Post by Iain Dooley on Jul 23, 2016 12:09:29 GMT
Anyone who has seen Steven Hail's presentation to the Greens:
www.youtube.com/watch?v=qBpm5sVmGYc
knows the slide from the presentation by Gerald Dodgson that says that bond issues are not for funding purposes. The slides from that presentation are online here:
doc.mbalib.com/view/067221ae699c93c483d04af98e505175.html
I've attached 2 screenshots of these slides because who knows how long they'll be online!
Anyway I looked up Gerald Dodgson and found his phone number and email address online, so I called him but Brad answered. Brad is Gerald's replacement because Gerald has retired.
I mentioned the slide to him and he said "Oh that's very out of date! That was only the policy from 2002 to 2008 or something because we had a surplus and didn't need borrowing to fund government, but the bond market still wanted treasury bonds".
I wonder if anyone from the Greens called up the AOFM and had the same conversation, and whether or not that threw Steven's credibility into question?
For those that don't know this policy was established after an equiry, to which Mithcell and Mosler submitted a paper in 2002:
e1.newcastle.edu.au/coffee/pubs/wp/2002/02-13.pdf
SO ... now the AOFM says that the government DOES need to borrow in order to fund it's spending.
And guess what? Bill Mitchell agrees!
Tim and I went to meet with Bill yesterday and he said "The government does have to issue bonds in order to fund spending"...
However Bill described this as a "veil" over reality. It's a self imposed, regulatory constraint similar to the debt ceiling in the US, or to supply bills in the senate.
He also mentioned that we have a 5:1 or 4:1 bid to cover ration during auctions which means that there is a ridiculously high demand for our treasury bonds. This was confirmed by Brad who mentioned that they had done an auction for $600m yesterday and had about $2.3billion of offers to buy it.
I quizzed Brad for a while, trying to get to the bottom of this from an MMT point of view, but he was adamant: the government has an account, and when they tax, money goes into it, then they spend and money goes out of it... but the plot thickened because when I started to say that when the RBA drains reserves through bond sales and adds reserves through bond purchases on the secondary markets, the impact on the banking system is the same; that is whether it's new treasury issues on the primary market or bond sales on the secondary market the result is that ES funds are removed from the banking system and therefore government spending is money creation and taxation is money destruction and bond sales are only required to fund operations because of a self imposed constraint.
He said "That sounds more like you're asking questions about the monetary system which I don't really know about, you'll have to ask the RBA".
So even at the AOFM, people are there thinking that the way we have things setup is the ONLY way to have it setup. That the auction system is the only way to handle bonds. He didn't really understand the "Tap" system at all.
To be fair, I also didn't understand the tap system until I talked with Bill yesterday and he explained the difference:
1) The Auction system means Treasury says it wants to sell $600m in bonds and the market offers prices and yields. The government then takes the best price/yields. The RBA buys some of these for operational reasons (ie. so that it has sufficient leverage to drain reserves and hit it's interest rate target when the government spends the money).
2) The tap system means Treasury says it wants to sell $600m in bonds at 4% and if the private market doesn't buy them all, then the RBA did -- in a sense if you use the word "borrowing" to describe bond issuance (which we shouldn't) then the government was lending money to itself!
Bill also directed me to several blog articles he's written of which this is probably the best example:
bilbo.economicoutlook.net/blog/?p=1266
which cite a speech from Peter McCray, Deputy Chief Executive Officer of the AOFM:
archive.aofm.gov.au/content/publications/speeches/2000-03-28-1/SpeechToADB_Paper.asp
In this speech he cites the fact that under the "tap" system:
"In these situations, the authorities used short-term borrowing from the central bank to fund these shortfalls, breaching what is today regarded as a central tenet of government financing - that the government fully fund itself in the market. It then became the central bank's task to operate in the market to offset the obvious inflationary consequences of this form of financing, muddying the waters between monetary policy and debt management operations."
So he is clearly acknowledging that whenever the government was unable to "raise revenue" by issuing bonds the RBA would just create new money to "buy" the bonds, or "lend money" to the government, which it would then spend. But the RBA is part of government, so it's just money creation by the government.
From the same speech, Bill cites this excerpt:
"arrangements provide governments with the scope to raise funds comparatively cheaply, an important fiscal discipline is removed and governments may be encouraged to be less careful in their spending decisions."
In other words, what he's saying is that we need to create an artificial constraint on government spending.
Where is this artificial constraint coming from? It's coming from private investors who hold cash reserves in their accounts at the RBA. They are saying "we will buy your bonds at this rate". We are allowing people who hold currency to make decisions about how much our government should spend. Then we cut spending for fear these private investors won't want to "fully fund" the government.
Doesn't that seem sick?
A democratically elected government being "disciplined" by "markets".
The people elect the government to provide for the public purpose but instead of spending by the government being disciplined by a democratic or parliamentary process, it is being disciplined by the whims of private investors.
