Given that sovereigns can create money, why should they issue debt?

Thomas Edison once said:


Clearly, as I've proven in other threads, money creation is simply a less understood form of regressive taxation (at best). Given that governments presumably have the right to create money, why don't they simply create money to fund many of their expenses, rather than borrow money, or worse yet, borrow money that was created for private benefit?

It's true that this would be inflationary. But 100% of the proceeds would be used (presumably) towards the public's benefit, whereas with the issuance of debt "twice the amount of the bond and an additional 20%" (more or less) would go directly to private lenders.

One method benefits the public in its entirety, while putting the burden on the price system, the other method benefits private lenders unnecessarily, given the aforementioned right to create money, while putting the burden on the direct tax system.

So, why should we allow governments to borrow money on our behalf?

If the government consistently printed its entire deficit every year the result would be massive inflation.

So it prints some of the deficit and borrows the rest. Or rather, it borrows the money to fund its deficits and the Fed prints money to decrease some of the debt. Since Fed profits are remitted to Treasury, it is effectively the government printing money to buy back some of its debt.

psionl0 said:

If the government consistently printed its entire deficit every year the result would be massive inflation.

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Did you read what I wrote? Even though the result would be inflationary, 100% of the proceeds would still (presumably, to the extent that government spending in general does) benefit the public. How is this not preferable to borrowing money (from private lenders, not the Fed), for which a fraction of the cost would actually benefit the public, and the interest be remitted in a private stream of rent to government lenders? Or, far worse, the current system in which the Fed creates money and lends it to private cronies @ 25 basis points, who then turn around and lend it to the government at 225 basis points?

Clearly, sovereign credit money creation benefits taxpayers far more than government borrowing does. Edison was unquestionably right.

You are expressing a preference against inflation as a means of funding deficit spending, even though it would be far more cost-beneficial for the public than government borrowing.

So it prints some of the deficit and borrows the rest. Or rather, it borrows the money to fund its deficits and the Fed prints money to decrease some of the debt. Since Fed profits are remitted to Treasury, it is effectively the government printing money to buy back some of its debt.

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The Fed doesn't "decrease some of the debt", it monetizes even more debt than what the private market would bear, which, as we both agree, is essentially printing money.

Why do you prefer this process over the more ideal one of simply not doing any private borrowing at all?

Tippit said:

.....Given that governments presumably have the right to create money, why don't they simply create money to fund many of their expenses.....

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Zimbabwe tried this recently. It doesn't end well.

MikeG said:

Zimbabwe tried this recently. It doesn't end well.

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That's a poor argument. First of all, Zimbabwe doesn't control the issuance of the global reserve currency, nor do they have a lot of creditors lining up to lend them money. Assuming that they did have a line of creditors willing to lend them money, this would still be worse for the Zimbabwean public than if the government just created money to pay its bills (assuming that at least some percentage of Zimbabwe government spending actually does benefit the public, and doesn't line Mugabe's pockets).

Tippit said:

That's a poor argument. First of all, Zimbabwe doesn't control the issuance of the global reserve currency........

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Oh I see. You should have made it very clear that you were only talking about a certain select group of extra-special countries when you said:

Tippit said:

........Given that governments presumably have the right to create money, why don't they simply create money..........blah blah........

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Because anyone reading this might have thought by "governments" you actually meant "governments". How silly of us.

MikeG said:

Oh I see. You should have made it very clear that you were only talking about a certain select group of extra-special countries when you said:

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I wasn't, but even that is irrelevant. Zimbabwe has hyperinflation because its corrupt government wants to loot as much as it possibly can from it's population of savers, and it has undoubtedly raised conventional taxes as much as it can, and borrowed as much as it can already.

Since we established that any debt that the Federal Reserve monetizes is doing virtually the same thing as Zimbabwe, can you explain what limits prevent the US Congress and the Federal Reserve from doing the exact same thing that Zimbabwe is, and has been doing?

None of this addresses the point that by monetizing government expenses directly, 100% of the proceeds benefit the public (in theory), whereas only a small fraction of the net proceeds benefit the public when the government borrows, and pays private lenders interest.

Because anyone reading this might have thought by "governments" you actually meant "governments". How silly of us.

