By Dan Kervick
It’s hard enough for ordinary citizens to keep up with the routine crony rackets the American plutocracy runs with their lackeys in Washington to rob us blind and lock us in the neo-feudal cages they are trying to build out of the bones of what was once the US middle class. But the task of keeping up with the scams becomes even harder when central bankers promulgate myths and hide behind shibboleths designed to prevent the public from grasping just how much power we all still possess to seize control of our own destinies.
Tim Duy calls attention to a platform proposal by Japan’s Liberal Democratic Party to revise the law governing the Bank of Japan so as to improve cooperation between Japan’s central bank and the elected branches of Japan’s government. Former Prime Minister Shinzo Abe, likely to be returned to power on December 16th, has called for the BOJ to buy debt directly from the government – although that call is apparently not part of the LDP’s official platform.
As Duy notes, the BOJ has dismissed these proposals in the sacred name of central bank independence. BOJ Governor Masaaki Shirakawa rehearsed the established neoliberal pieties about central bank purity:
Central bank independence is a system created upon bitter lessons learned from the long economic and financial history in Japan and overseas countries. Any debate on revising something like the BOJ Law, which lays the foundations of Japan’s economic and financial system, must be done carefully, spending a good amount of time.
And on the topic of direct BOJ purchases of government debt, Shirakawa sniffed:
No advanced country has adopted such a policy.
Note Shirakawa’s snooty invocation of the supposedly high-falutin’ standards of “advanced” countries. Duy, curiously, concurs with Shirakawa’s statement:
Shirakawa is correct. Modern central banks may have lost some control over inflation at times, but I don’t think any has engaged in outright monetization of government debt.
I suppose that if we lean very heavily on the term “outright” Duy is correct. But I would argue that Duy is only being fussy here, and that central banks like the BOJ and the Fed monetize a portion of their governments’ debts routinely – even if they do not purchase the debt directly.
If a government issues securities and the central bank then purchases large amounts of those securities, how is that outcome functionally different in its net effect than if the central bank had just bought the securities directly? The only difference between the former procedure and the latter is that the former makes use of a private sector dealer as an intermediary. The intermediary gets a payoff – a piece of the action, so to speak – for participating in a routine intragovernmental operation. Otherwise, it is just as if the central bank had purchased the debt all by its lonesome. And central banks buy government debt all the time, as part of both conventional open market operations and the newer unconventional quantitative easing programs.
In the United States, when the central bank holds government securities, the Treasury does redeem and make coupon payments on the securities just as it would if they were held by someone in the private sector, but with this important difference: any interest paid to the Fed by the Treasury is by law returned to the Treasury. So when the Fed buys treasuries from private sector dealers, the public’s effective debt is reduced by the amount of the remaining interest payments. Isn’t that just a form of central bank monetization? The amount returned to Treasury by the Fed in 2011, by the way, was $76.9 billion.
There is no question that open market operations have utility for interest rate management. But the common idea that modern central banks in advanced countries with supposedly independent central banks don’t already engage in debt monetization is a bit of a fig leaf that these countries hold up over their financial private parts in an effort to posture as superior to their banana republic cousins in less “advanced” barbarian countries. In fact, we monetize some of our debt too. It’s just that when we do it, we pay an intermediary a service fee to keep up appearances.
One might argue that when the government has to find a private sector buyer for its debt first, rather than selling the debt directly to the central bank, that imposes a certain degree of market discipline on fiscal policy. But it’s hard to see that there is all that much of a disciplinary bonus here. When a central bank announces that it is prepared to buy government securities, the announcement automatically guarantees an eager private sector market for the securities – if there wasn’t one already. If dealers know that they can promptly re-sell newly purchased securities to the central bank, at some amount over the purchase price no matter how low, then they know they can make a profit from the purchase.
So long as the central bank is buying, the term and price of the security is not even that important. If some imaginary government sells a dealer a 10-year security on Monday at some rate of interest X% and at a purchase price of $Y, and the central bank purchases that security on Tuesday for a price of $Y + $1, then the dealer has made $1. And $Y + $1 is always better than $Y. When the government redeems the security ten years hence, the entire X% interest payment is returned by the central bank to the treasury. So as long as the central bank buys the security, it really doesn’t matter much whether X = 1/10 or X = 100. And so as long as the central bank signals a willingness to buy government securities, there will always be a private sector market for the securities, regardless of the yield. They buyer needn’t care about the official yield at maturity, only the spread between the purchase price and the price the central bank pays to buy it back. But as a result of this reality, a government working with a sufficiently aggressive central bank can set whatever yields it wants.