On a closing note, we can see that because there is a secondary bond market even the "veil over reality" as Bill put it, is pretty thin. Observe this sequence of events:
1) The AOFM (under the auspices of the government) sells bonds in an "auction"
2) Private investors buy these bonds at a price/yield by bidding competitively. The RBA buys some of these "for operational reasons" which means that they need to hold bonds in order to drain reserves from the banking system to hit their cash rate target (the rate at which banks lend to each other).
3) This action drains reserves from the private banking system, and puts them into a "government account" at the RBA (actually a group of accounts called the Official Public Account or OPA)
4) The government spends the money. This credits accounts in the private banking system, adding funds again.
5) If there is too much liquidity in the banking system then the RBA can sell some of the bonds it holds in order to drain reserves from the banking system.
6) If there is insufficient liquidity in the private banking system, the RBA will buy bonds ... and what happens when the RBA buys bonds? It credits bank accounts in the private banking system. Where does it get the money to do this? It doesn't. The money is created (ES funds) as a liability swap for government bonds under a repurchase agreement.
So what happened? The Government (AOFM) issued bonds ... but those bonds are basically IDENTICAL to cash because of the repurchase agreements under which the RBA transacts on the secondary market.
In fact, banks are not required to hold reserves against which they lend out, but they are required to hold bonds. Bonds are virtually identical to cash, the only difference is they can't be used in interbank settlements but since they can be traded for liquid ES funds immediately on demand ... there's really no difference.
So when the government "borrows" it drains reserves from the system by issuing bonds.
From the perspective of the private banking system there is NO DIFFERENCE between the government issuing bonds and the RBA selling bonds on the secondary market, they both just drain reserves.
Then when the government "spends" the money it "borrowed" it adds reserves to the private banking system. From the perspective of the private banking system there is NO DIFFERENCE between the government spending and the RBA purchasing bonds in the secondary market.
The little bit with the AOFM is just a little accounting trick. The government could just as easily directly credit accounts without issuing bonds first.
But even without understanding that all you have to point out is that BONDS are as GOOD AS CASH. They are basically just "reserves on which we pay interest" because the RBA will always buy them back.
So when the AOFM issues bonds, where do they come from?
Nowhere. Thin air.
So if bonds are as GOOD AS CASH then when the government "borrows" in order to "spend" it is creating "money".
The neoliberals have done a very good job of making this as confusing as possible but even with the current "veil" it's easy to see that government spending creates net financial assets in the private banking system.
Taxation simply removes reserves from the private banking system without adding issuing new bonds, so therefore taxation destroys net financial assets.
www.youtube.com/watch?v=qBpm5sVmGYc
knows the slide from the presentation by Gerald Dodgson that says that bond issues are not for funding purposes. The slides from that presentation are online here:
doc.mbalib.com/view/067221ae699c93c483d04af98e505175.html
I've attached 2 screenshots of these slides because who knows how long they'll be online!
Anyway I looked up Gerald Dodgson and found his phone number and email address online, so I called him but Brad answered. Brad is Gerald's replacement because Gerald has retired.
I mentioned the slide to him and he said "Oh that's very out of date! That was only the policy from 2002 to 2008 or something because we had a surplus and didn't need borrowing to fund government, but the bond market still wanted treasury bonds".
I wonder if anyone from the Greens called up the AOFM and had the same conversation, and whether or not that threw Steven's credibility into question?
For those that don't know this policy was established after an equiry, to which Mithcell and Mosler submitted a paper in 2002:
e1.newcastle.edu.au/coffee/pubs/wp/2002/02-13.pdf
SO ... now the AOFM says that the government DOES need to borrow in order to fund it's spending.
And guess what? Bill Mitchell agrees!
Tim and I went to meet with Bill yesterday and he said "The government does have to issue bonds in order to fund spending"...
However Bill described this as a "veil" over reality. It's a self imposed, regulatory constraint similar to the debt ceiling in the US, or to supply bills in the senate.
He also mentioned that we have a 5:1 or 4:1 bid to cover ration during auctions which means that there is a ridiculously high demand for our treasury bonds. This was confirmed by Brad who mentioned that they had done an auction for $600m yesterday and had about $2.3billion of offers to buy it.
I quizzed Brad for a while, trying to get to the bottom of this from an MMT point of view, but he was adamant: the government has an account, and when they tax, money goes into it, then they spend and money goes out of it... but the plot thickened because when I started to say that when the RBA drains reserves through bond sales and adds reserves through bond purchases on the secondary markets, the impact on the banking system is the same; that is whether it's new treasury issues on the primary market or bond sales on the secondary market the result is that ES funds are removed from the banking system and therefore government spending is money creation and taxation is money destruction and bond sales are only required to fund operations because of a self imposed constraint.
He said "That sounds more like you're asking questions about the monetary system which I don't really know about, you'll have to ask the RBA".
So even at the AOFM, people are there thinking that the way we have things setup is the ONLY way to have it setup. That the auction system is the only way to handle bonds. He didn't really understand the "Tap" system at all.