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Who are the "us" that you're speaking for? Is there more than one person behind your keyboard? I did actually mean governments. The fact that you used one of the most extreme and ongoing examples of hyperinflation as an example, when in fact the US Congress and Federal reserve can in theory do the exact same thing is irrelevant to the main point about the cost beneficiality of the different methods of funding deficits.

Tippit, I've just been learning about the fed system for the last month or so. I can see and understand the problem but I don't see anyone laying out any solutions. Is there a solution that doesn't include the use of a time machine? As entrenched as the current system is can it be replaced?

1. Because inflation.
2. Because even in a fiat economy the "money" still represents something, it just doesn't represent gold or similar physical objects in some direct 1:1 ratio. It represents a trust in the issuing agent, an investment in future growth in the economy, or some more esoteric concept. A fiat economy gives you more flexibility in the amount and value of the currency out there, but it still can't just be made up from nothing in any real amount.

bam said:

Tippit, I've just been learning about the fed system for the last month or so. I can see and understand the problem but I don't see anyone laying out any solutions. Is there a solution that doesn't include the use of a time machine? As entrenched as the current system is can it be replaced?

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I think the solution is to proceed as though a horrendous crime has been committed for centuries, which it has, by a few dynastic banking families. Central banks should be abolished, and owners/controllers of such banks should be identified, tried, and convicted in a court of law. Their property should be expropriated (socialized, for lack of a better word). All owners of shares, including trusts, charitable and private interest foundations, should be identified and verified not to be them, or have any significant connections to them, lest their property be expropriated as well. This goes for real estate and other assets. Their gold and silver should be expropriated, and the gold and silver held by treasuries and central banks should be put into circulation for use by the people, in no particular denominations, for use in commerce. Counterfeiting and coin debasement should be a capital crime, punished by death, just as in the Byzantine empire. Government debt should be abolished. Governments can only spend what they can generate in constitutional forms of taxation, which does not include Federal Income Tax (the Federal Income Tax and Federal Reserve acts signed by Wilson in 1913 should both be abolished). All credits which can be traced to these people should be cancelled, in a selective debt jubilee. Legitimate debts held by hard working savers should not be cancelled. Fractional reserve banking should be slowly phased out in favor of 100% reserve banking. All of the proceeds of the expropriation should either be used to fund governments, or securitized and gifted to everyone in a sort of glorified universal basic income system, or some combination.

Obviously these types of reforms are gargantuan in scope, and they would be fought vigorously by the perpetrators. The first step has to be educating the public on the money scam, and how truly paramount it is.

In case you were wondering, there have been some historical attempts to investigate these people and their tax-exempt, private interest foundations by the United States House Select Committee to Investigate Tax-Exempt Foundations and Comparable Organizations, but they largely failed. They were dismissed as part of the "red scare" and McCarthyism.

Here is an interview of Norman Dodd, chief investigator of the Reece Committee that is a fascinating watch. He was interviewed by G. Edward Griffin, author of the book The Creature from Jekyll Island: A Second Look at the Federal Reserve. This book is an absolute must-read for anyone interested in the subject.

This is kind of a derail from my thread, which I wanted to use to illustrate why government debt is basically a scam. I don't endorse either government debt OR fiat money, I think governments should be forced to run constitutional balanced budgets, funded purely by conventional taxation. But in this case, I can use the wisdom of Thomas Edison to prove why we shouldn't allow governments to borrow (or lend, for that matter).

JoeBentley said:

1. Because inflation.

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Can you explain why the burden of inflation is worse than the burden of US taxpayers paying $458,542,287,311.80 in interest for 2016, especially given that in the first case, the public benefits from 100% of the inflationary proceeds, versus private lenders benefiting from the debt?

2. Because even in a fiat economy the "money" still represents something, it just doesn't represent gold or similar physical objects in some direct 1:1 ratio. It represents a trust in the issuing agent, an investment in future growth in the economy, or some more esoteric concept. A fiat economy gives you more flexibility in the amount and value of the currency out there, but it still can't just be made up from nothing in any real amount.

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Actually, it can and is created "ex nihilo" or "out-of-nothing", both by private commercial banks, and central banks. I've never claimed that it doesn't represent anything, or that it's worthless. My claim is that it represents a perpetual vehicle for looting unfathomable amounts of real property, ie, corporations, bonds, real estate, etc...