This is why we have no need to worry about those dreaded bond vigilantes in a country like the US that controls its own currency and monetary operations. To the extent that the Fed signals it is willing to buy US debt aggressively, the Treasury can set almost any price it wants for its debt. So it’s not just that there is no insolvency threat haunting US public debt. There is also not a bond vigilante attack threat – not unless the Fed allows that attack to occur.
And if the Fed were inclined to allow such an attack to occur Congress could quickly step in to stop it, because the Fed is actually part of the government, despite the fig leaves that are used to array it as a private corporation operating in glorious private independence. The Fed Board of Governors is an agency of the government, created by Congressional legislation, with powers delegated to it to Congress, operating under mandates, constraints and directives established by Congress. Its vaunted independence is simply a matter of Congressional custom, not written into the deep nature of things, and Congress can exert whatever degree of direct control over the Fed it so chooses. If a stubborn Fed passively and perversely allows Treasury yields to rise in response to some would-be bond vigilante attack, Congress can step in, pass a law, and order the Fed to buy debt more aggressively, either directly or indirectly. And it can do a variety of other things to permit government spending to proceed unimpeded, no matter what the Fed Chairman decides to do.
So if your own local Member of Congress tries to tell you that we have to worry about the bond vigilantes attacking, tell your Member of Congress that such an attack can only happen if Congress fails to do its job.
The underlying reality of legislative monetary sovereignty and central bank integration into government in countries like the US, a reality that obtains no matter how many fig leaves are used to disguise it to suit the fastidious fancies of global neoliberal finance, has important implications for US fiscal policy and for understanding the true nature of US government debt. What we need to grasp and remember is that debts denominated in terms of some final means of payment are a completely different matter for the government that is itself the cost-free producer of that means of payment than are debts for households, businesses and other countries that are mere users of that means of payment.
Government securities are best seen as just a different form of the government’s issued money – a form that has a nominal face value that “matures” over time rather than a fixed nominal value that is already “matured”. When the government sells a security, it just issues and swaps some of this maturing money for matured money, the swap taking place with people who have an unspent surplus of the matured money. The question should be whether these operations are the best way to inject the needed financial assets into the economy so as to produce full employment while preserving price stability. But when the government injects any kind of money into the economy, it incurs no further obligation on itself other than the agreement to reduce people’s tax bills by equivalent amounts when the money is surrendered back to the government. The government creates these tax bills by fiat in the same way as it issues its different forms of fiat money, so the whole process is under its control.
We have voluntarily established a system in the US – at least for now – in which Treasury spending must take place with matured money, so Treasury spending in excess of Treasury revenues triggers an issue and swap of maturing money for matured money. That could be a price destabilization problem if the government could not control the rate in maturing money it must pay for the matured money. But as we have already seen, it always can control that rate if it acts intelligently. The bottom line, then, is that US Government spending creates money in the economy of dollar users, US Government taxation extinguishes money in the economy of dollar users, and the US government is not constrained in its spending by anything other than the rational requirements of its own macroeconomic policies and the goals of its pursuit of public purpose.
Treasury securities are highly liquid, and the fact that they will be swapped out for matured money is never in real doubt, so they carry no further risk beyond what is inherent in any monetary system (and beyond what the confused ratings agencies say about these securities). So they might as well be thought of as just more money. When the US Treasury issues a security and swaps it for some matured money, the impact really isn’t much different than if it had issued the matured money directly to enable its spending.
The monetary sovereignty of the US government has import for US fiscal policy. Earlier this week in the New York Times, Warren Buffet argued that the US should aim at a permanent, stable deficit of 2.5%. Now it’s definitely a good thing that Buffet is helping the public understand that we need never run a surplus; and that a permanent deficit is both possible and desirable. But there is something problematic about the way he puts the argument. He says:
Our government’s goal should be to bring in revenues of 18.5 percent of G.D.P. and spend about 21 percent of G.D.P. — levels that have been attained over extended periods in the past and can clearly be reached again. As the math makes clear, this won’t stem our budget deficits; in fact, it will continue them. But assuming even conservative projections about inflation and economic growth, this ratio of revenue to spending will keep America’s debt stable in relation to the country’s economic output.
