds based I forgot to mention some governments paying interest on reserves to the clearing banks. This is probably de facto an argument that focussing on preservation of value by government is possible when you take into account the reason why government is doing this.
I admit I do not follow your logic and am familiar with the issues