Tippit said:

Did you read what I wrote? Even though the result would be inflationary, 100% of the proceeds would still (presumably, to the extent that government spending in general does) benefit the public.

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By the same token you could say that internal government debt (that held by its citizens) would still benefit the public since the public would receive the interest payments. (This is largely the situation in Japan).

The truth is that neither is satisfactory. As long as inflation is contained within the property sector the government can get away with its massive deficits. If inflation spreads to consumer prices and wages then it would be a very different story.

The real answer is for the government to run much smaller deficits. Unfortunately, there are no votes in doing that - only talking about it.

psionl0 said:

By the same token you could say that internal government debt (that held by its citizens) would still benefit the public since the public would receive the interest payments. (This is largely the situation in Japan).

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No. Government debt held by private citizens, still only benefits a subset of citizens at the expense of all citizens. Only intra-governmental debt would qualify for your example. Of course, the lion's share of domestically held government debt is held by the super-rich, just as the lion's share of foreign-held US government debt is, in all likelihood, also held by the super rich, mostly by foreign central banks.

The truth is that neither is satisfactory. As long as inflation is contained within the property sector the government can get away with its massive deficits. If inflation spreads to consumer prices and wages then it would be a very different story.

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US Government deficits are funded by the Fed, China, the UK, and Japan, in that order (as i recall). We know where the Fed gets its money, and we know that by and large those debts are held by the respective central banks, and where they get their money. I would say that inflation is not contained, it's merely exported which is the luxury of the global reserve currency issuer.

The real answer is for the government to run much smaller deficits. Unfortunately, there are no votes in doing that - only talking about it.

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I mean, I agree. The real issue is government spending. Because thanks to the Fed and an array of foreign central banks, politicians have virtually unlimited money at their disposal.

My point in this thread is, if we're going to grant politicians a blank check, why don't we just let them create money at the Treasury instead of borrowing it from private or foreign lenders?

Tippit said:

My point in this thread is, if we're going to grant politicians a blank check, why don't we just let them create money at the Treasury instead of borrowing it from private or foreign lenders?

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I can see that we are already back at the beginning of the circle.

I can only reiterate: print too much money and consumer prices will no longer be quarantined from inflation (and I doubt that there would be too much confidence in the USD as an international currency). Then there will be hell to pay.

BTW intra-governmental debt is the worst kind. If the government ever decides that it needs to default on some of its debt, debt held by social security will be the first to go while the international bankers will continue to be as safe as houses.

psionl0 said:

I can see that we are already back at the beginning of the circle.

I can only reiterate: print too much money and consumer prices will no longer be quarantined from inflation (and I doubt that there would be too much confidence in the USD as an international currency). Then there will be hell to pay.

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We already have asset price inflation, which is just as bad. It's vastly increasing the chasm between haves (asset holders) and have-nots (workers, savers, and anyone who is asset poor and lives paycheck-to-paycheck. There already is hell to pay for these people who are finding it increasingly more difficult to pay their rent. I am an asset holder. I'm not super-rich, but I can assure you that I don't deserve the values placed upon my assets, relative to people who have to work for a living. As I mentioned in the bitcoin thread, I have a friend whose net worth is approaching a quarter of a billion dollars from a crypto-currency portfolio. He was worth only a few million just a few years ago. All of this enormous wealth has come from merely speculating on cryptos, I can assure you he doesn't really deserve it. I can only speculate that the Fed or other central banks, maybe the PBoC is involved with it.

Can you elaborate on why the burden of inflation is worse than the burden of interest payments? You seem to have conveniently ignored this point for the entire thread. What happens when the Fed's scam is up, the USD loses legitimacy in the rest of the world, and interest rates normalize? Then a ~$500 billion dollar annual debt service becomes a multi-trillion dollar annual debt service, and the US becomes the equivalent of Greece, only on a catastrophic global scale.

BTW intra-governmental debt is the worst kind. If the government ever decides that it needs to default on some of its debt, debt held by social security will be the first to go while the international bankers will continue to be as safe as houses.

