May 16, 2020 08:36 PM
(This post was last modified: May 17, 2020 03:27 AM by C C.)
https://nymag.com/intelligencer/2020/05/...money.html
EXCERPT: Republicans and Democrats have many disagreements about fiscal policy. But almost all lawmakers on Capitol Hill agree that there are exactly three ways that the U.S. government can finance new public spending: By raising taxes, cutting existing outlays, or increasing the national debt.
But this is a fiction. In truth, the federal government can fund large-scale public investments without burdening taxpayers, trimming other budget items, or adding to deficits. And not only can Uncle Sam work such sorcery in theory, he has already done so in practice.
During World War II and its immediate aftermath, the Federal Reserve committed to buying as many Treasury bonds as necessary to keep yields on U.S. debt flat. Much of that debt never made its way back into private hands. In keeping those bonds permanently on its balance sheet, the central bank effectively financed much of the U.S. war effort through printing money. When a central bank takes permanent ownership of its own government’s debt, that debt ceases to exist for all practical purposes. The Fed may own the U.S. government bonds, but the U.S. government owns the Fed. No entity can be meaningfully indebted to itself. Thus, by buying up its own bonds, the U.S. financed about 15 percent of its involvement in WWII through printed dollars rather than present or future taxes.
The United States is (almost certainly) bankrolling its response to the coronavirus crisis by the same means. The Fed is poised to buy up trillions of dollars worth of U.S. Treasuries this year, covering the bulk of the anticipated $3.7 trillion deficit. Officially, these bonds will sit on the central bank’s balance sheet only temporarily. But given the difficulties the Fed had in unwinding its balance sheet after the 2008 crisis, the safe money says much of this debt will remain on the central bank’s books in perpetuity; which is to say, much it signifies direct central bank financing of public expenditure.
Or so much of Wall Street believes. As Bloomberg reports [...see article...] As already indicated, America’s (tacit) embrace of debt monetization doesn’t actually put us in uncharted waters. Beyond our own nation’s experience in World War II, the Japanese government has spent the past quarter-century effectively financing large fiscal deficits by purchasing its own bonds. Japan has not officially declared that those bonds will never need to be paid back. But no one is under the illusion that the Bank of Japan will ever be fully unwinding its balance sheet.
Which raises the question: Why is the simple fact that the U.S. has the power to finance new spending without raising taxes or taking on (genuine) debt so thoroughly obfuscated in our political debates?
One answer is that conventional wisdom has long held that once you add “print money” to the fiscal tool kit of democratically accountable politicians, they will inevitably turn to it with abandon and trigger hyperinflation. Thus, the notion that all public spending must be “paid for” — either through taxes or the assumption of debts — serves as a noble lie to constrain the myopic profligacy of voters and those who represent them.
In other words, the widespread taboo against monetary finance rests on its presumptive political flaws, not its technical shortcomings. In fact, if implemented perfectly, financing stimulus through direct money creation has clear advantages over the issuance of debt. As then-Fed Chairman Ben Bernanke argued in 2003, when a government tries to fend off deflation with debt-financed public spending, some of the stimulative effect is lost to fears about future debt burdens. Funding stimulus by simply “making the money printer go brrr” eliminates such thrift-inducing fears.
Meanwhile, there is no technical reason why monetary finance should inevitably lead to hyperinflation. As Adair Turner, former chairman of Britain’s Financial Services Authority, recently explained... (MORE - details)
EXCERPT: Republicans and Democrats have many disagreements about fiscal policy. But almost all lawmakers on Capitol Hill agree that there are exactly three ways that the U.S. government can finance new public spending: By raising taxes, cutting existing outlays, or increasing the national debt.
But this is a fiction. In truth, the federal government can fund large-scale public investments without burdening taxpayers, trimming other budget items, or adding to deficits. And not only can Uncle Sam work such sorcery in theory, he has already done so in practice.
During World War II and its immediate aftermath, the Federal Reserve committed to buying as many Treasury bonds as necessary to keep yields on U.S. debt flat. Much of that debt never made its way back into private hands. In keeping those bonds permanently on its balance sheet, the central bank effectively financed much of the U.S. war effort through printing money. When a central bank takes permanent ownership of its own government’s debt, that debt ceases to exist for all practical purposes. The Fed may own the U.S. government bonds, but the U.S. government owns the Fed. No entity can be meaningfully indebted to itself. Thus, by buying up its own bonds, the U.S. financed about 15 percent of its involvement in WWII through printed dollars rather than present or future taxes.
The United States is (almost certainly) bankrolling its response to the coronavirus crisis by the same means. The Fed is poised to buy up trillions of dollars worth of U.S. Treasuries this year, covering the bulk of the anticipated $3.7 trillion deficit. Officially, these bonds will sit on the central bank’s balance sheet only temporarily. But given the difficulties the Fed had in unwinding its balance sheet after the 2008 crisis, the safe money says much of this debt will remain on the central bank’s books in perpetuity; which is to say, much it signifies direct central bank financing of public expenditure.
Or so much of Wall Street believes. As Bloomberg reports [...see article...] As already indicated, America’s (tacit) embrace of debt monetization doesn’t actually put us in uncharted waters. Beyond our own nation’s experience in World War II, the Japanese government has spent the past quarter-century effectively financing large fiscal deficits by purchasing its own bonds. Japan has not officially declared that those bonds will never need to be paid back. But no one is under the illusion that the Bank of Japan will ever be fully unwinding its balance sheet.
Which raises the question: Why is the simple fact that the U.S. has the power to finance new spending without raising taxes or taking on (genuine) debt so thoroughly obfuscated in our political debates?
One answer is that conventional wisdom has long held that once you add “print money” to the fiscal tool kit of democratically accountable politicians, they will inevitably turn to it with abandon and trigger hyperinflation. Thus, the notion that all public spending must be “paid for” — either through taxes or the assumption of debts — serves as a noble lie to constrain the myopic profligacy of voters and those who represent them.
In other words, the widespread taboo against monetary finance rests on its presumptive political flaws, not its technical shortcomings. In fact, if implemented perfectly, financing stimulus through direct money creation has clear advantages over the issuance of debt. As then-Fed Chairman Ben Bernanke argued in 2003, when a government tries to fend off deflation with debt-financed public spending, some of the stimulative effect is lost to fears about future debt burdens. Funding stimulus by simply “making the money printer go brrr” eliminates such thrift-inducing fears.
Meanwhile, there is no technical reason why monetary finance should inevitably lead to hyperinflation. As Adair Turner, former chairman of Britain’s Financial Services Authority, recently explained... (MORE - details)