To be fair, I also didn't understand the tap system until I talked with Bill yesterday and he explained the difference:
1) The Auction system means Treasury says it wants to sell $600m in bonds and the market offers prices and yields. The government then takes the best price/yields. The RBA buys some of these for operational reasons (ie. so that it has sufficient leverage to drain reserves and hit it's interest rate target when the government spends the money).
2) The tap system means Treasury says it wants to sell $600m in bonds at 4% and if the private market doesn't buy them all, then the RBA did -- in a sense if you use the word "borrowing" to describe bond issuance (which we shouldn't) then the government was lending money to itself!
Bill also directed me to several blog articles he's written of which this is probably the best example:
bilbo.economicoutlook.net/blog/?p=1266
which cite a speech from Peter McCray, Deputy Chief Executive Officer of the AOFM:
archive.aofm.gov.au/content/publications/speeches/2000-03-28-1/SpeechToADB_Paper.asp
In this speech he cites the fact that under the "tap" system:
"In these situations, the authorities used short-term borrowing from the central bank to fund these shortfalls, breaching what is today regarded as a central tenet of government financing - that the government fully fund itself in the market. It then became the central bank's task to operate in the market to offset the obvious inflationary consequences of this form of financing, muddying the waters between monetary policy and debt management operations."
So he is clearly acknowledging that whenever the government was unable to "raise revenue" by issuing bonds the RBA would just create new money to "buy" the bonds, or "lend money" to the government, which it would then spend. But the RBA is part of government, so it's just money creation by the government.
From the same speech, Bill cites this excerpt:
"arrangements provide governments with the scope to raise funds comparatively cheaply, an important fiscal discipline is removed and governments may be encouraged to be less careful in their spending decisions."
In other words, what he's saying is that we need to create an artificial constraint on government spending.
Where is this artificial constraint coming from? It's coming from private investors who hold cash reserves in their accounts at the RBA. They are saying "we will buy your bonds at this rate". We are allowing people who hold currency to make decisions about how much our government should spend. Then we cut spending for fear these private investors won't want to "fully fund" the government.
Doesn't that seem sick?
A democratically elected government being "disciplined" by "markets".
The people elect the government to provide for the public purpose but instead of spending by the government being disciplined by a democratic or parliamentary process, it is being disciplined by the whims of private investors.
On a closing note, we can see that because there is a secondary bond market even the "veil over reality" as Bill put it, is pretty thin. Observe this sequence of events:
1) The AOFM (under the auspices of the government) sells bonds in an "auction"
2) Private investors buy these bonds at a price/yield by bidding competitively. The RBA buys some of these "for operational reasons" which means that they need to hold bonds in order to drain reserves from the banking system to hit their cash rate target (the rate at which banks lend to each other).
3) This action drains reserves from the private banking system, and puts them into a "government account" at the RBA (actually a group of accounts called the Official Public Account or OPA)
4) The government spends the money. This credits accounts in the private banking system, adding funds again.
5) If there is too much liquidity in the banking system then the RBA can sell some of the bonds it holds in order to drain reserves from the banking system.
6) If there is insufficient liquidity in the private banking system, the RBA will buy bonds ... and what happens when the RBA buys bonds? It credits bank accounts in the private banking system. Where does it get the money to do this? It doesn't. The money is created (ES funds) as a liability swap for government bonds under a repurchase agreement.
So what happened? The Government (AOFM) issued bonds ... but those bonds are basically IDENTICAL to cash because of the repurchase agreements under which the RBA transacts on the secondary market.
In fact, banks are not required to hold reserves against which they lend out, but they are required to hold bonds. Bonds are virtually identical to cash, the only difference is they can't be used in interbank settlements but since they can be traded for liquid ES funds immediately on demand ... there's really no difference.
So when the government "borrows" it drains reserves from the system by issuing bonds.
From the perspective of the private banking system there is NO DIFFERENCE between the government issuing bonds and the RBA selling bonds on the secondary market, they both just drain reserves.
Then when the government "spends" the money it "borrowed" it adds reserves to the private banking system. From the perspective of the private banking system there is NO DIFFERENCE between the government spending and the RBA purchasing bonds in the secondary market.
The little bit with the AOFM is just a little accounting trick. The government could just as easily directly credit accounts without issuing bonds first.
But even without understanding that all you have to point out is that BONDS are as GOOD AS CASH. They are basically just "reserves on which we pay interest" because the RBA will always buy them back.
So when the AOFM issues bonds, where do they come from?
Nowhere. Thin air.
So if bonds are as GOOD AS CASH then when the government "borrows" in order to "spend" it is creating "money".
The neoliberals have done a very good job of making this as confusing as possible but even with the current "veil" it's easy to see that government spending creates net financial assets in the private banking system.
Taxation simply removes reserves from the private banking system without adding issuing new bonds, so therefore taxation destroys net financial assets.