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I totally agree. In fact, if you scour youtube, you can find a video where Alan Greenspan admits that the largest money center banks like Goldman Sachs and JP Morgan are contingent liabilities of the Fed. They will literally create however much money is needed to prevent these TBTF SIFI private for-profit banks from failing. Social security, not so much. While there is $20+ trillion of debt, there is over $120 trillion in unfunded liability, much of which is entitlements like SS. The social security promise will be broken in a number of ways, including higher taxes, higher inflation, and a severe reduction in benefits (higher retirement ages, and direct cuts in benefits/cost of living adjustments).

Tippit said:

........ The fact that you used one of the most extreme and ongoing examples of hyperinflation as an example, when in fact the US Congress and Federal reserve can in theory do the exact same thing is irrelevant to the main point about the cost beneficiality of the different methods of funding deficits.

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The fact that the USA can do the same thing as Zimbabwe is the point. I don't know why this is causing you such confusion. And you might want to visit Zimbabwe some time to see how with hyperinflation "100% of the proceeds benefit the public". Your dismissal of inflation as if it were trivial, or actually a benefit, is ludicrous.

MikeG said:

The fact that the USA can do the same thing as Zimbabwe is the point. I don't know why this is causing you such confusion. And you might want to visit Zimbabwe some time to see how with hyperinflation "100% of the proceeds benefit the public". Your dismissal of inflation as if it were trivial, or actually a benefit, is ludicrous.

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Your reading comprehension sucks. The point is, if the Zimbabwe government financed the same amount of deficit spending by borrowing, the public would be even poorer as a result than if the government simply monetized their expenses, resulting in inflation. Of course, one of the problems with Zimbabwe is that the public doesn't benefit from government spending much at all because Mugabe's government is completely corrupt, so it really doesn't matter either way. Whether the public's purchasing power is destroyed through inflation, or completely exported out of the country to foreign creditors is mostly irrelevant.

Tippit said:

We already have asset price inflation, which is just as bad.

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Politically, not so much. Asset price inflation is grossly unfair for the reasons you give but as long as it doesn't cramp Joe Sixpack's ability to pay for his beer, it is less likely to be an election issue.

OTOH if a wage/price spiral were to occur in the consumer arena then the perception will always be that the wages never catch up with prices. This perception may not be true but that won't stop voter anger threatening the government at the polls.

Tippit said:

Can you elaborate on why the burden of inflation is worse than the burden of interest payments?

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I don't know which is worse since they both have the potential to end disastrously if allowed to rise unchecked. All I can say is that inflation is not the solution to ever increasing debt.

Although I have no hard evidence for it, I suspect that there is a "tipping point" regarding printing money. That is to say that at some point, printing more money could suddenly trigger a serious bout of inflation. (This is not to say that debt has its own tipping point).

It is apparent that the Fed is trying to walk a fine line between printing too much money and allowing debt to rise too high (this still leaves plenty of scope for the Fed to do the other things that you charge it with).

Tippit said:

It's true that this would be inflationary.

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When the goverment borrows money it creates Treasury Bills or such like.
You still have the original money in circulation plus the T-Bill (or whatever). The T-Bill is almost as good as normal money. Does it matter that much, if a government creates T-Bills or legal tender?

GnaGnaMan said:

The T-Bill is almost as good as normal money.

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Although T-Bills can theoretically be used to pay for goods and services they are invariably exchanged for currency so they don't add to the money in circulation.

These TV shows where ransoms are paid in "bearer bonds" are pure fiction.

GnaGnaMan said:

When the goverment borrows money it creates Treasury Bills or such like.
You still have the original money in circulation plus the T-Bill (or whatever). The T-Bill is almost as good as normal money. Does it matter that much, if a government creates T-Bills or legal tender?

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It matters in the sense that the interest to pay on the t-bills has to come from taxpayers, money creation (taxing savers), or the issuance of still more debt. This is money that instead of being spent on public services, is paid out to private lenders.

From an inflationary standpoint, t-bills are not money. Have you ever tried to pay for something using t-bills? You would have to find someone who is willing to accept the government's credit risk, the coupon rate, and the duration until the bill matures. They are liquid, because obviously a lot of people are willing to accept all three of these terms at any given time, but they are not money. If you have $100,000 of pre-existing money and you invest in a newly issued t-bill, that is $100,000 that will not be invested in the private sector, therefore, they're not inflationary. On the other hand, when the Federal Reserve buys them with money created ex-nihilo, they are inflationary since the money supply gets diluted, and the government deprives people of scarce resources to build it's tanks, or aircraft carriers, etc...

psionl0 said:

Politically, not so much. Asset price inflation is grossly unfair for the reasons you give but as long as it doesn't cramp Joe Sixpack's ability to pay for his beer, it is less likely to be an election issue.

