Insights on Monetary Theory
19 November 2016 | Pago Pago, American Samoa
From Deficit Owls
Sovereign Currency-Issuing Governments Should Stop Selling Bonds
Professor L. Randall Wray discussing how bond sales work with a currency-issuing government with a floating exchange rate. Because the government can issue currency (and indeed must every time it spends) there is no need to issue debt in order to spend. What the debt accomplishes is to remove the excess reserves in the banking system that are created by government deficits (government spending creates reserves, taxes destroy reserves), which raises the interest rate. With excess reserves in the system, banks are not able to get rid of them through lending, so overnight interest rates will fall to zero. Selling bonds drains the excess reserves, causing interest rates to rise above zero.
So, the currency issuing government (with a floating exchange rate) doesn't need to sell bonds, and can control the interest rate. The position held by most adherents of Modern Money Theory is that the government should just stop selling bonds, and let interest rates fall to zero as the excess reserves accumulated. Part of the reason is that adjusting the interest rate is ineffective as a tool to stabilize the economy (see more on that here: https://www.youtube.com/watch...) and also partly because keeping the interest rates above zero is a subsidy for the top 1%. Since most of the government bonds are held by the wealthy, and most of the lending in the economy is done by the wealthy, the government keeping interest rates above zero enriches the already-wealthy.
Selling bonds is completely necessary on a fixed exchange rate, in order to lock up your excess currency to minimize your citizens' demands to convert to the reserve currency. But on a floating exchange rate, this is not a problem, because the government doesn't need to hold on to the foreign currency, because they have no peg to maintain.
See the whole video here: https://www.youtube.com/watch?v=0zEbo8PIPSc
I was asked to comment on this piece as an economist. I do here. Ignoring for a moment, the idea that government and bank borrowers buy with credit created by those institutions which is indirectly and concurrently monitized by the Fed by being allowed to circulate as money (easily done as loans are also paid back and taxes also paid destroying money, both offsetting monitized credit), I think Wray is basically correct. Both create reserves. Government can destroy reserves by taxation. Banks can't. They must await loan repayments. Both, along with the Fed, create money, but the Fed does it directly and the other two do it by having their credit automatically monetized by what the Fed approves of as money and reserves. This view extends Wray and integrates credit.
The interest rate analysis is too absolute. Excessive reserves simply depress rates, but not necessarily to zero. Other factors are involved. I agree adjusting interest rates is an ineffective tool to stabilize the economy. Monetary aggregates have a bigger impact, via banks, the Fed and government spending. Friedman was not all wrong. Fiscal and monetary policy blur. Low interest rates raise secondary bond and stock market prices by raising internal rates of discount and so favor the rich, not deprive them. Otherwise and with these qualifications, I agree and should write something up myself.