In the last fiscal year, we were far away from this fiscal balance — bringing in 15.5 percent of G.D.P. in revenue and spending 22.4 percent. Correcting our course will require major concessions by both Republicans and Democrats.
So in the present context Buffet is effectively arguing for a government austerity plan to reduce the deficit from 6.9% of GDP to 2.5% of GDP. He apparently thinks 2.5% is an acceptable deficit to stop at because it is sustainable in a modestly growing economy without adding to the debt. But this is to focus far too much on the size and stability of the public debt. Our economy is still very fragile, and is staggering along with a very high rate of unemployment. We need to keep our deficits large until we are back to where we should be economically. And what we need on a permanent basis are mechanisms that allow the size of the deficit to expand and contract in response to macroeconomic circumstances, so as to maintain full employment and economic vitality. We shouldn’t be aiming at some fixed target quantity in our deficit-to-GDP ratio.
And yet, with the real economy mired in stagnation, we have two parties in Washington currently arguing over how much to shrink the government contribution to GDP. As if Toryism in the UK and fanatical Merkelism in the Eurozone had not done enough damage to Europe’s economy and social fabric already, and blighted the hopes of a whole younger generation of Europeans, some now want to bring the European austerity disease here to the US.
Buffett has succumbed to public debt phobia. He might be thinking like a smart businessman – but a government like the US is neither a household nor a business. It is a monetarily sovereign nation that manages and controls its own fiat currency rather than depending on some commodity money standard or depending on some currency it does not control.
Why do the leaders of the financial sector, the major media and the central halls of power insist on promulgating the whole panoply of neoliberal monetary myths: the independent central bank, monetary dependency, the burdensomeness of public debt and the glowering menace of the bond vigilantes at the frontier? I think part of the answer is seen in a recent post by Matt Yglesias citing data from Morgan Stanley’s Adam Parker. As of November 23, just ten companies are responsible for 88% of the S&P 500’s year-over-year earnings growth. We increasingly live in a highly stratified economy where a small number of powerful corporations – most prominently banking and insurance powerhouses, are reaping what few rewards are out there still to be reaped. Throughout the neoliberal era, and at an accelerating pace lately, gains from productivity are funneled to the most affluent members of our already dementedly unequal society. The financial sector and the wealthy are thriving because of their endless ingenuity in devising new ways to create ownership claims and collect rents on the productive output of people who actually do productive work, and to gin up new Ponzi investment schemes when real output flags in productive enterprises.
Now, in their ceaseless drive to accumulate profits and find new revenue streams in a world in which fewer and fewer bounteous streams flow, the plutocrats are after those few remaining assets that they haven’t already claimed. Big finance has long eyed the Social Security and Medicare systems. In these systems, organized around the anti-plutocratic principles of social solidarity and intergenerational obligation, some revenues flow directly out of worker pay checks into government accounts, and others flow out of government accounts into retirement and medical payments – all without first passing through the bloated bellies of private financial corporations, where the wealthy few who own the bulk of our country could exercise their God-given prerogatives of digesting their accustomed share of our wealth before excreting back the remainder to us.
The strategy is to chip away little by little at these remaining social programs, diminishing the benefits and number of beneficiaries, and by extension the political power of the beneficiary class. Once they have shrunk them down to despised Poor People’s Programs, they will be able to deliver the final blow in the name of reform, just as happened in the past with welfare reform. The plutocrats won’t rest until we have all been moved over to fully private retirement programs and health insurance programs – and sadly, both political parties appear poised to help them.
So it’s easy to see why the ownership elite does not want us to understand that we, through our government, actually control our own monetary system, and why they resort to all of the neoliberal legends, myth-making and fig leaves. The fig leaves help to create the illusion that we are utterly dependent on forces that we do not and cannot control, forces that are poised to attack us and send us to that imaginary debtors’ prison where land irresponsible democracies that run up public debts, and that we must appease with further surrenders and sacrifices lest they devour us.