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Asset price inflation is insidious. Most people don't have a clue. Maybe you've seen this quote from Keynes:


Due to asset inflation, Joe Sixpack can't pay for his beer because he has to pay his landlord, not because the beer is too expensive (in which case, he would probably blame the grocer). So instead of rightfully blaming Janet Yellen and the Federal Reserve, he blames his landlord. Or maybe he blames "capitalism" itself, and decides to join Antifa. He knows something is dreadfully wrong, but he doesn't know why or how, so he accepts the scapegoat he is provided. Very insidious. I see this all around me in the US. In Jacksonville, Florida, near where I live, there are abandoned buildings, and the city is in a general state of decay virtually everywhere. There is a sense of general desperation. Yet, there are pockets where there are lush gated communities with posh mansions, and conspicuous wealth on display. There is also an increasing sense of social unrest. People distrust each other, and have contempt for anyone who is wealthier than they are. Capitalism is on trial. Groups like Antifa are gaining support. It is not a good situation and i'm worried about the future, and the future of the country, even though personally I am fine.

OTOH if a wage/price spiral were to occur in the consumer arena then the perception will always be that the wages never catch up with prices. This perception may not be true but that won't stop voter anger threatening the government at the polls.


I don't know which is worse since they both have the potential to end disastrously if allowed to rise unchecked. All I can say is that inflation is not the solution to ever increasing debt.

Although I have no hard evidence for it, I suspect that there is a "tipping point" regarding printing money. That is to say that at some point, printing more money could suddenly trigger a serious bout of inflation. (This is not to say that debt has its own tipping point).

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The "tipping point" is when investors become clear that the central bank is no longer going to subsidize asset holders with endless money by buying assets, and maintaining low interest rates. When that paradigm shifts, money moves out of securities and into commodities, which affects consumer prices.

It is apparent that the Fed is trying to walk a fine line between printing too much money and allowing debt to rise too high (this still leaves plenty of scope for the Fed to do the other things that you charge it with).

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It seems to me they have failed at both.

Tippit said:

The "tipping point" is when investors become clear that the central bank is no longer going to subsidize asset holders with endless money by buying assets, and maintaining low interest rates.

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That is inconsistent with your argument that the government should print money instead of borrow it.

You might not think so but removing government securities from circulation and replacing them with cash has the same bottom line effect as printing the cash in the first place instead.

psionl0 said:

That is inconsistent with your argument that the government should print money instead of borrow it.

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I don't think the government should be able to "print" money at all, nor anyone else. I just agree with Edison that money creation (by Treasury, not an unaccountable, quasi-private central bank) is better than borrowing, from the public's perspective, since the public benefits 100% from this process even though it is inflationary.

You might not think so but removing government securities from circulation and replacing them with cash has the same bottom line effect as printing the cash in the first place instead.

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Almost, yes. Remember that the Federal Reserve incurs expenses of its own which amounted to $4.1B in 2016, which of course is peanuts given the real action.

Remember, the Federal Reserve monetizes all sorts of non-governmental assets by proxy, for instance whenever it loans virtually cost-less money to hedge funds, or money center banks, or even foreign banks. I don't think Edison envisioned this when he made his comment. I think he was talking about funding public works. But this is the ultimate flaw of fiat money. Even if you can take it out of the hands of a corrupt central bank and put it in the hands of a (presumably) democratically accountable Treasury, how do you really guarantee that politicians won't abuse it themselves?

Tippit said:

......... the public benefits 100% from this process even though it is inflationary........

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When did the public ever do anything other than suffer heinously from inflation? Your notional benefits are entirely wiped out by inflation, which always creates unemployment and by definition erodes the public's spending power. Until you make the case that there are benefits (you haven't listed them) which outweigh the downsides (mass unemployment and poverty, leading to increased crime and other social ills) then no matter how rude you are, you won't be anywhere near winning this argument.

GnaGnaMan said:

When the goverment borrows money it creates Treasury Bills or such like.
You still have the original money in circulation plus the T-Bill (or whatever). The T-Bill is almost as good as normal money. Does it matter that much, if a government creates T-Bills or legal tender?

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I think this is essentially correct. Given the current financial system, government securities are essentially as good as money… perhaps even more so if it's about U.S. government securities because they are easily transferable and can function as collateral for financial leverage all over the globe (both in the balance of payments sense and otherwise [e.g., private and public money creation]).

However, I'm not sure the financial system would have developed as it did during the past hundred years or so, if the government always simply opted to finance the gap between receipts and expenditures via currency creation. The structure of the (private) banking system might be completely different if that would have been the case.

MikeG said:

When did the public ever do anything other than suffer heinously from inflation? Your notional benefits are entirely wiped out by inflation, which always creates unemployment and by definition erodes the public's spending power. Until you make the case that there are benefits (you haven't listed them) which outweigh the downsides (mass unemployment and poverty, leading to increased crime and other social ills) then no matter how rude you are, you won't be anywhere near winning this argument.

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I'm actually pro-deflation, anti-fiat money. Inflation, or more accurately money creation, is a scam. I'm also certain after reading a few of your posts, that you have absolutely no clue what Edison's argument is about.

If the government needs steel to build an aircraft carrier, it can either a) expropriate your money via taxation, and then go into the steel market and exchange the money for steel, or b) create money out of thin air, and go into the steel market and exchange the money for steel.

In example a), you lose purchasing power because you have less money than when you started, and there is less steel for everyone other than the government, since steel is scarce. The burden of government spending is born by the taxpayer, and it is not inflationary.

In example b), you lose purchasing power because the money supply has been diluted, and there is less steel for everyone other than the government, since steel is scarce. The burden of government spending is born by the saver, and it is inflationary.

The burden in each case is the same - the amount required to purchase the steel. The only difference in the method, is where the burden falls.

lupus_in_fabula said:

I think this is essentially correct. Given the current financial system, government securities are essentially as good as money… perhaps even more so if it's about U.S. government securities because they are easily transferable and can function as collateral for financial leverage all over the globe (both in the balance of payments sense and otherwise [e.g., private and public money creation]).

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It's not correct, bonds are not money. Try offering to pay your bills with treasury notes or bills, and see what the response is. If you're lucky enough to find someone who will accept, don't be shocked at the discount they offer you.

However, I'm not sure the financial system would have developed as it did during the past hundred years or so, if the government always simply opted to finance the gap between receipts and expenditures via currency creation. The structure of the (private) banking system might be completely different if that would have been the case.

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Yes, it would be different. The corruption of the monetary system would be mostly limited to (hopefully) democratically accountable politicians.

Tippit said:

...... I'm also certain after reading a few of your posts, that you have absolutely no clue what Edison's argument is about.

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And your posts reveal your lack of knowledge of manners. I'll leave you to play alone. Have fun.

MikeG said:

And your posts reveal your lack of knowledge of manners. I'll leave you to play alone. Have fun.

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It took you no more than one post to become condescending and rude, speaking on behalf of some mythical "us". Take care!

MikeG said:

.....Because anyone reading this might have thought by "governments" you actually meant "governments". How silly of us.

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Boy, you lectured me about reading comprehension. Unless you think I was the only person reading the thread, what other pronoun other than "us" goes with "anyone reading this"?

Now, I really am out of here.

MikeG said:

Boy, you lectured me about reading comprehension. Unless you think I was the only person reading the thread, what other pronoun other than "us" goes with "anyone reading this"?

Now, I really am out of here.

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By "mythical us", i meant the people that you pretended to be speaking for. Take Care! Again!

Tippit said:

It's not correct, bonds are not money. Try offering to pay your bills with treasury notes or bills, and see what the response is. If you're lucky enough to find someone who will accept, don't be shocked at the discount they offer you.

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Since the original outlay is still administered according to the usual process – i.e., DEBIT government account, CREDIT recipient account – regardless of such payment being financed through currency or bond issuance, it's only a matter of balance sheet composition between the government and the payment service provider.

Having treasury securities on the asset side of the balance sheet is as good as having reserves. In fact, having U.S. treasury securities gives more leeway in terms of leverage and money creation outside the initial jurisdiction.

lupus_in_fabula said:

Having treasury securities on the asset side of the balance sheet is as good as having reserves.

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Would that not depend on the liquidity of the reserve?

psionl0 said:

Would that not depend on the liquidity of the reserve?

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Well, "in-house" treasury securities and reserves are basically the same thing from a liquidity standpoint.

"Out-of-house" treasury securities are more mobile and carry less of a risk premium/haircut than any privately issued security even though it's based, for example, on the issuer's term deposit facility at the Fed.

Also, while foreign central banks may accept U.S. treasury securities as eligible collateral (or buy them as part of their foreign reserves), that is often not the case with privately issued securities, regardless of the underlying base.

Tippit said:

why should we allow governments to borrow money on our behalf?

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Short-term benefits. We borrow and live in luxury, _the next generation_ pays back the debt. Convenient and pleasant, so it buys more votes than austerity.

lupus_in_fabula said:

Well, "in-house" treasury securities and reserves are basically the same thing from a liquidity standpoint.

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That I find hard to believe. If a bank is running short of reserves it will borrow more. It won't say "I'm short of reserves, have some treasury securities instead".

psionl0 said:

That I find hard to believe.

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It's not a matter of belief; they are considered liquid assets on the same standing per definition. That is, according to Basel rules the liquidity coverage ratio (LCR) is calculated as High Quality Liquid Assets (HQLA) divided by cash outflows minus cash inflows. Treasuries, as claims on the sovereign, are Level 1 assets together with cash and central bank reserves, which means they can be included in unlimited quantities (there's a 40% limit to Level 2 assets). I.e., the LCR does not differentiate between reserves and treasuries in terms of liquidity valuation.

psionl0 said:

If a bank is running short of reserves it will borrow more. It won't say "I'm short of reserves, have some treasury securities instead".

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A bank that has treasury securities does not run out of reserves unless its unencumbered collateral pool is exhausted. These securities can be pledged and thus they serve, together with central bank deposits, as the automatic collateral/asset pool making payment transactions and intraday overdrafts possible in Fedwire or any other central bank controlled RTGS-system (real-time gross settlement).

That's why, prior to the financial crisis, banks could transfer funds to each other to the value of $2.3 trillion daily in Fedwire, even though total overnight reserve balances only averaged at +/- $10 billion.

Treasury securities have the added benefit that they can be pledged both intraday and overnight with the central bank as well as pledged or sold in the (private) market.

lupus_in_fabula said:

Since the original outlay is still administered according to the usual process – i.e., DEBIT government account, CREDIT recipient account – regardless of such payment being financed through currency or bond issuance, it's only a matter of balance sheet composition between the government and the payment service provider.

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You're describing the government paying its bills, which it does with money in the Treasury, some of which has already been borrowed in exchange for a bond or bill.

The "original outlay", as I understand it when Treasury issues a bond, is that it credits its liabilities for the bond issued, and credits its assets, for the pre-existing money that is received. Lets assume that bond is held in bearer form. Explain how this increases the money supply?

Having treasury securities on the asset side of the balance sheet is as good as having reserves. In fact, having U.S. treasury securities gives more leeway in terms of leverage and money creation outside the initial jurisdiction.

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Except, it isn't, really. There is government credit risk, inflation risk, and duration risk. I understand that the rate on 10 year treasuries is deemed to be the "risk free" rate, but in reality that is just some arbitrary designation which will be true right up until the point that it becomes apparent that it's not risk-free.

lupus_in_fabula said:

It's not a matter of belief; they are considered liquid assets on the same standing per definition. That is, according to Basel rules the liquidity coverage ratio (LCR) is calculated as High Quality Liquid Assets (HQLA) divided by cash outflows minus cash inflows. Treasuries, as claims on the sovereign, are Level 1 assets together with cash and central bank reserves, which means they can be included in unlimited quantities (there's a 40% limit to Level 2 assets). I.e., the LCR does not differentiate between reserves and treasuries in terms of liquidity valuation.

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So what you're saying is, when bonds are held by the general public, they don't increase the money supply, but when they're held by banks, they do?